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Estate Planning Organizer

Please review and complete the attached Estate Planning Organizer in advance of your introductory estate planning meeting.  Family names and contact information, along with a breakdown of your assets/liabilities are most relevant for estate planning purposes.  If you maintain a listing of assets in a separate format, please feel free to forward that list as opposed to completing the asset/liability section of the form.

Estate Planning Organizer (Fillable Forms)

The Holidays And The Gift Of Family Harmony: The Importance Of Proper Estate Planning To Avoid Litigation After Your Passing

This year, when many will not be able to spend the holidays with loved ones because of COVID-19 fears or restrictions, the thoughts and memories of family gatherings at the holidays will likely bring both joy and sadness.  Not all families, however, associate the holidays with harmonious family gatherings.  In recent years, the litigators at our firm have seen an increasing amount of litigation cases resulting from poor or no estate planning.  Many times, the litigation is between siblings that have never gotten along, and once their parents pass away, they are left with no one to try and keep the peace between them.  Sometimes, however, the parents did something, or did not do something, that leads to disputes between family members at the passing of the second to die parent.

Many people forego proper estate planning because of the perceived cost of having an attorney prepare the documents, and the proliferation of online websites offering low-cost, do it yourself estate planning. Others simply don’t want to face their own mortality and engage in the process. This can, however, lead to costly litigation and unintended consequences.

Americans are fascinated with celebrities, and despite their fame and fortune, there are many examples of contested litigation after their passing. Some notable examples of these celebrity estate disputes over the years include: Casey Kasem, Anna Nicole Smith and the Estate of J. Howard Marshall II, Martin Luther King, Jr., Tom Clancy, James Brown, Tony Curtis, Jimi Hendrix, Prince, and. Kurt Cobain. More recently, disputes have arisen in the estate of the “Queen of Soul”, Aretha Franklin, whose situation provides a cautionary tale for those inclined to avoid estate planning, or to prepare documents themselves.

Everyone knows the iconic lyrics to Ms. Franklin’s song “Respect”: “What you want, baby, I got it. What you need, do you know I got it?…. I’m about to give you all of my money; and all I’m askin’ in return, honey….”  Unfortunately, the disposition of all of her money at her death is in limbo, and the Queen of Soul’s actual wishes may be known, but not followed.

On August 16, 2018, it appeared that Ms. Franklin died without a will to govern disposition of assets at her death.  Her four sons expected that her estate would be split evenly between each of them under Michigan’s laws of intestacy, which is the statutory disposition of assets when someone dies without a will.  In 2019, however, Ms. Franklin’s longtime attorneys disclosed the discovery and existence of several handwritten wills, found in one of her homes.  These documents were only signed by her, and contained notes in the margins, or delineations, and crossed out words and provisions.

This surprising turn of events shook up the administration of Ms. Franklin’s estate and pitted family against one another in court.  A Petition for Instructions on Validity and Admission of a Purported Holographic Will was filed on May 20, 2019 submitting three holographic wills to the probate court.[1]  This left it up to the probate court to decide whether these alleged handwritten wills, that contradicted each other, referred to in the legal community as “holographic wills”, are valid and control the disposition of Ms. Franklin’s estate.

In Maryland, the handwritten documents would be held invalid and Ms. Franklin’s estate would be distributed under the laws of intestacy and divided equally among her four sons.[2] This is because Maryland, unlike Michigan, only recognizes holographic wills under extremely limited circumstances, and offers none of the flexibility built into Ms. Franklins home state of Michigan. Maryland only recognizes holographic wills of a Maryland domiciled decedent the armed services and sign the holographic will outside of the U.S., D.C., or any U.S. territory.[3] Even if this limited exception is met, the holographic will is automatically voided one year after the testator is discharged from the armed forces, further limiting its control of the decedent’s estate.[4] To be valid under Maryland law a will must meet the following requirements to be valid: (1) In writing; (2) Signed by the testator, or by some other person for the testator, in the testator’s presence and by the testator’s express direction; and (3) Attested and signed by two or more credible witnesses in the presence of the testator.[5]  These statutory requirements are strictly construed.  For example, a will signed by the testator and witnessed by only one witness, even if that witness is a notary public, is invalid. The only exceptions under Maryland law are, as noted above a valid holographic will, or a will executed by the testator or testatrix in conformance of the laws of their prior place of domicile or where they were physically located when the will was signed.

Michigan, however, has a much broader definition and acceptance of holographic wills. Under Michigan law, such a document is valid “whether or not witnessed, if it is dated, and if the testator’s signature and the document’s material portions are in the testator’s handwriting.”[6] Under Michigan law, extrinsic evidence, outside the four corners of the document and parts of the document not in the testator’s handwriting, is also admissible to prove their intent. Under Maryland law, absent a latent ambiguity[7] in the document, extrinsic evidence is not admissible to prove the testator or testatrix’s intent.

Ms. Franklin, as could many others who die with no will or documents they prepared themselves, could have saved her family the time and expense of protracted probate and litigation if she had proper estate planning in place. The well-known idiom, you get what you pay for, certainly applies in this situation.  The one-size fits all product that has you input information into a computer and spits out a resulting document, may work in some instances, but the lack of personal touch, especially the ability to delve deeper into your specific family situation and needs, can result in a document that fails to address your needs. Similarly, trying to create a legal document by using a sample form you pulled up on the internet, may result in a document that is deemed invalid, or leads to more questions than answers.

The best way to try to ensure that your wishes are followed at your passing, and to try to promote family harmony, is to meet with an attorney and have proper estate planning in place.  Even if the family members don’t see eye to eye on matters, having documents in place that are clear and concise, and in accordance with Maryland law, can help mitigate potential issues and litigation.

[1] https://www.documentcloud.org/documents/6020063-TYPED-PAGES-Aretha-Franklin-Will.html.

[2] Md. Code Est. & Truss § 3-101 and 3-103.

[3] Md. Code Est. & Trusts § 4-103(a).

[4] Md. Code Est. & Trusts § 4-103(b).

[5]Md. Code Est. & Trusts § 4-102.

[6] http://www.legislature.mi.gov/(S(etgxewgcsge5jiql154uslgh))/mileg.aspx?page=getobject&objectname=mcl-700-2502.

[7] A latent ambiguity arises when the language at issue is clear on its face but upon introduction of extrinsic evidence, it reveals multiple interpretations. For example, a will that leaves assets to John Smith, could refer to multiple individuals known by the testator or testatrix, which would require introduction of extrinsic evidence to reveal this ambiguity and to help sort out their intent as to which John Smith is referred to in the document.

Estate Tax Planning in Advance of the 2020 Presidential Election

Many high net worth clients are taking advantage of the heightened Federal Estate/Gift Tax exemption through lifetime giving to their intended beneficiaries (or a trust for their benefit) prior to any planned (or unplanned) drop in the Federal Estate/Gift Tax exemption.

 Background:

  • The Tax Cuts and Jobs Act (TCJA) enacted by President Trump in 2017 increased the Federal Estate/Gift Tax exemption (“Federal Exemption”) (the amount you can pass to beneficiaries free from estate/gift tax either during lifetime or at death) to $10 million indexed for inflation (currently $11.58 million for 2020), an increase from $5 million indexed for inflation in 2017. The Maryland Estate Tax Exemption remains at $5 million per spouse. Distributions to spouses and charities are exempt from tax.
  • All assets transferred either during lifetime (or at death) in excess of the Federal Exemption are subject to a 40% Federal Estate/Gift tax plus any state level estate tax. Assets in excess of the Maryland Estate Tax Exemption will be taxed at 16%.
  • The Federal Exemption is set to “sunset” back to $5 million indexed for inflation in 2026, absent legislative action.
  • Vice President Biden, if elected, has proposed a reduction in the Federal Exemption back to $5 million prior to 2026.

Impact of a Drop in Federal Exemption? For high net worth clients with assets in excess of the current Federal Exemption, the proposed reduction, could result in an increased estate tax liability at death of $2 million per spouse (or $4 million per couple).

How are High Net Worth Clients Planning? Many clients are considering gifting to fully utilize their increased Federal Exemption before it drops in 2026 (or earlier). To gift an asset outside of your estate, you must give up control and the right to benefit from a gifted asset. The Treasury has issued regulations that any gift completed prior to the “sunset” of the Federal Exemption will not be “clawed back” into the estate.

 Opportunities for gifting include:

  • Outright to children, grandchildren or other beneficiaries – often not advised for substantial gifts due to creditor concerns and future estate tax considerations.
  • In trust for children, grandchildren or other beneficiaries – which can be helpful to control use of funds for a minor or spendthrift beneficiary. Oftentimes lifetime/dynasty trusts (as opposed to trusts that provide for a mandatory distribution of assets when a beneficiary reaches a certain age) are used to preserve creditor protection and estate tax efficiency.
  • Spousal Lifetime Access Trust (SLAT) for the benefit of your spouse for lifetime – which helps to maintain access and control over the gifted funds through a spouse. Both spouses can create and fund SLATs for the other spouse if the trusts are drafted properly to avoid the Reciprocal Trust Doctrine.
  • Grantor Retained Annuity Trusts (GRAT) – A GRAT is a trust to which the Grantor transfers property and from which the Grantor receives an annuity payment each year for a term of years. The retained annuity payment has the effect of reducing the value of any gifted asset.

Intentionally Defective Grantor Trusts (“Grantor Trusts”) – often when lifetime gifts are made in trust, they are made to Grantor Trusts. Assets gifted to a Grantor Trust are removed from the Grantor’s estate for estate tax purposes, yet still part of the Grantor’s estate for income tax purposes. All income generated by the trust will continue to be taxed back to the Grantor. The Grantor could be reimbursed from the trust for this tax liability or alternatively could pay the tax on behalf of the trust which has the effect of an indirect gift (without any additional gift tax consequence). In addition, Grantor Trusts allow a Grantor to sell an asset to the Grantor Trust without recognition of gain/loss.

How Much to Gift? – As mentioned above, to fully utilize the heightened Federal Exemption to its fullest, the entire $11.58 million exemption would need to be gifted. A gift for less than the full Federal Exemption will reduce your remaining Federal Exemption following any sunset. Therefore, if you gift $1 million before the end of 2020 and the Federal Exemption drops to $5 million in 2021, your remaining Federal Exemption at that time will be $4 million. To avoid Buyer’s Remorse, flexibility in the gifting strategy should be considered. In addition to the Federal Exemption, each spouse is currently permitted to gift $15,000 per person per year, without any reduction of the Federal Exemption.

Which Assets to Gift? – Ideally, there are three factors that make an asset a target for gifting, including (1) the ability to devalue the “fair market value” of the asset due to a low appraisal and/or valuation which incorporates discounts for lack of marketability and lack of control on a business valuation, (2) an asset that is likely to appreciate in value in the future, and (3) an asset that is cash flowing.

How to Prepare?

  • Prepare a detailed financial statement with asset information, ownership titling and estimated value to determine the need for gifting;
  • Schedule a meeting with your estate planning professional at Bagley Rhody to review your financial statement and goals for planning;
  • Formulate a gifting plan and begin drafting Irrevocable Trusts, as needed;
  • Obtain appraisals/business valuations for identified gifting targets; and
  • Finalize execution of gifting transaction and file Form 709 Gift Tax Return.

* The above is not legal advice and a personalized review is necessary to determine the exact impact of the Federal Estate/Gift Tax on your estate.

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