R-E-S-P-E-C-T Find Out What It Means To…Your Estate Plan

While this week’s article wasn’t intended to be the third in a series, resolution of Aretha Franklin’s Estate merited examination, particularly because of the various Estate Planning issues raised both during the pendency of the proceeding and with its final resolution.

Aretha Franklin died on August 13, 2018, at age 76. At the time of her death, she was unmarried and had four sons, Clarence, Edward, Ted, and Kecalf. Aretha’s family believed that she died without any Will or Revocable Trust. In other words, she died intestate which meant that the laws of the state of her residence would determine distribution of her estate. Michigan laws required distribution of her estate equally among her sons, one of whom has special needs.

Aretha’s sons unanimously selected a cousin to serve as the estate’s personal representative, the individual responsible for distributing the late singer’s estate. While clearing out Aretha’s home, her niece found two different handwritten documents, portions of which were illegible, that expressed conflicting testamentary directions. Aretha failed to execute either of those documents with the requisite formalities for a Will, no one witnessed the creation of these “Wills,” and no attorney prepared the documents, although a notary signed one. An expert confirmed that all documents were in Aretha’s handwriting. In addition, one of her sons obtained a draft Will along with Aretha’s handwritten notes from a law firm Aretha allegedly had engaged to help her complete her Estate Planning and submitted those documents to the probate court.

A Michigan jury ended four years of family conflict when it decided what Aretha’s family could not – that a four-page handwritten document found in her couch represented her true testamentary intent regarding division and distribution of her estate. This case demonstrates clearly that truth is often stranger than fiction. The simplified recitation of the facts of Aretha’s case alone raises enough issues to qualify for a law school exam. First, it raises the issue of intestacy. Each state has a statutory scheme that governs distribution of the estate of a resident who dies intestate. Unfortunately, these laws disregard the needs of the individual recipients, including those who may have special circumstances, such as receiving governmental benefits. As noted above, one of Aretha’s sons has special needs. If the case had proceeded on an intestate basis, each son, including the one with special needs, would have received an equal ¼ portion of Aretha’s estate, outright. If the son with special needs were receiving government benefits, receipt of the inheritance would have disqualified him from those benefits. By determining that the document found constituted a Will, the jury helped Aretha’s sons avoid that result.

Probate represents yet another area of concern. If an individual dies with only a Will or without any Estate Planning documents, then that individual’s estate needs to go through probate. During the probate process, the executor or personal representative obtains the legal authority to distribute the decedent’s assets to the proper beneficiaries. Probate requires court oversight, costs money, and takes time. In addition, the probate process allows anyone, even those unrelated to the matter, to learn about the estate, its beneficiaries, and other facts that the family probably prefers to keep private. Most individuals who understand the probate process choose to avoid probate of their estate by creating and funding a Revocable Trust during their lifetime. The Revocable Trust contains provisions that direct a successor Trustee on how and under what circumstances to distribute the assets held in the Trust to the beneficiaries upon the death of the individual who created the Trust. The successor Trustee need not obtain permission from a judge before making these distributions, generally need not spend additional funds on the process, and usually can make distributions shortly after the death of the decedent, all while keeping private matters private. Unfortunately, Aretha’s family could not avoid probate because her assets were not in a Trust and would pass either pursuant to a Will or the laws of intestacy. Determining which “Will” would govern distribution of Aretha’s assets caused a four-year delay in receipt by her sons while subjecting them to public scrutiny of these private matters.

Finally, we see the problem of “holographic” or handwritten wills. A handful of states such as Alabama, Connecticut, Iowa, Washington, and Wisconsin refuse to recognize a holographic Will. Others like Florida, Illinois, Missouri, New Hampshire, and Wisconsin may accept a holographic Will if the document otherwise meets the statutory requirements for a valid Will, including witness and notary requirements, which seems to undermine the goal of creating a holographic Will. Thankfully, Aretha resided in Michigan, one of several states that recognizes holographic Wills. Of this majority of states, some require that the Testator write the entire document, while others, like Michigan: Section 700.2502 require that the Testator write only the substantive provisions dictating who receives what property.

Celebrity estates demonstrate the myriad of issues that arise when an individual fails to undertake Estate Planning or tries to complete this important task on their own. As this article has demonstrated, holographic Wills, along with any self-created document, complicates, rather than simplifies, an estate. It’s important to speak with a qualified Estate Planning attorney (Me!) regarding your Estate Plan and your unique circumstances. Had Aretha created a Revocable Trust, she would have given her family the privacy to work through their issues, even if they disagreed about the terms of the Revocable Trust. Save your family the time and expense that Aretha failed to save hers, and make sure that I guide you through the creation of your Estate Plan. Your family will have nothing but R-E-S-P-E-C-T for you when you do.

A Real-Life Look at the Application of the Slayer Statute

Mercifully, in my many years in private practice, I rarely, perhaps never, had cause to review the slayer statutes. After all, the only time that an attorney needs to review those statutes exists in tragic cases in which someone tries to derive a financial benefit from another person in whose death they may have played a role. I reviewed them in preparing this blog and found them adequate and oddly comforting. I remember being intrigued the first time I heard about Kouri Richins. She’s not a celebrity but her actions have garnered her some notoriety. Celebrity stories about a lack of proper Estate Planning and attorneys behaving badly make for great blogs. Both types of stories provide lessons for attorneys and clients alike. This story fits neither of those categories yet serves as a reminder of the importance of proper Estate Planning and underscores many of the lessons found in those stories.

Kouri Richins was married to Eric Richins and they had three children together. Eric died in 2022 and about a year after his death, Kouri authored a children’s book about grieving the loss of a loved one. In an interview that she gave in early 2023, Kouri said that she wrote the book to help her minor children cope with their father’s death. Shortly thereafter, authorities arrested Kouri in connection with her husband’s death. As of this writing, Kouri stands accused of murdering Eric by serving him a cocktail laced with a lethal dose of fentanyl. Prosecutors and Eric’s family have disclosed several unfavorable facts regarding Kouri’s behavior and it seems not only that she attempted to kill him several times before succeeding, but that she had a financial motive for killing her husband. It also seems that Eric long suspected her of trying to kill him. All of these facts underscore the opening sentence – one only reviews the slayer statutes in the most tragic of cases when someone tries to derive a financial profit from someone in whose death they played a role.

According to prosecutors, Kouri withdrew money from Eric’s bank accounts without his knowledge or permission. She tried to change the beneficiary designation on his life insurance policy to name herself as the sole beneficiary. According to allegations made in the civil lawsuit filed by Eric’s family, Kouri used his Property Power of Attorney to secure a $250,000 loan and repeatedly took checks from his business, using them for her own benefit. A forensic document examiner found evidence that Kouri forged some of Eric’s financial documents. Interestingly, Eric took steps during his life to protect himself from Kouri. He named someone else as his healthcare agent and asked his sister to serve as Trustee. It’s unclear whether Eric updated his Property Power of Attorney and named someone other than Kouri to act in that capacity and it’s unclear whether a Will or Trust governs distribution of Eric’s assets. Kouri and Eric signed a prenuptial agreement that left Eric’s business interest to Kouri if they were married at the time of his death, which provides the basis for Kouri’s lawsuit. The lawsuit alleges that Eric’s estate owes Kouri $3.6 million for the value of their family home, his business interests, and payments she made to maintain the home. Thankfully, Utah, like most other states, has statutes designed to prevent Kouri from profiting from Eric’s death.

Unfortunately, as is often the case, Utah’s “slayer statues” require that the murderer be found guilty of the crime by criminal standards (beyond a reasonable doubt), which are far higher than those required in civil court (a preponderance of the evidence). Utah’s statute, like most others, prevents a surviving spouse from receiving an intestate share, an elective share, a spouse’s share, a homestead allowance, exempt property, or a family allowance from their victim’s estate. Additionally, Utah’s statute prevents the killer from receiving property under a revocable instrument, such as a revocable trust, removes any general or limited power of appointment, disqualifies the killer from serving in any fiduciary capacity, and severs the interest of the decedent and killer in any joint tenancy property making it tenants in common property. The statute goes on to prevent the killer from profiting from the killer’s wrong in any way not already covered by the statute.

This article barely scratches the surface of a case that will continue to play out in public over the next several months. As stated in the beginning, it highlights the importance of keeping an Estate Plan updated. When things changed for Eric, he took steps to prevent Kouri from serving in fiduciary capacities and presumably, from inheriting assets from his estate. Unfortunately, Eric failed to go far enough and paid the ultimate price. The biggest tragedy of the story is that Kouri’s acts likely left her three children without either of their parents. Hopefully, Eric’s plan contained provisions nominating guardians to care for his children now that neither he nor Kouri can. That’s what a comprehensive Estate Plan does, plans for the unthinkable, solves problems that don’t yet exist, and gives peace of mind.

Step-Up in Basis Rule is an Heir’s Best Friend

The step-up tax adjustment has been under siege for decades but has so far survived the onslaughts. The provision, which reduces capital gains tax for estates, has been controversial since the 1970s. Policymakers would still love to get their hands on the bonanza in tax revenues it represents.

There is a counterargument: If the law were repealed, assets held though multiple generations would suddenly become liable for substantial tax bills. Besides, imagine the misery of trawling through decades-old documentation to try to reconstitute transactions! In any case, the step-up basis is destined to remain a flashpoint for estate accounting.

How it works

The story begins in 1916, when federal estate tax law was adopted. (Before 1916, temporary death taxes were enacted to raise funds earmarked for special projects such as the formation of the Navy or underwriting the Civil War.) The step-up itself was introduced in 1921 for all types of assets, ranging from real estate to stocks and bonds. The purpose was to avoid double taxation on unrealized appreciation after assets had already been taxed once at fair market value.

The step-up serves as a valuation method of any asset after the owner dies. Essentially, it resets the cost basis for inherited assets, which is to say the original value of the asset, adjusted for commissions, expenses, depreciation, etc. The step-up propels that number forward to be assessed as of the day the owner dies. The intervening years, when the asset may have appreciated, no longer count in the calculation of capital gains tax. In reverse, if the asset has in fact lost value over this time period, the step-up would be negated.

Estates can employ several exceptions. Instead of using the date of death, the personal representatives can opt for a date six months later, assuming the later date reduces the estate’s tax bill. If they go that route, all property must be lumped together for valuation purposes. Representatives cannot select only the advantageous assets. The IRS is also mindful to circumvent tax-designed acquisitions, so the step-up is ruled out for any transfer from heir to owner enacted within a year of the owner’s death.

A costly loophole

Various administrations have struggled to close what they interpret as an elitist loophole, on the grounds that it disproportionately benefits larger estates. So far, they have not succeeded. Repeals advocated by presidents Clinton, Obama and Biden were all unsuccessful.

Fairness arguments aside, there is also a lot of money at stake for government coffers. According to the Congressional Budget Office, replacing the step-up with the original cost basis would generate about 110 billion over 10 years. The federal Joint Committee on Taxation likewise ascribes 42 billion of lost revenues to the step-up in 2021 alone.

The step-up was repealed in 1976, reinstated in 1980, and again challenged and reversed in 1980, in the wake of complaints about record-keeping for old transactions. Recently, opponents of the rule argue that the double taxation concern has lost its teeth when so few pay the federal estate tax anyhow now that the exemption is over 12 million. Opponents also cite revenue distortions. They claim that the step-up promotes a lock-in effect, whereby asset owners resist selling to avoid paying capital gains tax, hindering portfolio choice and liquidity

Watch out for changing legislation

As a beneficiary, you can use the step-up to minimize your capital gains costs in the estate. You might not even be the first in your family to do so. Successive heirs over many years could keep passing on a property, taking the step-up in each generation and paying little capital gains tax. Nevertheless, try to keep up to date with any new proposals for eliminating the tax break. Like so many other tax rules, step-up can get complicated. If you have an inheritance or are planning to leave one, be sure to call me to discuss the details.