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Charitable gifts offer a great opportunity to reduce income tax liability. When a taxpayer makes a charitable contribution, typically they get an offsetting charitable income tax deduction. Unfortunately, that offsetting deduction doesn’t always end up reducing the total tax burden. To take a charitable income tax deduction, the taxpayer needs to itemize their deductions. If the charitable contribution and other itemized deductions don’t exceed the standard deduction amount, then it makes sense to take the standard deduction and forego the itemized deductions.

Let’s look at an example. Assume that Charlie Charitable has taxable income of $100,000 each year. He files as a single taxpayer with a standard deduction of $14,600 (in 2024). He has $10,000 of state and local taxes (an itemized deduction and the most one could take as a deduction for such taxes under current law). In addition, he makes a charitable contribution each year of $2,500 to his alma mater. His itemized deductions would be $10,000 plus $2,500 = $12,500, i.e., less than the standard deduction amount of $14,600. It doesn’t make sense for Charlie to itemize his deductions since they would be less than the standard deduction he could take without itemizing.

If Charlie Charitable spoke with an advisor, he would discover that by making several years’ worth of charitable contributions in one year, he would increase his charitable deductions to an amount exceeding the standard deduction amount. Charlie could refrain from making charitable contributions in the “off” years and simply take the standard deduction amount. Charlie likes that idea and decides to make a charitable contribution of $10,000 in 2024. That raises his itemized deductions to $20,000. This saves him the tax on $20,000 (his itemized deductions) less $14,600 (the standard deduction) = $5,400. Assuming he’s in a combined state and federal bracket of 40%, that would result in savings of above $2,160. In the “off” years of 2025, 2026, and 2027, he’d take the standard deduction amount each year and the strategy would not impact his taxes in those years. In 2028, he could repeat the large charitable contribution for another itemized deduction.

Another way for Charlie to optimize his charitable deduction would be by using a Donor Advised Fund (“DAF”). Contributions to DAFs give an immediate income tax deduction to the donor while creating a reservoir of assets for distribution to charities in the future. In addition, DAFs provide an opportunity for donors to invest contributed funds and make suggestions regarding which charities should receive the distributions. Donors may change their recommendations regarding the charitable distributions allowing great flexibility coupled with immediate benefits. In our example above, that means that Charlie could continue to make charitable contributions to his alma mater, but Charlie could decide to switch to a different charity altogether. In the interim, Charlie could invest the funds as he determined was appropriate prior to their distribution to a charity.

Donors may combine DAFs with other strategies to produce even better results. For example, if a donor gave highly appreciated public stock to a DAF, the donor would receive an income tax deduction for the full value of the appreciated stock without ever paying tax on the gains. Going back to our Charlie example, assume that Charlie gave $10,000 worth of publicly traded stock in which he had a basis of $1,000 to the DAF. If Charlie had sold the stock, he would have had to pay tax on the $9,000 gain. Assuming a state and federal combined capital gain tax rate of 30%, he’d owe $2,700 on the gain. If he then contributed the proceeds to charity, he’d only have $7,300 to contribute to charity. By giving the appreciated publicly traded stock directly to the charity (or DAF), he increases the amount that he contributes to charity which increases the deduction he receives.

DAFs complement any charitable giving strategy already in effect and provide a great opportunity for those new to charitable giving to discover the benefits it provides. It allows one to maximize the tax benefit from charitable giving while retaining a say over the timing and distribution of the money. 

This blog often focuses on avoiding litigation; more than one blog has detailed ways to make an Estate Plan “litigation-proof” or at least as litigation-proof as possible. Sometimes, though, beneficiaries need to litigate in order to achieve the goals of the decedent. A recent California appellate case, Smith v. Myers (2024) 103 Cal.App.5th 586, highlights just that. Let’s explore a real-life example of how litigation helped ensure proper implementation of a decedent’s plan.

Ernest Myers’ first wife died in 1992 and at that time, he gifted a 45.8% interest in his ranch consisting of two parcels, to his daughter, Kathleen Smith. Seven years later, Ernest married his second wife, Emma. Shortly after marrying Emma, Ernest restated the “Ernest Wilbur Myers 1992 Family Trust” (hereinafter “Trust”). The restatement indicated that Ernest was leaving no further gifts to Kathleen because he had or would provide for her otherwise outside the terms of the trust. The restatement gifted the remaining 54.2% of the ranch to Emma upon his death. The restatement also named Emma to serve as successor Trustee upon Ernest’s death. Ernest later amended the Trust on July 19, 2016 (hereinafter “Amendment”) giving the remaining 52.4% of the ranch to Kathleen and her husband, Bruce, upon his death. According to the Amendment, Emma would continue to receive income from rental units located on the ranch and she would become successor Trustee of the Trust. Interestingly, Ernest died just about a month after executing the Amendment on August 22, 2016.

Nearly 4 years after Ernest’s death, on July 10, 2020, Kathleen and Bruce filed a petition for an order confirming the validity of the amendment and to remove Emma as Trustee of the Trust. Emma countered and argued that Kathleen and Bruce could not seek to confirm the validity of the Amendment because they failed to do so within one year of the decedent’s death and further that the Amendment was procured through undue influence. Emma argued that Kathleen and Bruce were seeking to enforce a promise or agreement with the decedent to distribute a portion of his estate or trust. The court reviewed the terms of the statute that Emma sought to use and determined that she was correct that the statute imposed a one-year statute of limitations on claims based upon a decedent’s declaration to undertake or refrain from undertaking an act when the decedent promised to arrange for the claimant to receive a distribution from an estate, trust or other instrument, but that this was not the case at issue.

The California appellate court affirmed a lower court’s decision that the one-year statute of limitations did not apply to Kathleen and Bruce’s petition. The appellate court examined the statute at issue and determined that the claim at issue was not based upon Ernest’s promise to make a distribution from his estate or trust to Kathleen and her husband. Rather, Kathleen and Bruce were alleging that the Amendment required that the Trustee (Emma) distribute the remainder of the ranch to them, that the Amendment was valid, and that they were entitled to the ranch under the Amendment. Kathleen and Bruce did not allege that Ernest promised to make a distribution or any other allegation that meant application of the statute Emma cited. Ultimately, the court decided that the Amendment posed no obligation on Ernest to distribute the property and made no obligation on the beneficiaries. The Amendment imposed an obligation upon the Trustee to distribute the ranch.

While the case doesn’t indicate whether Emma will continue as Trustee, it made clear that she was obligated to distribute the ranch in accordance with the terms of the decedent’s Trust. It’s a logical conclusion from the case that Emma intended to keep the ranch for herself despite Ernest’s Amendment. It’s unclear why Ernest ultimately changed his mind regarding distribution of the ranch, especially so close in time to his death and sixteen years after his documents gifted it to Emma. It may be that it was a case of undue influence, as Emma alleged, or it simply may be that Ernest changed his mind, which happens often. That’s the beauty of Estate Planning, the decedent may change his mind at any time up until death.  Regardless, this case demonstrates the importance of understanding an Estate Plan and how litigation sometimes becomes a necessary evil.

Finally, on a smaller scale, this case highlights the difference between an amendment to a trust and a promise or agreement by the decedent. It underscores the importance of filing an action timely, especially when enforcing provisions of a Revocable Trust. While I always work to avoid litigation, sometimes, like in this case, it produces the right result. In those situations, it’s good to understand the options that exist. If you have concerns about your rights under an Estate Plan, connect with me. While it’s less expensive and stressful to address the issues while everyone is alive, sometimes litigation is a necessary evil.

Recently, this blog examined the benefits of creating an Estate Plan and made the point that while many individuals think that they need only a “simple plan” because they don’t have significant assets or have few beneficiaries, that’s simply not true, see Estate Planning – There’s Something Here for Everyone Part I. This second part of the series will examine the most common mistakes that occur in an Estate Plan and how to avoid them.

Of course, any individual who fails to create an Estate Plan makes the biggest mistake of all. Failing to prioritize your Estate Plan or failing to ensure its completion leaves your affairs and your family in limbo both during life and after your death. As we learned in the first part of this series, without a proper Estate Plan, the state of your domicile controls distribution of your assets upon your death which has a snowball effect. Even if an individual undertakes Estate Planning, that alone does not guarantee a successful plan. Numerous opportunities exist for blunders to create chaos in an Estate Plan. For purposes of this article, I have divided those mistakes into four categories below.

The first type of mistake results when an individual seeks to shortcut the Estate Planning process in some way. Some individuals try to avoid creating an Estate Plan by retitling their assets jointly with another individual so that the asset passes to that individual automatically upon the death of the first individual. While doing this avoids probate, it creates other issues. For example, either joint tenant has the right to all the assets in the joint account, regardless of who supplied the funds. Further, joint tenants share legal worries. Property owned as joint tenants with rights of survivorship becomes vulnerable to the legal claims of each joint tenant, even if the other joint tenants had nothing to do with the legal issue. Revising the title to an asset may also raise gifting issues. This can be particularly troublesome for real estate because lenders will require the approval of every owner to refinance or sell the property.

Next, failing to account for the circumstances of a beneficiary results in mistakes in an Estate Plan. This could involve leaving assets outright to a minor, an individual with special needs, or a spendthrift. Any of these could have disastrous results. If an individual leaves assets outright to a minor, then most states require the establishment of a guardianship. Guardianship proceedings involve significant time, trouble, and expense, and often mean continuing court oversight. Usually leaving assets outright to a beneficiary with special needs results in loss of public benefits. Finally, beneficiaries known for spending money, battling addiction, facing legal woes, or dealing with creditors need the benefit of a trust holding their inheritance, rather than outright distribution. Mistakes in failing to account for beneficiary circumstances lead to disastrous results for the beneficiary.

The next category of mistakes are those plans that surprise the beneficiaries. As Trust and Estate litigators know, a beneficiary whose inheritance failed to meet their expectations makes a great client. Plenty of contentious battles begin because the grantor treated one beneficiary differently than another or one person decided something of which another disapproved. To prevent those surprises, this author suggests having a conversation with beneficiaries, no matter how uncomfortable so that they know what to expect. Clients may hesitate to discuss their plan because they worry that a beneficiary who knows that they will receive an inheritance will lose motivation to work hard. Others may worry that disclosing the information will cause current conflict or believe that the details of their plan should remain private until after their death. Still, others may have a hard time assessing family dynamics or the limitations of their intended beneficiaries. An experienced Estate Planning practitioner assists a client in working through these concerns and encourages an open dialog with the beneficiaries and fiduciaries to reduce conflict after death.

The final category of mistakes occurs because the individual fails to consider the Estate Plan holistically. An Estate Plan involves more than just the documents evidencing the plan. Effective estate planning requires an understanding of an individual’s assets and how the plan will work for those assets. It also involves knowing what assets the plan won’t cover. Under normal circumstances, any asset that passes pursuant to a beneficiary designation, such as a retirement plan, life insurance, or an annuity passes outside the Estate Plan. Sometimes, these assets make up the bulk of an individual’s wealth. Thus, coordinating beneficiary designations for those assets constitutes an integral part of comprehensive Estate Planning. In addition to considering assets that pass pursuant to beneficiary designation, it’s important to consider the overall impact that taxes will have on the plan as well as the beneficiaries themselves. An attorney creating the Estate Plan needs to understand whether the estate exceeds the Applicable Exclusion Amount ($13.61 million in 2024) which includes determining whether lifetime gifts reduced that amount. Further, if the estate will have an estate tax liability, then it’s important to consider which assets the estate will use to pay such liability. In a situation in which the client has children from a prior relationship, this matters a great deal. While assets passing to a surviving spouse do not incur an estate tax because of the unlimited marital deduction under Internal Revenue Code Section 2056, when those assets pass from the surviving spouse to the children of the first deceased spouse, a tax liability may occur and determining which party ultimately bears the taxes matters.

Finally, I can help every client understand potential income tax consequences of the plan. For example, if the client has designated a beneficiary on an Individual Retirement Account (“IRA”), that beneficiary will have to pay income taxes on the distributions from the IRA unless it’s a ROTH IRA. The income tax consequences of receiving these assets may influence the client to structure their plan another way. Perhaps they intended to make a charitable bequest and after discussing the income tax consequences of distributions from an IRA decide that using a portion of the IRA to fund that charitable bequest makes more sense for their plan. Of course, the practitioner advising the client needs to be aware of these issues. Retaining a competent me makes a world of difference in creating and implementing a comprehensive Estate Plan.

As this article has demonstrated, mistakes happen in many ways and lead to various unintended and potentially catastrophic consequences for the loved ones of those who fail to plan. These mistakes may make an impact during the life of the individual who failed to plan, and they certainly cause problems at death. Making matters worse, these mistakes may cause lasting trouble after an individual’s death either through an unnecessary (and possibly expensive or time-consuming) probate process or by improper planning for the intended beneficiary which takes numerous forms.

I often hear that someone didn’t or doesn’t need an Estate Plan, or needed only a “simple plan” because they didn’t have much in the way of assets, or they only had relatively few beneficiaries. Other potential clients indicated that they didn’t need a plan because they added a beneficiary to all their assets.  None of these circumstances means that an individual doesn’t need an Estate Plan.  In fact, individuals whose estates are modest, who have few beneficiaries, or who have added beneficiaries to assets may require more planning than they realize.  I make it my mission to disabuse potential clients of the notion that they need a large estate or multiple beneficiaries to create an Estate Plan.  Nothing could be further from the truth.  Let’s examine why in this first part of a two-part series.  Part II will examine the most common mistakes that occur in an Estate Plan and how to avoid them.

As a threshold matter, it’s a good idea for anyone aged 18 or older to have at least the basic Estate Planning documents that include a Will, or Will substitute also known as a Revocable Trust, a Property Power of Attorney, a Health Care Power of Attorney, an Advance Health Care Directive / Living Will, and a Health Insurance Portability and Accountability Act (“HIPAA”) Authorization.  These documents need to lay out who should make decisions if the adult cannot and who should have access to their protected health information.  These documents play an invaluable role both during life and at death.  For young adults headed off to college or living on their own for the first time, they establish clear boundaries and instructions regarding circumstances in which those individuals want their parents or another individual to have access to their financial or health information.  For older adults, it provides those same benefits plus many more.  During life, the plan gives directions regarding finances and medical care during incapacity or other periods when an individual cannot articulate their preferences.  At death, the Estate Plan provides a roadmap complete with instructions regarding who should distribute assets, in what manner, and to whom.

If an individual dies without a Will or Revocable Trust, that’s called dying “intestate.”  When a person dies intestate, the laws of intestacy in their state of domicile control what happens to their assets upon death. Intestacy laws usually give at least half of those assets to the surviving spouse and distribute the remainder among an individual’s children, all outright. Allowing the laws of intestacy to dictate disposition of assets upon death equates to a failure to plan.  Outright distribution could have disastrous consequences for any special needs beneficiary by making them ineligible for the benefits that they were receiving. Outright distribution causes issues for a minor child by requiring establishment of a guardianship for such child to receive the assets. Outright distribution could result in a beneficiary’s creditor, rather than such beneficiary, receiving assets.  Any of these consequences could prove costly, costlier, in fact, than if the individual had simply decided to create a comprehensive Estate Plan.  If outright distribution would not cause any of the issues raised above, the distribution pattern set forth in the intestacy statutes may not match an individual’s preferred pattern of distribution. Creating a comprehensive Estate Plan that consists of the documents noted above avoids these potentially catastrophic results and leaves control of important decisions to the individual creating the plan.

Some individuals try to avoid creating an Estate Plan by using titling mechanisms to transfer their assets at death. Practitioners often cite avoiding probate as one of the reasons for creating a Revocable Trust to govern the distribution of assets at death. As any good Trusts and Estates attorney knows, probate avoidance comes in other forms. For example, taking title to an asset as joint tenants with rights of survivorship avoids probate as long as the other joint tenant(s) survive. However, using that form of joint ownership raises certain issues that using a Revocable Trust does not. Because joint tenants each have rights to the entire asset, a joint tenant could deplete a joint account without the permission or knowledge of the other joint tenants. In addition, joint tenants could share legal worries. Property owned as joint tenants with rights of survivorship becomes vulnerable to legal claims of each joint tenant, even if the other joint tenants had nothing to do with the legal issue. Finally, this form of ownership could create gifting issues if one or more of the owners failed to contribute to the purchase price of the property or failed to contribute funds to the account.  Transferring assets to a Revocable Trust, however, avoids those problems. Owning assets in a Revocable Trust allows the owner to maintain the use of the assets during life and prevents the creditors of another individual from getting to those assets while the trustor is alive. The Revocable Trust also allows the trustor to include safeguards for the beneficiary that will continue after the death of that trustor and that could continue for multiple generations.

As this article demonstrates, there are many great reasons to create an Estate Plan.  First, it provides detailed instructions regarding what happens both during life and death.  Next, it avoids application of the laws of intestacy upon death.  Further, an Estate Plan provides an opportunity to consider the individual circumstances of each beneficiary and plan in a way that protects those beneficiaries.  This is particularly important for any beneficiary with special needs who may receive government benefits, for minors who cannot hold legal title to property directly, and even for spendthrift beneficiaries whose creditors might obtain the assets.  While potential clients may be tempted to use shortcuts to create an Estate Plan, those shortcuts often cause more problems than they solve.  A true Estate Plan entails creating a Revocable Trust, pour-over Will, Property Power of Attorney, Health Care Power of Attorney, Living Will, and Health Insurance Portability and Accountability Act Authorization, but that’s just the beginning. A comprehensive Estate Plan involves regular meetings to ensure the plan remains current both with the grantor’s goals and the ever-evolving estate tax laws. The next part in this series will explore the most common mistakes that could undermine an Estate Plan.

Even those individuals who have not yet created an Estate Plan have certain goals in mind regarding their legacy. They may have had conversations with their loved ones regarding what they want to happen, including discussing detailed disposition of their assets upon death. Often, these goals reflect long-standing plans to reward a beneficiary for their devotion to the business or even to follow through on a promise to gift a particular asset to a beneficiary. When an individual creates a plan like this, it may seem straightforward; however, these “simple” bequests can prove difficult, if not impossible, to implement for a variety of reasons. For example, if the assets no longer remain in the estate, or if the value of the asset changes substantially between the time the documents are signed and the death of the donor, the fiduciary administering the decedent’s Estate or Revocable Trust may not be able to implement the plan as intended. Sometimes circumstances such as medical expenses require the sale of an asset prior to death, resulting in ademption of the asset. Sometimes changes in the assets and their values occur with the mere passage of time. This article explores what happens when an Estate Plan includes a specific gift and circumstances change such that the estate no longer owns that specifically devised asset or its value has changed drastically and the potentially catastrophic and likely unintended consequences that follow.

Specific gifts present an easy way to accomplish Estate Planning goals. Let’s assume that Johnny’s mother left a Will leaving him her business, Fran’s Flowers, worth $1 million. She left the remainder of her Estate, also worth $1 million to her daughter, Sally. Each child would receive an approximately equal share of mom’s estate. If Johnny’s mother sold the business and then died prior to updating her Will, in states that follow the common law doctrine of ademption, Johnny would receive nothing. For those unfamiliar with the term, ademption occurs when specific property given to a beneficiary no longer exists at the death of the donor. The testator may have sold or otherwise disposed of the property. It matters not how or why the property no longer exists, only that it’s gone.

Let’s assume that instead of her business, Johnny’s mom plans to give him her Aspen, Colorado vacation home because he travels there every winter for ski season. Mom contracts to sell the property, intending to buy a larger home, but dies prior to closing. Although the contract is executory, the doctrine of equitable conversion deems the purchaser the owner of the home from the moment the contract becomes enforceable. Even in this scenario, the specific bequest was adeemed and Johnny again loses out on his inheritance.

To further illustrate the point, assume that Johnny’s mom wants to give her diamond ring to Johnny’s sister, Sally. Shortly before Mom’s death, a thief steals the diamond ring. The personal representative makes a claim against Mom’s insurance and the estate collects the insurance proceeds. You might assume that Sally would receive the proceeds in place of the diamond ring. In most states that recognize ademption, the specific devise would be adeemed by extinguishment, notwithstanding the estate’s receipt of insurance proceeds. Sally would have no recourse, although receipt of the insurance proceeds made the estate whole. A few states have moved to enact statutes that give the insurance proceeds to the beneficiary when the asset no longer exists, but that’s not universal.

Some states, like Florida, will look to the testator’s intent to determine if a suitable replacement exists. Other states, like Wisconsin, have attempted to abolish the doctrine of ademption by extinction by awarding beneficiaries the balance of the purchase price of an asset sold prior to death. Yet others, like Virginia, have enacted statutes that carve out what happens with specific types of assets, such as stock certificates. Thus, if a new company buys the stock of the old company that was the subject of a specific devise and issues new stock, that specific bequest would not have been adeemed and the beneficiary would take the new stock in place of the old. Still others, like California, actively seek to avoid ademption whenever possible.

Now, let’s flip the scenario back to the original example in which Johnny receives the business and Sally receives the residuary estate. Assume that the business appreciates substantially between the time Mom signs her Estate Plan and her death. If Johnny receives the business valued at $8 million and Sally receives the $1 million residuary estate, Johnny receives many multiples of what Sally does. Obviously, this was not Mom’s intent, but most states would never get to intent in this situation because the documents were clear. This example highlights an extreme result of planning gone awry but represents an important consideration whenever a client wants to make specific bequests.

Is there anything that can be done? Perhaps. clear drafting that indicates what should happen should the asset no longer be in the estate, or if an asset appreciates substantially, help keep the beneficiaries whole. In most states, if a specific devise fails because it has been adeemed, the intended beneficiary has little or no recourse and will not receive the value of the intended specific bequest from other components of the Estate. It matters not whether the removal was intentional or unintentional. Once the Estate no longer holds the assets, that’s the end of the inquiry. Some states consider a specific bequest of an asset that has changed substantially in character adeemed. In other situations, if the specific devise appreciates well above the value of all the other assets combined, children who were supposed to have equal treatment would end up with unequal treatment. While we often say that fair does not necessarily mean equal in Estate Planning, most individuals design their Estate Plans to treat their beneficiaries fairly and would loathe having the plan altered by outside factors. It’s important to take care of specific bequests and ensure that you consider all the possibilities for the asset and include appropriate adjustments as part of a comprehensive Estate Plan.

Celebrity estates often go wrong and become the subject of ridicule and infamy. Given the numerous sources that detail the consequences of failed Estate Plans, it surprises me that anyone, let alone a person with any degree of fame, would fail to implement a proper Estate Plan prior to their death. Sometimes, it’s because they died an untimely death and never created the plan or created a convoluted plan. Other times it’s because they neglected to update the plan as family circumstances changed. Finally, some famous individuals do not follow the required formalities for their Estate Plan. None of these excuses outweigh the benefit of creating an Estate Plan and reviewing it regularly. Simply put, none of us should leave our legacy to chance.

Rupert Murdoch may understand the importance of legacy better than most other famous people. Indeed, Murdoch expects his children to compete for his respect by vying for control of the family empire. This family dynamic served as the inspiration for the television show, Succession. Much like what happened in the show, the “heir apparent” to the family empire changes over time based upon that individual’s action or inaction in a particular matter. In the show, when a child disobeyed or angered Logan Roy, he made changes and often pitted his children against one another. According to sources, that’s exactly what’s happening now with the Murdoch family. Late last year, Murdoch filed a petition to amend the terms of an irrevocable trust that holds Murdoch’s approximately 40% interest in News Corporation (“News”) (which owns The Wall Street Journal) and Fox Corporation (“Fox”). According to documents obtained by the New York Times, Murdoch initiated the petition because of his concerns regarding the politics of some of his children. He worries that their beliefs could influence News and Fox and ultimately, negatively impact the economic value of the entities.

Murdoch created the trust at issue in 1999. According to the New York Times, upon Murdoch’s death, the terms of the trust give equal voting control of the entities in the trust to Lachlan Murdoch, James Murdoch, Elisabeth Murdoch, and Prudence Murdoch, four of Murdoch’s six children. In the petition, Murdoch seeks instead to grant exclusive control of the entities to his eldest son, Lachlan. Lachlan began running News and Fox last year when Murdoch retired and aligns with his father politically. Notably, James, Murdoch’s youngest son, has clashed with his father politically and has criticized editorial content published by the media outlets. If Murdoch wins this lawsuit, it will strip James, Elisabeth, and Prudence of any power to control News or Fox.

Murdoch’s desire to change the terms of the trust may not come to fruition. The New York Times reports that the terms of the trust only allow changes made in good faith and for the benefit of the heirs. Sources indicate that Murdoch plans to argue that giving Lachlan sole control of News and Fox will protect the value of the companies and benefit the heirs by putting control in the hands of just one child thereby preventing intrafamily squabbles. James, Elisabeth, and Prudence oppose the change and it’s unclear how the court will view the proposed modification given that three of four children would lose their voting rights. The hearing will occur in September.

Interestingly, we get to watch this battle unfold during Murdoch’s life. In many disputes involving the estate of a famous individual, the battle occurs after that person’s death. Here, it occurs at Murdoch’s behest during his life, which provides insight into his true intentions. Beneficiaries rarely have the opportunity to understand the underlying reason for a plan that deviates from expectations or that treats children differently. That isn’t the case here. Murdoch’s children know what he wants to do and why and will have the opportunity to oppose the proposed revision. Unfortunately, no matter how the case ends, it may cause irreparable damage to the family.

While fascinating, it’s unfortunate that this matter will play out on a public stage. The family is no stranger to the press, lawsuits, and publicity. Typically, when intrafamily litigation ensues, only the lawyers benefit. Litigation takes time, causes stress, and costs money. Thankfully for the Murdoch family, the dispute plays out now, rather than at Rupert Murdoch’s death. While it will undoubtedly hurt feelings, having it play out now may give the parties time to heal and potentially reconcile while everyone lives. It may also motivate them to settle the dispute privately. These public feuds provide great lessons for all of us.

Grammy Award winner, Tony Bennett, died on July 21, 2023, at the age of 96. Bennett had a prolific career releasing more than 70 albums and winning over 19 Grammys. He enjoyed a resurgence in popularity late in his career when he partnered with Lady Gaga to release two albums. He devoted his life to music amassing an impressive music catalog, image rights, and memorabilia, along with paintings and artwork. Rolling Stone reported that Bennett earned more than $100 million from live performances in the last 15 years of his life and sources estimate the value of his estate over $200 million.

From the facts that we have available, it appears that Tony Bennett left more than enough money and assets to take care of all of his loved ones: his wife, Susan Crow, and his four children D’Andrea  Bennett (“Danny”), Daegal  Bennett (“Dae”), Johanna Bennett, and Antonia Bennett. Yet, that hasn’t stopped litigation from ensuing. Two of Bennett’s four children, Johanna and Antonia, filed a lawsuit against their brother, Danny, in New York Supreme Court earlier this summer. In that lawsuit, Johanna and Antonia allege that Danny failed to provide a full accounting for sales of Bennett’s music catalog and image rights proceeds, that he withheld information about their father’s assets, and that he personally benefitted from the estate and received a substantial commission from financial activities prior to Bennett’s death.

To the untrained observer, Tony Bennett did everything right. He created an Estate Plan, which included the Bennett Family Trust. A comprehensive Estate Plan consists of a Revocable Trust, pour-over Will, Property Power of Attorney, Health Care Power of Attorney, Living Will, and a Health Insurance Portability and Accountability Act Authorization. During life, the plan acts as a set of instructions regarding who makes what decision, be it medical or financial, if the client is unable to make those decisions. At death, these documents dictate who controls distribution of the estate, to whom the estate will be distributed, and when and how it will be distributed to those individuals. While we cannot know which documents Bennett signed, we know that the Bennett Family Trust would have kept his plan private as Trusts are used to prevent the public probate process. Now that his daughters have filed a lawsuit, that changes.

Unfortunately for Tony Bennett, he didn’t do everything right. According to sources, he named Danny to serve as co-Trustee of the Bennett Family Trust along with him during the later years of his life. At Tony’s death, Danny became the sole Trustee. Additionally, it seems that Danny managed property and assets for the Bennett Family Trust and the family’s Delaware-based company, Benedetto Arts, LLC (“LLC”) in which Bennett’s children and the LLC all hold membership interests.

According to the lawsuit, Danny oversaw the sale and consignment of Bennett’s memorabilia, personal property, and an interest in Bennett’s name and likeness in July 2022. Danny founded an artist management and strategic marketing company, and the lawsuit alleges that in this capacity he received a “substantial commission” from the sale. Bennett’s Will contained a provision distributing all of his tangible personal property equally among his children after debts, expenses, and taxes. The daughters allege that they were not aware which of Bennett’s assets were sold in the deal. They further allege Danny prevented them from visiting their father’s apartment and that they were not allowed to view Bennett’s tangible personal property. The lawsuit alleges that these items had “significant sentimental value.” Finally, the lawsuit alleges Danny donated Bennett’s clothing to charity without notice to his sisters in contravention of the express terms of Bennett’s Will. Further, Danny auctioned off Bennett’s remaining tangible personal property without consulting his sisters even though none of Bennett’s Estate Planning documents directed a sale.

Danny’s actions or inaction caused his sisters to file their lawsuit, undoubtedly damaging their relationship permanently. The sisters’ lawsuit contains allegations regarding allegedly improper $1.2 million loan and gifts totaling $4.2 million, which is “more than double the value of gifts to each of Bennett’s other three children.” It’s possible that the loan and gifts were legitimate. It’s possible that they weren’t. We may never know. What we do know is that this family drama will play out in a public forum despite Bennett’s desire to keep his plan private.

This case highlights the importance of communicating your wishes to your beneficiaries. While many clients prefer to keep their plan private, letting your beneficiaries know the general scheme of the plan and any reasons for inequalities while you are alive will help prevent hurt feelings after your death. The case also serves as a reminder of the important role that a Trustee plays after your death. Whoever you name to serve as Trustee has a fiduciary duty to act for the benefit of the beneficiaries which includes providing them with information about the Trust, maintaining transparency in the actions that they take on behalf of the Trust, and communicating regularly about the Trust. Individuals serving as Trustee usually desire to abide by the decedent’s wishes, but often fail to realize the immense responsibility that comes along with the office. Finally, this case demonstrates the discord that arises when one child serves as Trustee. Naming any sibling to serve as Trustee for another sibling causes strife. If the children have different mothers that will only exacerbate that friction. Clients often want to name the eldest or most responsible child as the Trustee or co-Trustee to take over after their death, but that causes issues and may result in irreparable damage. If anything in this article sounds like something in your Estate Plan or if you have questions about your plan, reach out to me today. It could prevent litigation after your death.

What Is the Generation-Skipping Transfer Tax (GSTT)?

The generation-skipping transfer tax is a federal tax on a gift or inheritance that prevents the donor from avoiding estate taxes by skipping children in favor of grandchildren. With the generation-skipping transfer tax, grandchildren receive the same amount as if the inheritance were coming from their parents.

Before the generation-skipping transfer tax was introduced in 1976, wealthy individuals were legally able to gift money and bequeath property to their grandchildren, without paying federal estate taxes. The legislation effectively closed the loophole where inheritances could skip a generation to avoid double estate taxation.

Understanding the Generation-Skipping Transfer Tax

The generation-skipping transfer tax (GSTT) is an additional tax on a transfer of property that skips a generation, known as a generation-skipping transfer (GST) for short. The GSTT was implemented to prevent families from avoiding the estate tax for one or more generations by making gifts or bequests directly to grandchildren or great-grandchildren.

The parent’s generation is skipped to avoid an inheritance being subject to estate taxes twice. The GSTT ensures that grandchildren end up with the same value of assets that they would have had if the inheritance was transferred to them directly from their parents, rather than their grandparents.

The person giving the gift is referred to as the transferor and the recipient is known as the skip person. Many people use a grandchild as a skip person, but a skip person does not have to be a family member. Any individual is eligible to receive a generation-skipping transfer as long as they are at least 37½ years younger than the transferor. The generation-skipping transfer tax is imposed only if the transfer avoids incurring a gift or estate tax at each generation level. To make up for the taxes that may be avoided by skipping one generation, the Internal Revenue Service (IRS) imposes a second layer of tax on gifts and bequests above the estate and lifetime gift exclusion. It means that the GSTT is only due when a beneficiary receives amounts in excess of the GST estate tax credit.

Direct vs. Indirect Skips With the GSTT

The taxation of a GST depends on whether the transfer is a direct or an indirect skip. A direct skip is a property transfer that’s subject to an estate or gift tax. An example of a direct skip would be a grandmother gifting property to a grandchild. The transferor or their estate is responsible for paying the GST tax for direct skips.

An indirect skip involves a transfer that has intermediate steps before reaching a skip person. There are two types of indirect skips: the taxable termination and the taxable distribution.

A taxable termination involves a skip person and a non-skip person. A non-skip person is the primary beneficiary who will receive property before it is transferred to the skip person. The transfer to the skip person occurs upon the death of a non-skip person—typically the child of the transferor.

As an example of a taxable termination, consider a transferor who establishes an income-producing trust for his son. Upon the son’s death, the remaining property would be passed on to the transferor’s grandchild, at which time those assets would be subject to the GST tax.

A taxable distribution refers to any distribution of income or property, from a trust to a skip person that is not otherwise subject to estate or gift tax. If a grandmother established a trust that made payments to her grandson, those payments would be subject to GST taxes, which the recipient is responsible for paying.

How Much Is the Generation-Skipping Transfer Tax?

In the past, the GSTT has been hefty, ranging from 35% to 77%.9 The current rate, which has been in effect since 2014, is 40%; however, the Tax Cuts and Jobs Act dramatically lessened the estates that might be affected by it. For 2022, the federal estate, gift, and GSTT exemption is $12.06 million for each individual ($12.92 million in 2023) and $24.12 million for married couples ($25.84 million in 2023), more than doubling the pre-TCJA limit of $5.49 million (for individuals).

Only the value of a person’s estate that is in excess of the applicable exemption is subject to an estate tax at death or the GSTT, at that flat rate of 40%. So only aggregate gifts and bequests to a skip person in excess of $12.06 million in 2022 ($12.92 million in 2023) would be subject to the 40% flat generation-skipping transfer tax.

The GSTT is assessed when the gift or property transfer is made; GSTs can occur before or after the death of the transferor. While still alive, the transferor can give the gift directly to the skip person. But upon death, the transferor’s will may either stipulate that property is bequeathed to a skip person, or it may call for the establishment of a trust from which distributions will be made. Form 709 is used to report both GST taxes and transfers whereby federal gift taxes are due.

GSTT Strategies

Most beneficiaries will avoid the GST tax because the estates they inherit will be worth less than the government-provided estate tax credit. The GSTT exemption is very high (as noted above).

However, in cases where the tax could apply, transferors can create dynasty trusts, which are designed to avoid or minimize estate taxes with each generational transfer. By parking assets in the trust and making specified distributions to each generation, the corpus of the trust isn’t subject to estate taxes with the transfer.

What Triggers the Generation-Skipping Transfer Tax?

The generation-skipping transfer tax is triggered when a person gifts another person an asset but skips a generation in doing so. For example, when a person gifts a home to their grandchild and skips their child.

Who Pays the Generation-Skipping Transfer Tax?

The generation-skipping transfer tax is paid by either the grantor or the skipped beneficiary. The grantor pays the direct generation-skipping tax while an indirect generation-skipping tax is paid by the skipped beneficiary. The former is the most common scenario.

How Much Can a Parent Gift a Child Tax-Free in 2022?

A parent can gift a child tax-free $18,000 in 2024.

Anyone who has seen my house at Christmas knows that it tops the list as my favorite holiday. We deck the halls, make cookies, exchange presents, look at light displays, and revel in the Christmas spirit as long as possible. Christmas in July seems like a great idea except we can’t celebrate Christmas in July until Independence Day has passed! While Christmas is my favorite holiday, the 4^th of July ranks a very close second. Now you really may be wondering where I’m headed in this blog dedicated to all things Estate Planning and how it ties into Independence Day. Keep reading and I promise to make the connection.

Freedom, liberty, and the right to individual ownership serve as the reasons that this country declared its independence from England in 1776. The desire to have freedom from the worry about what will happen to our family and loved ones upon our death, to give liberty to those individuals by continuing to care for them after our death, and to protect our beneficiaries’ ownership of assets thereafter all influence the decisions that we make while undertaking Estate Planning. We create Estate Plans to protect some of the very same ideals that our nation sought to protect when it declared its independence.

To help us gain a better understanding of the need for and benefit of Estate Planning, let’s review the history of the federal estate tax. Congress passed the Stamp Act of 1797 to raise money for the Navy to defend the United States against a threat from France. The Stamp Act required a stamp on Wills and other probate-related documents. The stamp cost money to affix creating the first ever estate tax, a tax on the transfer of property from decedent to beneficiary. Congress repealed the Stamp Act in 1802.

Several decades later when the government needed to raise money for the Civil War in 1862, it passed the Revenue Act of 1862 (“1862 Act”). The 1862 Act included the nation’s first true inheritance tax but excluded bequests to surviving spouses, bequests of real estate, and small estates from the tax. Interestingly, both tax-free bequests to a surviving spouse and exclusions for small estates exist in today’s version of the federal estate tax. The government expanded the 1862 Act to impose a succession tax on real estate. Congress repealed both the legacy and succession taxes in the early 1870s. The repeal was short-lived because of the Spanish-American War and passage of the War Revenue Act of 1898 (“1898 Act”) which imposed a legacy tax, although the tax was on the estate, not the beneficiaries. Traditionally, beneficiaries, rather than the estate itself, bear the burden of legacy or inheritance taxes. The 1898 Act applied to personal property only and was repealed in 1902 when the war ended.

The Revenue Act of 1916 assessed taxes on estates (“Estate Tax”) based upon the value of an individual’s assets as of the date of death when President Woodrow Wilson signed legislation creating it. Originally, the government used the revenue generated from the Estate Tax to fund the United States’ involvement in the First World War; however, after that war ended, the Estate Tax stuck. The Revenue Act of 1924 added a gift tax on transfers during life (“Gift Tax”) when it became clear that wealthy individuals found a way around the Estate Tax by transferring wealth during their lifetimes. Legislation repealed and then reinstated several years later the Gift Tax that continues today.

The Tax Reform Act of 1976 unified the Estate Tax and Gift Tax giving us the precursor to the system that exists today. The Economic Recovery Act of 1981 codified the unlimited marital deduction for estate and gift tax providing the unlimited marital deduction that exists in today’s estate and gift tax system. The Economic Growth and Tax Relief Reconciliation Act of 2001 contained provisions that phased out and ultimately repealed the Estate Tax and Gift Tax in 2010. The American Taxpayer Relief Act of 2012 made the Estate Tax permanent, indexed the Applicable Exclusion Amount for inflation, and introduced the concept of portability which allows one spouse to “port” the unused Applicable Exclusion Amount from their deceased spouse. The Tax Cuts and Jobs Act of 2017 temporarily doubled the exclusion amount from $5 million to $10 million, as adjusted for inflation, which is the current law and which is set to sunset on January 1, 2026, if not sooner.

In 2024, the Applicable Exclusion Amount is $13.61 million, meaning that a person can pass that amount to anyone without worrying about Estate Tax consequences. In addition, an individual can pass an unlimited amount to their spouse both during life and at death; however, just because your estate doesn’t reach the threshold amount does not mean that you need not worry about an Estate Plan. As indicated above, an Estate Plan provides much more than a way to protect your assets from taxes.  It provides certainty and peace of mind for your family and loved ones long after your death.

I hope that this blog has given you a view of our country’s history through the lens of Estate Planning and helped you understand the long history behind the Estate Tax. For years, this country funded its freedom by taxes levied on its citizens. These days, the revenue raised from the Estate Tax represents a small portion of the nation’s budget but it’s interesting to understand the important role that the Estate Tax once played for our nation. As we celebrate the birth of independence for the United States, let’s give ourselves the gift of freedom as well. Create a comprehensive Estate Plan that will provide peace of mind today and every day. That’s something worth celebrating while you enjoy barbeque, eat a popsicle, and watch the night sky light up. Enjoy your 4^th of July – however you choose to spend it!

Just about a year ago, I examined the case of In Re Gregory Hall Trust, No. 361528 (Mich. Ct. App. March 16, 2023) In Hall, the upper court affirmed a lower court opinion holding that a spreadsheet created by the decedent years after executing his Estate Plan and prior to his death constituted an amendment to his Trust, notwithstanding that the document was not in the form of a typical Trust amendment and notwithstanding that it did not conform exactly to the terms of amendment set forth in the Trust. Earlier this year, the Supreme Court of California examined a similar case, Haggerty v. Thornton, San Diego County Superior Court 37-2019-00028694-PR-TR-CTL (February 8, 2024), and allowed a handwritten amendment of a Trust which failed to follow the method for modification set out in the Trust itself. Let’s explore.

Jeane Bertsch (“Bertsch”) created a revocable trust in 2015 naming an accountant and professional fiduciary as her successor Trustee. The Trust left several bequests to friends and family members, including $50,000 to her niece, Brianna Haggerty (“Haggerty”). The terms of the Trust split the remainder after the specific distributions between two non-profit organizations. In 2016, Bertsch amended the trust naming her niece as the successor Trustee in place of the accountant and increasing her niece’s bequest by naming her as remainder beneficiary of the Trust in place of the non-profit organizations. Sometime thereafter, Bertsch had a disagreement with Haggerty and subsequently created a handwritten amendment in 2018 removing Haggerty as beneficiary and fiduciary. The 2018 amendment was signed by Bertsch, but it was not notarized. Bertsch sent the amendment to the attorney who had drafted the Trust and the 2016 amendment along with a note to the attorney to place the document with her Trust and noting that the attorney could verify her handwriting. Bertsch died in late 2018.

Shortly after Bertsch died, Haggerty and the successor Trustee named in the 2018 amendment submitted competing petitions to the probate court both asking to be named as successor Trustee. Haggerty’s petition alleged that the handwritten document was invalid because it was not notarized and therefore not “acknowledged” as required by the Trust. Of note, the Trust contained the following reservation of rights: “[t]he right by an acknowledged instrument in writing to revoke or amend this Agreement or any trust hereunder.” The probate court found that the Trust amendment was valid. Haggerty appealed that decision to the Court of Appeal, Fourth Appellate District, Division One. The Court of Appeal affirmed the lower court’s decision holding that the 2018 amendment was a valid modification pursuant to the statutory method.

California Probate Code Section 15402 provides that “[u]nless the trust instrument provides otherwise, …the settlor may modify the trust by the procedure for revocation” which is set out in California Probate Code Section 15401. That section allows modification as provided in the Trust instrument and explains that if the Trust clearly declares that method exclusive, then the Trust may not be modified in any other way. Absent such a clear instruction, the Trust may be modified as set forth in the California Probate Code. The California Supreme Court affirmed the Court of Appeal decision holding that because “the method of revocation and modification described in the trust agreement is not explicitly exclusive” Bertsch modified her Trust under the procedure set forth in the statutory method which allows modification by “a writing, other than a will, signed by the settlor…and delivered to the trustee during the lifetime of the settlor…” Bertsch’s handwritten amendment met the statutory requirements and therefore was a valid modification under California law. For those interested, the California Supreme Court does an excellent job detailing the various lower court holdings, reviewing the applicable statutes, and pulling it all together: https://cases.justia.com/california/supreme-court/2024-s271483.pdf?ts=1707415308.

Without question, this case will have a lasting impact on Trust modification in California.

This case, like Hall, demonstrates that courts have begun moving away from strict adherence to the methods of amendment set forth in a Trust agreement itself in favor of complying with the deceased Trustor’s probable intent when evidence exists supporting that intent. While it’s possible to find opinions that require strict compliance with the terms of the Trust or applicable statute, Hall and now Haggerty mark a shift toward “substantial compliance” under the statute. Of course, this shift could result in increased litigation or dispositions that fail to meet a decedent’s true intent which makes proper Estate Planning with a qualified Trusts and Estate practitioner all the more important. Don’t leave your legacy to chance. Make sure that your Estate Plan says and does what you want it to do. After all, you never know when a disgruntled beneficiary may try to obtain more or less than the share to which they are entitled under your plan. Let me ensure that you have left nothing to chance and that your estate will pass to your intended beneficiaries.