The Magic of Grantor Trusts

An earlier article examined “grantor trusts” and how they are an income tax issue, not an estate tax issue. As that prior aerticle indicated, grantor trusts may be drafted so they are not included in the taxable estate of the grantor for estate tax purposes, yet they are still taxed to the grantor for income tax purposes. These “intentionally defective grantor trusts” can be very powerful estate planning tools.

Let’s look at an example of such an intentionally defective grantor trust. Let’s say the power that causes it to be a grantor trust is the power to substitute assets pursuant to Section 675(4)(C). Such a power does not cause inclusion in the taxable estate of the grantor.

Mary put $1 million of XYZ stock into the Mary Smith Irrevocable Trust, drafted with such a power of substitution. The trust is for the benefit of her children. The stock pays 7% dividends, or $70,000.  Assuming Mary and her beneficiaries are in the top income tax brackets, that $70,000 of income would incur a federal tax of 23.8% or $16,660. Since the trust is drafted as a grantor trust, that $70,000 of income would go on Mary’s Form 1040 and she would owe the $16,660 of additional tax, rather than the trust itself or the beneficiaries. This would allow the assets in the trust to grow tax-free. This is the case whether the trust distributed the income to Mary’s children, the beneficiaries of the trust, or it retained the $70,000 of income and allowed it to grow.

Years go by and Mary gets a terminal diagnosis. Let’s assume the XYZ stock increased in value to $5 million. Since it would be outside of Mary’s taxable estate in the Mary Smith Irrevocable Trust, it would not get a step-up in basis at Mary’s death. However, with the power of substitution, Mary can swap $5 million of cash for the XYZ stock worth $5 million. Since it’s a grantor trust, this exchange of assets would not trigger a taxable event. It’s like taking a dollar out of your left pocket and exchanging it for four quarters in your right pocket. Now, when Mary dies, she’ll have the XYZ stock in her taxable estate, and it’ll receive a step-up in basis, while the Mary Smith Irrevocable Trust has $5 million in cash, which won’t be included in Mary’s taxable estate.

Thus, the grantor trust which is outside the taxable estate is very powerful on two fronts.

  1. The growth of the assets in the grantor trust is not subject to gift or estate tax in the grantor’s taxable estate.
  2. The income earned by the trust is taxed to the grantor, not the beneficiaries or the trust itself. This means the grantor pays the income tax on the income earned by the trust and doing so isn’t an additional transfer by the grantor for gift and estate tax purposes.

This magic of grantor trusts is very powerful and allows assets to grow outside the taxable estate of the grantor tax-free while the grantor pays the income tax on those assets. The power of substitution is a particularly useful power to trigger grantor trust status while not causing inclusion in the taxable estate.

Exploring the Many Issues Surrounding the Estate and Trust of Richard Blum – Part III

Anyone who follows the news needn’t look far to catch a headline regarding Dianne. Recent articles indicate that her daughter, Katherine Feinstein (“Katherine”), acting as Attorney-in-Fact for Dianne, has initiated a third lawsuit in as many months against the Trustees of the Marital Trust established by Diane’s late husband accusing them of elder abuse, among other things.

Richard and Dianne were married in 1980 and lived together in the community property state of California until Richard’s death in February 2022. During their marriage, Richard created the Richard C. Blum Revocable Trust dated January 9, 1996, as amended (hereinafter “RCB Trust”). Michael Klein, along with Verett Mims, and Marc Scholvinck became co-Trustees of the RCB Trust upon Richard’s death.

The RCB Trust directs the co-Trustees to hold the assets received from a joint property trust created by Richard and Diane during their lives in a marital trust (“RCB Marital Trust”) for the benefit of Dianne during her lifetime. Upon Dianne’s death, the assets in the RBC Marital Trust will pass to Richard’s daughters, Annette Blum, Heidi Blum, and Eileen Blum Bourgade. In addition to the property received from the joint property trust, RCB Trust directs the Trustees to fund RCB Marital Trust with $5 million in cash and marketable securities. The terms of the RCB Marital Trust require the Trustees to provide Dianne with the entire net income in quarterly installments. If the net income is less than $1.5 million in any year and if the trust has sufficient liquidity, then the Trustees are to distribute principal in an amount that when added to the income provides Dianne with $1.5 million annually.

According to the lawsuit, notwithstanding Richard’s death over a year ago, the Trustees have failed to fund the Marital Trust, failed to make income distributions to Dianne, and ignored Dianne’s requests for information, thereby breaching their duties to administer the trust and to provide information to the beneficiary. The third lawsuit alleges that one Trustee “in an act of hostility and retribution” attempted to interfere with another trust that names Dianne as a beneficiary but of which he is not Trustee. The lawsuit also alleges that the co-Trustees have attempted to disparage Dianne in the press through their counsel who claimed that she was “engaging in some kind of misguided attempt to gain control over trust assets to which she is not entitled.” Harsh words, especially on behalf of co-Trustees who seem to be shirking their duties.

Additionally, the August lawsuit indicates that certain gifts were to be made from the RCB Marital Trust in a specific order and that the RCB Marital Trust contained provisions regarding the order in which the specific gifts were to abate. The August lawsuit indicates that the Trustees have made gifts out of order to the detriment of Dianne thereby breaching their duties of loyalty and impartiality. The lawsuit further alleges that the co-Trustees sold Richard’s interest in the Claremont Hotel in Berkeley, California for $163 million, but failed to inform Dianne of the sale or fund the RCB Marital Trust. Finally, the lawsuit alleges that these various acts or omissions constitute elder abuse given Dianne’s age and that the acts have effectively deprived her of property rights given to her by the RCB Marital Trust. The third lawsuit filed on August 8, 2023, contains 8 counts and several damning allegations.

The allegations correctly assert that the California Probate Code entitles Dianne to information regarding the assets and administration of the RCB Trust and that the co-Trustees’ failure to comply with her requests breaches their fiduciary duties. There are so many alleged breaches in this lawsuit, it’s hard to pick the most important lesson. Those interested in the details should read the entirety of the August lawsuit. On paper, Richard Blum did everything right. He left detailed instructions regarding what should occur after his death. He involved an attorney, he updated his plan regularly, and despite all of this, his trust still ended up in litigation. His failing, if one can call it a failing, was choosing the wrong individuals to serve as co-Trustees. If all the allegations contained in these lawsuits are true, or if even most of them are true, then Richard made a mistake in choosing the individuals that he chose to serve as fiduciaries.

These three lawsuits read together paint a bleak picture of the co-Trustees’ behavior, if true. Trustees have a duty to administer the trust expeditiously in accordance with the terms of the Trust and it appears that the co-Trustees of the RCB Trust and RCB Marital Trust have failed to do either. Additionally, if they have made gifts to other beneficiaries before making gifts to Dianne as required by the terms of the Trust, then they have also breached their duties of loyalty and impartiality. Finally, they have breached the duty to provide information to Dianne. Of course, these lawsuits paint the co-Trustees in the worst possible light, but if the allegations are true, then those Trustees could face serious repercussions, including removal, surcharge, and disgorgement of fees. Again, it’s unfortunate that Dianne had to travel down this path to fight for the gifts her husband of 42 years intended for her to have. This case demonstrates that even the best-laid plans can go awry. If you want to save your Estate from a fate such as this, now’s a great time to reach out to me to discuss and implement an estate plan for you.

Exploring the Many Issues Surrounding the Estate and Trust of Richard Blum – Part II

Anyone who consumes the news needn’t look far to catch a headline regarding Dianne Feinstein. Recent articles indicate that her daughter, Katherine Feinstein (“Katherine”), acting as Attorney-in-Fact for Dianne, has initiated a third lawsuit in as many months against the Trustees of the Marital Trust established by Dianne’s late husband accusing them of elder abuse.

Richard and Dianne were married in 1980 and lived together in the community property state of California until Richard’s death in February 2022. While Richard was alive, he created the Richard C. Blum Marital Trust of 1996, dated January 9, 1996 (“Marital Trust”) naming Dianne as the sole income beneficiary for life. In addition to the income generated by the trust, the Marital Trust provides that Dianne shall receive distributions of principal for her health, education, maintenance, and support. The lawsuit goes on to indicate that Dianne incurred significant medical expenses and sought reimbursement from the Marital Trust. The lawsuit alleges that the Trustees of the Marital Trust have failed to reimburse her medical expenses. The Marital Trust contained a provision allowing Dianne, as the sole income beneficiary, to appoint a successor Trustee and Dianne appointed her daughter, Katherine.

The Trustee appointment provisions are at issue in the second lawsuit. Richard appointed N. Colin Lind (“Lind”) to serve as original Trustee of the Marital Trust during Richard’s lifetime. Lind had the power to designate “the immediate and all subsequent successor Trustees or co-Trustees to serve” were he unable or unwilling to serve. For Lind to exercise that power, he needed to designate the successor Trustee in a notarized document and then deliver the same to the Trustee, the designated successor, or the adult income beneficiaries. Upon Richard’s death, the Marital Trust appointed Richard W. Canady (“Canady”), followed by Gary Wilson (“Wilson”), serving in that order, to serve in the place of Lind, neither of whom had the power to designate a successor. In addition, pursuant to the terms of the Marital Trust, upon Richard’s death, any Trustee appointed and serving because Lind exercised his power to appoint a successor ceased serving.

After Richard’s death, Dianne received a notice pursuant to the California Probate Code indicating that Mark Vorsatz (“Vorsatz”) executed a resignation on March 15, 2022, effective on April 15, 2022 and that because of the resignation, Mark R. Klein and Marc T. Scholvinck were the trustees of the Marital Trust. Of note, the notification failed to indicate how Vorsatz was appointed, although the lawsuit presumes that Lind appointed Vorsatz during Lind’s tenure as Trustee before Blum’s death. Remember that the Trustees nominated to serve after Blum’s death, Canady and Wilson, had no power to appoint a successor Trustee. Even assuming that Lind appointed Vorsatz appropriately, Vorsatz’s tenure ended upon Blum’s death pursuant to the terms of the Marital Trust. At that time, Canady, followed by Wilson, were to serve. According to the July lawsuit, Dianne never received notification of the resignation of either Canady or Wilson.

The second lawsuit filed on July 7, 2023, contains one count and various allegations and can be found here: In the matter of: The 1996 Dianna Feinstein Trust under the Richard C. Blum Marital Trust of 1996, dtd January 9, 1996. This lawsuit, much like the one filed earlier, has a narrow focus: the proper appointment of a successor Trustee and the unreimbursed medical expenses. Given this narrow focus, it’s easy to pull lessons from the lawsuit. First, it’s imperative to follow the terms of the trust when appointing a successor Trustee. It’s unclear whether Lind appointed Vorsatz; unclear whether Canady or Wilson resigned or declined to serve; and unclear how Klein and Scholvinck were appointed. Given these uncertainties, Dianne’s allegation regarding the improper appointment of Klein and Scholvinck seems correct. Klein and Scholvinck, if they are the Trustees, have a duty to keep proper records and their inability to demonstrate how they came to hold office arguably breaches that duty. Whether the judge overseeing the case agrees with this remains to be seen.

Another valuable lesson we can take from this case involves the distribution of principal from the Marital Trust. While the terms of the Marital Trust allow the Trustee to distribute principal for Dianne’s health, education, maintenance, and support, the determination of what fits within that standard remains within the Trustee’s discretion. Should Klein and Scholvinck exercise that discretion to distribute to Dianne? Now that Dianne has initiated a lawsuit, it seems unlikely that Klein and Scholvinck will exercise their discretion and reimburse Dianne’s medical expenses. Of course, if it’s determined that they do not hold the office of Trustee and the court accepts Dianne’s appointment of her daughter as Trustee, then it seems likely Katherine will reimburse those expenses upon taking office. The lesson here is that you must be clear what is intended. It’s up to the drafting attorney to reduce the client’s intent to writing. After all, the language in the document might be interpreted years later by someone other than the drafting attorney. Thus, it’s best to ensure that your documents spell out precisely what your client wants to happen. For example, if Richard intended for the Marital Trust to cover all Dianne’s medical expenses, then the trust should have been drafted that way.

It seems clear that Richard thought about his Estate Plan, consulted attorneys in creating it, but neither he nor they anticipated the difficulty in administering it. In the prior lawsuit, the appropriately appointed Trustees failed to act expeditiously, and in this one, it’s unclear who should be serving as Trustee. More than a year after Richard’s death, three separate lawsuits have been filed but it seems little else has occurred. It’s unfortunate and undoubtedly not what Richard intended when he created the plan. When litigation ensues, only the lawyers benefit as will no doubt be the case here. Litigation takes time and costs money during periods of significant grief.

Tips For Widows/Widowers

Losing a spouse is emotionally challenging. During this difficult time, managing finances can become overwhelming. The following are tips for widows or widowers dealing with financial matters after the death of a spouse:

  1. Take Your Time: Grief can cloud your judgment, so give yourself time to process your emotions before making major financial decisions.
  2. Gather Important Documents: Collect essential documents such as the will, death certificate, insurance policies, bank statements, retirement account details, property deeds, and investment information. These will be necessary for managing the financial aspects.
  3. Notify Institutions: Inform relevant institutions about your spouse’s passing, including banks, credit card companies, insurance providers, and government agencies. This helps prevent any unauthorized access to accounts.
  4. Update Beneficiary Designations: Review and update beneficiary designations on insurance policies, retirement accounts, and other assets. Make sure they reflect your current wishes.
  5. Create a Financial Snapshot: Compile a comprehensive list of your assets, liabilities, income sources, and monthly expenses. This will help you understand your financial situation and make informed decisions.
  6. Seek Professional Advice: Consider consulting a financial advisor, estate attorney, or tax professional who specializes in dealing with estates and inheritance. They can guide you through the legal and financial aspects.
  7. Evaluate Immediate Expenses: Determine the immediate expenses such as funeral costs, outstanding debts, and any legal fees. Use available assets or insurance proceeds to cover these costs.
  8. Review Social Security and Pensions: If your spouse was receiving Social Security benefits or a pension, understand how these benefits might change for you. Social Security survivor benefits and pension options may be available.
  9. Assess Your Income: Understand your sources of income after your spouse’s death. This may include salary, pensions, Social Security, investments, and rental income.
  10. Review Insurance Policies: Review your insurance policies to ensure you have adequate coverage for your needs. Update beneficiaries and assess whether any adjustments are necessary.
  11. Manage Debt: Address any joint debts you and your spouse had. Determine how they will be paid off and consider seeking advice on handling them appropriately.
  12. Create a Budget: Establish a new budget based on your changed financial circumstances. Prioritize essential expenses and allocate funds for savings and future goals.
  13. Consider Downsizing: If your housing situation is no longer suitable, think about whether downsizing or relocating would be financially beneficial.
  14. Update Legal Documents: Update your will, estate plan, and power of attorney documents to reflect your new circumstances and wishes.
  15. Embrace Long-Term Planning: Start planning for your long-term financial future. This might involve retirement planning, investments, and estate planning to ensure your financial security.
  16. Educate Yourself: Take the time to learn about financial matters if you’re not already familiar. Understanding investments, taxes, and other financial concepts can empower you to make informed decisions.

Not all this information applies, but it’s a helpful reminder about the many elements of finances that need to be addressed after a loved one dies.

Exploring the Many Issues Surrounding the Estate and Trust of Richard Blum – Part I

The late Richard Blum, a billionaire investment banker and late husband of Dianne Feinstein, the Senior United States Senator from California. Anyone watching the news with any regularity knows that Dianne has had her fair share of press lately. Recent articles indicate that her daughter, Katherine Feinstein, acting as Attorney-in-Fact for Dianne, has initiated a third lawsuit in as many months against the Trustees of the Marital Trust established by Feinstein’s late husband accusing them of elder abuse. Obviously, starting here would be like starting a story in the middle, so let’s start at the beginning. This first part of a three-part series will explore the issues raised by the first lawsuit. The second part will delve into the issues raised by the second lawsuit and the third will explore the issues raised by the third lawsuit.

Richard and Dianne were married in 1980 and lived together in the community property state of California until Richard’s death in February 2022. During their marriage, Richard and Dianne established the Richard C. Blum & Dianne Feinstein Joint Property Revocable Trust, dated January 10, 1996 (“JPT”), and amended and restated it several times. They amended and restated the JPT in 2015 and that iteration forms the basis for the various lawsuits filed by Katherine on Dianne’s behalf. Richard and Dianne served as co-Trustees of the JPT until Richard’s death at which time, Michael Klein became co-Trustee with Dianne. On August 1, 2022, Dianne resigned as co-Trustee and Katherine became co-Trustee serving with Michael. The JPT holds title to three separate parcels of real property, one located in San Francisco, California, another in Stinson Beach, California, and one in Kauai, Hawaii.

The terms of the JPT require the Trustees to divide the trust estate into a survivor’s share and marital share upon Richard’s death. Dianne’s separate property along with her share of the community property will fund the survivor’s share which will pass through the Survivor’s Trust to the survivor’s separate property trust, the Dianne Feinstein Trust u/a/d June 23, 1978, as amended (“DF Trust”). The remaining assets constitute Richard’s share of the community property and comprise the marital share which will be distributed through a Marital Trust to Richard’s separate property trust, the Richard C. Blum Revocable Trust dated January 9, 1996, as amended (hereinafter “RCB Trust”). Michael Klein, along with Verett Mims, and Marc Scholvinck became co-Trustees of the RCB Trust upon Richard’s death.

The RCB Trust directs the Trustees to hold the property from the JPT in a marital trust (“RCB Marital Trust”) for the benefit of Dianne during her lifetime. Upon Dianne’s death, the assets in the RBC Marital Trust will pass to Richard’s daughters, Annette Blum, Heidi Blum, and Eileen Blum Bourgade. In addition to the property from the JPT, RCB Trust directs the Trustees to fund RCB Marital Trust with $5 million in cash and marketable securities. The terms of the RCB Marital Trust require the Trustees to provide Dianne with $1.5 million per year if the trust has sufficient liquidity.

The first lawsuit filed on June 27, 2023, contains four counts and various allegations found here: In the matter of The Richard C. Blum & Dianne Feinstein Joint Property Revocable Trust, u/t/a Dated 01/10/1996.

First, Katherine alleges that in the fifteen months since Richard’s death, the JPT co-Trustees failed to distribute any assets from the JPT to either the DF Trust or the RCB Trust. Further, Katherine alleges that Dianne desires to sell the Stinson Beach property as she no longer wants to use it or continue to pay for the carrying costs and has made several requests to the co-Trustee of the JPT regarding the same to no avail. The lawsuit alleges that no action has occurred on the property at least in part because Blum’s daughters want to limit the liquidity in RCB Marital Trust. Limiting its liquidity means smaller distributions to Dianne during her life with a greater portion of the trust going to Blum’s daughters as the remainder beneficiaries. Katherine’s lawsuit asks the court to direct Michael to sign documents to transfer the marital share to RCB Trust, surcharge Michael the costs of bringing the lawsuit, and prohibit Michael from using the JPT funds to defend himself. The lawsuit alleges that Michael has breached his duties as co-Trustee by failing to administer the trust.

Thankfully, this lawsuit has a narrow focus: Michael’s failure as co-Trustee of the JPT to fund the sub-trusts thereunder. The lawsuit focuses on the Stinson Beach property and Dianne’s desire to make improvements and sell it. Given this narrow focus, it’s easy to pull lessons from the lawsuit. Most importantly, Richard and Dianne should have planned exactly what would happen to the Stinson Beach property upon the death of either. By sending half to the DF Trust and the other half to the RCB Trust, they increased the tension between the surviving spouse and the children of the decedent spouse. Anytime an Estate Planning attorney deals with a blended family, they need to be sensitive to this issue. Many blended families sit before the attorney and promise that everyone gets along and that everyone agrees to a particular plan. Imagine the attorney’s surprise upon discovering that’s not the case after one spouse dies. I shy away from any arrangement that requires the surviving spouse and children from a previous relationship to agree by appointing an independent Trustee. While that’s what happened here, those independent Trustees have not done what’s required under the terms of the JPT or the RCB Trust. The Estate Planning attorney needs to encourage the parties to consider what should happen, be it sale, transfer in total to one trust, or decision solely by an independent Trustee, should the unthinkable occur and the parties have a falling out after death. Too often, as is the case here, that’s exactly what happens.

The other valuable lesson here is to encourage the Trustee to administer the trust expeditiously. Based upon what’s available publicly, it’s hard to determine whether the Trustees really breached their duties in administering the trusts or whether Katherine initiated the lawsuit early. Either way, the Trustees have a duty to administer the trust and should commence taking steps in that direction as soon as possible after the death of the Trustor. Sometimes delays result because of the assets of the trust, other delays result because the Trustee procrastinates. The former requires transparency by the Trustee whereas the latter may require a lawsuit.

While it’s unclear exactly where the parties stand in the proceedings, it appears that few or none of the usual actions required by a successor Trustee after taking office have occurred as of the filing of the lawsuit. While fascinating, it’s unfortunate that this matter will play out on a public stage. Typically, when litigation ensues, only the lawyers benefit as will no doubt be the case here. Litigation takes time and costs money during periods of significant grief. Stay tuned for next week’s installment which will focus on the second lawsuit.

IRS Confirms Grantor Irrevocable Trust Status Alone Does Not Cause a Step-Up in Basis

Earlier this year the IRS released Revenue Ruling 2023-2. That Ruling examined a common situation in advanced estate planning. The grantor had set up an irrevocable trust and had gifted assets to the trust in what was a completed gift for gift tax purposes. The taxpayer retained powers which caused the trust to be taxed to the grantor for income tax purposes but did not cause inclusion for estate tax purposes. There are several such powers, such as the power to substitute assets under Code Section 675(4). The Ruling did not specify exactly which power had been retained to trigger grantor trust status.

A trust that is taxed to the grantor for income tax purposes (under the provisions of Code Sections 671 and following) is often called a “grantor trust.” A grantor trust which is not included in the taxable estate of the grantor is often called “intentionally defective.”

The Ruling looked carefully at Code Section 1014, which provides for a “step-up” in income tax basis when property is included in the estate of a decedent. The Ruling looked at the clear language of the Code and determined that it did not apply to property that was merely income taxable to the decedent since such property wasn’t acquired or passed from the decedent by bequest, devise, inheritance, or otherwise, as required by the Code section. (Sometimes, even property included in the taxable estate will not qualify for the step-up in basis, such as “Income in Respect of a Decedent,” e.g., an IRA.)

This Ruling did not break new ground. It merely confirmed what I already knew. Under Section 1014, a “step-up” in basis is only available when the assets are included in the taxable estate of the decedent.

The step-up in basis under Section 1014 may be one of the biggest tax loopholes. It allows the gain to escape income taxation entirely. For example, let’s say a taxpayer owns an asset, “Blackacre,” which they purchased for $50,000. Years later, moments before the taxpayer’s death, Blackacre is worth $500,000. If the taxpayer sold Blackacre before their death, they would owe tax on the appreciation of the asset. ($500,000 less their “basis” of $50,000, for a gain of $450,000.) Let’s say the tax rate on their gain was 20%, then they would have owed $90,000 in tax. However, if the taxpayer died before selling Blackacre, Blackacre would have received a new “basis” of the property’s market value as of the date of the taxpayer’s death, or $500,000. (While this is commonly known as the “step-up” in basis, if the value decreased, there may be a “step-down” in basis.) Thus, in this case the taxpayer’s estate or beneficiaries would owe no income tax when they sold the property after the taxpayer’s death for the stepped-up value.

However, to qualify for this loophole, the assets must be included in the decedent’s taxable estate. As the Ruling demonstrates, the fact the assets are in a trust which is income taxable to the taxpayer isn’t sufficient to qualify for this loophole, unless the assets are also included in the decedent’s taxable estate.

Understanding the Importance of the Simultaneous Death Act

Recently, I received a question about interpretation of a simultaneous death clause and whether the individual could modify the clause. At first blush, I thought it was an easy answer, but as I thought through the various issues that the question raised, I realized the underlying complexity of the question. I thought if thinking through that issue caused me to pause, then it might do the same for others. I suspect that next week’s blog will return us to recent legislation or failure of celebrity planning, but this topic piqued my interest. As regular readers of this blog know, everyone needs a comprehensive Estate Plan. That comprehensive Estate Plan consists of a Revocable Trust, Will, Property Power of Attorney, Healthcare Power of Attorney, Living Will, and Health Insurance Portability and Accountability Act (HIPAA) Authorization. While each document plays an important role in the plan, only two survive death, or have testamentary effect: the Revocable Trust and the Will.

Most married couples choose to create a plan that benefits the surviving spouse during life and thereafter goes to the couple’s children, or other beneficiaries. This plan works properly as long as it’s clear that one spouse survived the other. What happens if both spouses die at the same time or so close in time that it’s impossible to tell who died first? That’s where the simultaneous death provisions save the day. Simultaneous death clauses presume that one spouse survived the other so that the plan works the way intended. Without the simultaneous death clause, both estates might end up going through the probate process and their respective loved ones might spend significant time, money, and energy determining what goes where. It’s important for the drafting attorney to think through these issues to ensure that the plan structure works best for the family, regardless of which spouse the simultaneous death clause presumes survives. If the documents do not contain provisions regarding survivorship in a simultaneous death situation, then state statutes will make the presumption for the individuals.

Nearly every state has enacted the Uniform Simultaneous Death Act (the “Act”) in its original form, or the revised version promulgated in 1993 (the “Revised Act”) found here: The Revised Act expanded the narrow application of the Act to include more than simply situations in which it was unclear who died first.

The preamble to the Revised Act details some of the cases that led to revision of the Act. As originally promulgated, application of the Act often led to litigation whereby representatives of each side tried to produce medical evidence that one or the other survived by mere seconds. The preamble uses the word “gruesome” to describe the evidence. The Revised Act addressed that by inserting a 120-hours survivorship requirement which was originally inserted in the Uniform Probate Code years prior. The Revised Act included the “clear and convincing” standard to prove survival by that amount of time in the hopes that would reduce litigation. According to the Revised Act, in a situation when two or more individuals die at the same time, or within 120 hours of one another, then each individual will be treated as having predeceased the other. Thus, if John and Mary die together, for purposes of John’s estate, he will have died first, leaving Mary as the survivor, and for purposes of Mary’s estate, she will have died first leaving John as the survivor. Both the Act and the Revised Act make clear survivorship provisions contained in the documents themselves trump the provisions of the Acts. For this reason, it’s vital to review those provisions and ensure that they accomplish a client’s goals and work together. When both a Revocable Trust and Will are involved, the importance increases as there’s increased opportunity for typographical errors or mismatches in the provisions.

While you might assume that the simultaneous death clause only applies when an individual is married, that’s not the case. These clauses apply anytime two people die at nearly the same time. Most Revocable Trusts and Wills have separate provisions regarding presumption of survivorship for a spouse versus that for a beneficiary. Next time you draft a plan, make sure to consider the implications of the simultaneous death clause and make sure that it works for the individual’s assets and family.

The SECURE Act – the Gift That Keeps On Giving

On July 14, 2023, the Internal Revenue Service (“IRS”) released an advance copy of Notice 2023-54 (the “Notice”) that provides relief to plan administrators, payors, plan participants, IRA owners, and beneficiaries in connection with the change in required beginning date for required minimum distributions (“RMDs”) under §401(a)(9) of the Internal Revenue Code (“Code”) regarding RMDs for 2023. The Notice warns that final Regulations relating to RMDs yet to be issued will apply beginning on January 1, 2024. To better understand the impact of the Notice, let’s review some of the basics of the Setting Every Community Up for Retirement Enhancement (“SECURE”) Act, the associated Treasury Regulations, and SECURE Act 2.0 (“the Act”).

SECURE changed the landscape of retirement planning by increasing the age at which a taxpayer could contribute to their Individual Retirement Account (“IRA”), creating a new class of beneficiary called the “Eligible Designated Beneficiary” (“EDB”), and eliminating the lifetime stretch for any beneficiary who is not an EDB and instead implementing the 10-year rule. For those needing a quick refresher, EDBs consist of surviving spouses, children who have not yet reached the age of majority, chronically ill or disabled individuals, and any other individual not more than ten years younger than the participant, or appropriately structured trusts for the benefit of those individuals. EDBs are the only beneficiaries exempt from the 10-year rule, which operated like the 5-year rule from pre-SECURE Act. Thus, under the 10-year rule, a non-EDB need not worry about RMDs and only needed to withdraw all funds by December 31st of the year of the tenth anniversary of the participant’s death.

In February 2022, the United States Treasury released much-anticipated proposed regulations updating, among other things, the rules regarding RMDs from IRAs. The proposed regulations backtracked on some of the published guidance by adding the requirement of lifetime distributions to any non-EDB in years 1-9 after the participant’s death if the participant died after his or her Required Beginning Date (“RBD”). Now, any non-EDB needs to take annual distributions based upon the beneficiary’s life expectancy over the nine years following the participant’s death and exhaust the IRA by December 31st of the year of the tenth anniversary of the participant’s death if the participant reached their RBD prior to death. Thankfully, the Internal Revenue Service realized that this represented a sharp departure from the advice that many advisors were giving their clients and promulgated Notice 2022-53 that confirmed waiver of any excise taxes resulting from failure to take RMDs in either 2021 or 2022.

SECURE 2.0 passed at the end of 2022 and built on the foundation of SECURE by extending, clarifying, and expanding provisions of the original SECURE Act. Notably, the Act increased the age at which the participant needs to begin taking RMDs to 73 beginning in 2023 and lasting until 2032, at which time the age increases to 75. SECURE also tied the RBD to April 1st in the year after the participant reached the applicable age rather than age 72 specifically to accommodate this change. However, this change caused a bit of confusion because anyone reaching age 72 in 2022 would have had to begin taking RMDs in 2023 prior to the Act but given that the Act passed late in 2022, many failed to realize that they had no RMD due in 2023 and took those distributions and many plan administrators mischaracterized them as RMDs. This mischaracterization made the distributions ineligible for the 60-day to roll over to another plan or IRA.

The Notice fixes this issue by recharacterizing distributions from IRAs taken in 2023 and allowing individuals born in 1951 (or that participant’s surviving spouse) who took distributions between January 1, 2023, and July 31, 2023, to roll them over by extending the 60-day roll over deadline to September 30, 2023. Thus, if you received a lump sum distribution in January 2023, part of which was treated as ineligible for the roll over because it was characterized as an RMD, you now have until September 30, 2023, to roll over the mischaracterized part of the distribution. This same rule applies for certain IRA distributions made to an owner (or their surviving spouse) made between January 1, 2023, and July 31, 2023, to an IRA owner born in 1951 (or their surviving spouse) that would have been an RMD but for the change in RBD under the Act. The roll over is permitted even if the participant or spouse already rolled over a distribution in the last twelve months but will preclude any roll over in the next twelve months.

As should be clear, this article applies to a specific subset of people – only those born in 1951 who received a distribution in 2023. If you would like to read the Notice in its entirety, here’s a link: chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/ This Notice provides a great opportunity to connect with clients and advisors to see if they want to take advantage of the extended roll over period.

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.