A Few Words About Gratitude

I’ve not blogged in a while, in part because I’ve been weighed down lately by a personal health issue that, thankfully, has turned out to be nothing of concern. However, during the nine long days between the biopsy and receiving the results, which were interminable to me, my brain conjured up quite a parade of horribles that caused me some loss of sleep and quite a bit of consternation.

Yesterday, I received the good news that the abnormal growth on my right ear was not malignant. Whew! All that worry for naught. Now what?

I must confess that I’ve not written a gratitude list in quite a while, even though I know well how therapeutic writing a list of things for which we are grateful can be because I’ve written many over the years to get through some rough patches. Given my good news, I thought that I’d share a partial list of that for which I am grateful.

I begin with a couple of quotes about gratitude:

Sometimes we need to remind ourselves that thankfulness is indeed a virtue. William John Bennett.

Gratitude is not only the greatest of virtues, but the parent of all others. Cicero

He is a man of sense who does not grieve for what he has not, but rejoices in what he has. Epictetus

You can’t be hateful if you’re grateful. Shorty

I’m grateful for:

Being alive today, during the greatest period in which to live.

My good health.

Living in the greatest country in the world, one where I am free to pursue my passions.

My faith in God, which, though occasionally tested, always carries me through.

My loving parents, Paul and Marilyn, who gave me a great life.

My brothers, Doug and Keith, who I love dearly, even though I don’t see them very often.

My loving wife, Carol, who came into my life at a low ebb and who patiently and gently loved me back to life.

My wonderful sons, Paul and Evan, who have made me a very proud papa.

My ex-wife, Lynn, for giving me two wonderful sons and for keeping me humble.

My wonderful job, and the people with whom I work.

All of my friends, of which God has blessed me with many.

My abilities and talents, of which God blessed me with many.

A warm and wonderful home in which we live.

Plenty of food to eat, in which I regularly overindulge (and it shows).

The wonderful game of baseball.

Hot running water.

Amazing technology, which permits me to do so many things, including writing this blog.

Our amazing cat, Callie-Cat, who I love dearly.

My family on both sides, including my aunts and cousins.

My in-laws, who accepted me into their family.

My love of music and my music collection.

My love of books, and my personal library.

I could go on and on, but, hopefully, you get the point. And, more importantly, that I understand that I’ve been extremely blessed. I truly am fortunate to have what I have, and I’m grateful for it. I really do try to focus on what I’ve got and not on what I don’t have.

It is therapeutic to go through a gratitude list exercise, and, if you’ve never done one, or it’s been a while since you have, you really should consider taking this path because it truly makes you feel good.

I choose to live in gratitude. It’s truly a great place to live.

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Baseball: It’s back!!! But It’s Different This Year

Those of you who know me at all know of my unquenchable love of all things about The Game: baseball. All of the teams are working out now either in the Grapefruit League (Florida) or the Cactus League (Arizona), and spring training games begin on Wednesday, February 22. I’m so excited!!! For me, the off-season is such a downer; I refer to it as The Void. The Hot Stove League (trades, rumors, free agent signings, etc.) heats up from time to time, but there isn’t that healthy daily dose of Vitamin B (baseball) that I crave and need.

I’ve been enthralled with The Game since I was first introduced to it as a small child. One of the greatest days of my life was when my parents gave me a small portable transistor radio at around age 9, which became my connection to My Team: the Houston Astros. I listened to every game, vicariously going through all of the ups and downs of a season with the team just as though I was a part of it.

During the games, I paced all around our neighborhood with the radio tucked up at my ear, listening to the wonderful calls of then Astros play-by-play announcers Gene Elston and Loell Passe. It was magical. I celebrated good things, was crushed when bad things happened, and I sometimes questioned a managerial move out loud. While I love watching games on television, there’s just something about baseball on the radio that I love. The current Astros radio broadcast team of Robert Ford and Steve Sparks are awesome at their craft.

I remember one night when the Astros were playing the Dodgers on the west coast, and the game started after my 8:00 p.m. bedtime. However, not to worry. I just got under the sheet, turned the radio down real low and listened anyway. One night I listened until 4:00 a.m. because the game went well into extra innings, which I love and view as free baseball.  I say a silent prayer that each game that I watch (that doesn’t involve my Astros) goes into extra innings! Of course, I want the Astros to win convincingly every game in  regulation nine innings!

My late mother, who honestly couldn’t care a less about baseball, and I had a ritual that we went through every spring from 1969 on until her death last October. Before the season started, Mom would ask me who would win the pennant, and my response was always the same: the Houston Astros. Never mind that I’ve only been right one time since 1969 (2005). It was a ritual, and it is one that I will sorely miss this season.

I miss Mom terribly. But I want to be clear about this: my Houston Astros will win the pennant this year! That’s for you, Mom!!!

Play ball!!!

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A Few Words on Jury Duty…

Recently, I was summoned for state jury duty. I always see jury duty for what it is: an important public service, a civic duty. Millions of good people have died for my right to a trial by jury, so I figure the least I can do is not to bitch about it or try to get out of it and just show up on the appointed day, which I did, armed with a book in hand, since the wheels of justice often are very slow to move (in which case was true).

As luck would have it, there was only one case that needed a jury that day, and it was a civil case, which, here in Ohio, only requires eight jurors and two alternates. I went through voir dire and admitted that I knew the lawyers, yet I wasn’t excused at that point. However, ultimately, I was not selected to be on the jury for that week-long trial, for which I was grateful since I had plenty of important things to do at work.

My history with jury duty goes back to my days as a judge’s law clerk back into the mid-1980’s. I have to confess that, prior to that job, I hadn’t given jury duty a second’s thought. Back then, as the judge’s law clerk, I was besieged with requests from people wanting me to help them get out of jury duty. I became somewhat callous and incredulous at these numerous requests, and I used to counter back with this question:” What if we let everyone out of jury duty who wanted to get out of it?”

I would then explain the whole civic duty thing and tell them that juries wouldn’t be either good or fair if the only people who served on juries were those who wanted to serve. Suppose that you or a loved one was facing a serious charge, and you really wanted a fair jury. Would you like your chances with only those who want to be on juries to exercise a little power, or would you want a cross-section of your community peers to be there?

I told them that I would want the latter, right about the time that I would tell them that their request to get out of jury duty was denied. I told them that the odds of getting picked to be on an actual jury were very small because most cases settle on the courthouse steps before trial, so that, at most, it would be a slight inconvenience. While I’m certain that I didn’t make any friends doing this, I hoped that the people would come around to my way of thinking.

As a practicing lawyer, I actually served on two criminal juries and was foreman on one of those juries. We reached a unanimous guilty verdict in an I-12 drug trafficking case. While the other jury was impaneled, the DA and the defendant reached a plea bargain agreement, thereby obviating the continued need for the jury, so we were excused. That one would have been an interesting trial because it involved a defendant who’d robbed a convenience store armed with a squirt gun, which the DA was trying to treat as a real gun for purposes of the aggravated robbery charge.

The jury that I was on that reached a verdict was a very educated jury for a cross-section of the public-at-large. I wasn’t the only lawyer on the jury of 12; there was a plaintiff personal injury lawyer also on that jury, as well as a Ph.D. and two others with master’s degrees. Nevertheless, I was astonished at what some of the jurors during deliberation thought was important during the trial. We had to hash through quite a bit of irrelevant nonsense, which wasted a lot of time, before we were able to discuss the facts actually adduced at trial. It really opened my eyes as an office lawyer who spent very little time in a courtroom.

However, I used to employ my jury experience often in my estate planning and tax practice. I used to tell my wealthy clients who were contemplating intra-family litigation about my jury service and experience, and that it was my opinion that they should redouble their efforts to avoid litigation at all costs. I explained that they had no true peers of equal or greater wealth down at the courthouse, and that there was a great likelihood that they’d be painted as spoiled rich kids who were complaining about nothing, wasting the court’s precious time.

I told these desirous wanna-be litigants that these courthouse people, including judges, may well dislike them so much that they could go out of their way to make sure that they lost their case. I told them that the chances were far better if they just continued trying to work things out.

This tack didn’t usually endear me to these often self-righteous souls who wanted to spend lots o’ principal over principle. However, my sworn duty as a counselor at law, which I took very seriously, required that I impart that advice. Thankfully, in just about all of those situations, cooler heads prevailed, and they avoided litigation.

Jury service is an important civic duty that we all must take seriously and agree to serve when asked. There aren’t many places on this planet where a trial by jury is a right. It’s a precious right that must be buttressed by a public willing to serve as jurors.

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Attempted Reformation Shot Down: A Bridge Too Far?

Executive Summary: In this New York Surrogate’s Court opinion, the surrogate denied a petition to reform an income tax inefficient estate plan to leave an IRA to charity instead of to the surviving spouse, as the plan provided, with an offsetting legacy of other assets left to charity to the surviving spouse.
Facts: Charles died on August 17, 2013. Under his will, executed on November 4, 2004, Charlest left his tangible personal property and cooperative apartment to his surviving spouse, Vivian, and left his residuary estate to The Charles and Vivian Sukenik Philanthropic Fund, Inc. (the “Foundation”). Under Charles’ revocable trust, established on August 21, 1996, and amended and restated the same day as the will’s execution, he provided that, upon his death, Vivian would receive certain real property in Columbia County, New York, with the balance of the trust remainder to be distributed to the Foundation.
Charles left Vivian an IRA, apparently valued at approximately $3,200,000. Charles signed the IRA beneficiary designation form on July 29, 2009, almost five years after the will and trust, and it named Vivian as the recipient of his IRA.
The Problem: Vivian quickly realized that Charles’ estate plan was inefficient from an income tax standpoint in that Charles should have left his IRA, which was pregnant with income tax liability, to the Foundation, while transferring other assets from the estate to her.
Vivian asked the Surrogate’s Court for New York County to reform the trust to add a pecuniary bequest to her in a sum equal to the value of the IRA and to reform the IRA beneficiary designation form to name the Foundation the beneficiary instead of her. Vivian asserted that if such relief were granted, she would avoid receipt of an asset (the IRA) on which approximately $1,600,000 of income tax would be due. According to Vivian, while Charles intended to benefit the Foundation and herself, his estate plan “could have been structured in a more tax efficient manner, By “swap[ping]” assets, i.e., giving the taxable IRA to the Foundation while leaving after-tax assets to her. Vivian further noted that Charles’ intent to benefit her and the Foundation, would be carried out in a reformation of the trust and beneficiary designation “more tax efficiently.” Neither the Foundation nor the Attorney General of the State of New York opposed the application, apparently because the Foundation would be receiving equivalent value in the swap.
The Surrogate didn’t buy Vivian’s arguments, noting:
the reformation requested here is prompted by neither a drafting error nor a subsequent change in law. Several years after executing his will and trust, decedent himself thwarted the tax efficiency of his own estate plan by making [Vivian] the beneficiary of the IRA. There is nothing in the record indicating why, after executing these estate planning instruments, [Charles] chose to leave additional assets to his wife in this manner or why, in the four years before his death, he did not take steps to cure the unfavorable tax consequences of his choice of IRA beneficiary.

The Surrogate went on:

[Vivian] has offered no authority to support the reformation of a clear and unambiguous instrument in order to remedy the adverse tax consequences of poor estate planning. Although the court is sympathetic to [Vivian’s] regret that [Charles’] decision to leave her additional assets left her with an additional tax burden as well, nothing in the trust or the will indicates that [Charles] intended to minimize the income tax consequences of distributions to any beneficiary. Indeed, in both instruments, decedent indicated that he was neutral as to the tax consequences of distributions by giving his fiduciaries the power to distribute assets without regard to “income tax basis.” The IRA beneficiary designation is, of course, silent on this issue.

The Surrogate then denied the petition.
Comment: I guess that this was a good try to rescue a tax-inefficient estate plan from the bowels of the tax collector, but it seemed to have been a bridge too far. The Surrogate even acknowledged as such, noting:
[Granting the petition] would expand the reformation doctrine beyond recognition and would open the flood gates to reformation proceedings aimed at curing any and all kinds of inefficient tax planning.

Estate planners who aren’t abreast of basic income tax aspects of estate planning will no doubt lament this decision because it could have given erring practitioners an out on the malpractice exposure of poor income tax planning advice via reformations.

However, is the income tax on an IRA equal to the face value of the projected income tax liability, as Vivian claimed? The opinion does not set forth the terms of the IRA. However, if that IRA is like most, Vivian does not have to take the income tax hit all at once, but, rather, only as distributions are received, which could greatly reduce the present value of the alleged $1,600,000 income tax liability. And there also is the possibility that little income tax will ever be paid on the IRA, especially if Vivian does what Charles did not do and leaves it to charity at her death and only takes out the annual minimum required distributions.

Of course, Charles could have better planned for income taxes, since there is a significant difference between leaving an IRA to a charity, which is income tax-exempt, and to a surviving spouse. This is the lesson of this case. Why did Charles not do so? He clearly should have had plenty of time. There is a footnote in the opinion that seems to say that while his lawyer suggested leaving the IRA to the Foundation (and, thereby sidestepping a potential malpractice claim), Charles was too sick to make any changes.

It would not have surprised me one iota if the Surrogate had gone along with the proposed reformation. After all, there was no apparent opposition (although we don’t know whether the IRS was noticed in the matter). In uncontested matters such as these, it was my experience that the courts will bless just about any reformation, particularly one that saves the estate and its beneficiaries (who often are constituents of the judge) taxes!
The bottom line is that there are limits to what a court can be expected to do after the fact as a rescuer. It is incumbent upon estate planners to properly advise as to the income tax ramifications of an estate plan.
Cites: Matter of Sukenik, 2016 N.Y. Slip Op. 31217U (New York County Surrogate’s Court June 28, 2016).

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At the Intersection of Portability and Blended Families!

Executive Summary: In this case, out of the Oklahoma Supreme Court, the Oklahoma Supreme Court affirmed a trial court’s order forcing the executor of a deceased spouse to file a federal estate tax return and make a portability election.

Facts: Anne died intestate on January 22, 2016, survived by her husband, C.A., and two children from a prior marriage. Anne and C.A. had married in 2006 and had signed a prenuptial agreement whereby each waived all interests in the other’s estates. There was no mention of portability in the prenuptial agreement, probably since portability wasn’t added to the law until 2010.

At first, Anne’s son, Robert, probated a 1995 will and was named executor. C.A. moved to be named administrator, alleging that since Anne died intestate, having revoked the 1995 will, and C.A. was then named administrator, until they provided the court with the prenuptial agreement, wherein C.A.’s waiver of the right to serve as administrator came to light, after which Robert was named administrator.

On August 10, 2016, C.A. filed an Application to Compel Administrator to Timely Prepare and File a Federal Estate Tax Return for Purposes of Irrevocably Electing Portability of Decedent’s Deceased Spousal Unused Exclusion Amount (Application).

On November 8, 2016, the district court entered its order effectively granting C.A.’s Application. The district court, non-exhaustively: 1) denied C.A.’s request for appointment of a special administrator for purposes of filing an estate tax return for Anne; 2) ordered Robert to provide C.A. with a list of the records necessary to prepare the estate tax return and ordered C.A. to provide the records; 3) ordered C.A. to produce to Robert a detailed inventory of the personal property of Anne in his possession and make it available for pickup; 4) ordered, if a DSUE Amount is available, that Robert shall timely file an estate tax return electing portability of the DSUE Amount and allow C.A. 60 days to review the return and documentation prior to filing; and 5) ordered C.A. to pay for the filing of the return if a DSUE Amount is available.

Robert filed a fast track appeal to the Oklahoma Supreme Court, which granted that motion on December 16, 2016. Robert raised several points of error on appeal, including: 1) the district court lacked subject matter jurisdiction; 2) its order concerning the DSUE is preempted by federal law; 3) the trial court failed to properly consider the antenuptial agreement and therefore erroneously determined C.A. had standing; 4) the district court’s order violates the terms of the antenuptial agreement.

On appeal Robert asserted that he is the appointed executor within the meaning of the relevant federal law. Accordingly, he argued on appeal that, pursuant to IRC Sec. 2010 and the applicable regulations, the decision to elect portability of the DSUE Amount is discretionary and entirely his to make. Robert further argued that the district court therefore had no subject matter jurisdiction over the matter, and that its order compelling him to make the election is directly contrary to federal law and any state law grounds on which it might be based are defeated by the preemption doctrine.

The Oklahoma Supreme Court didn’t agree with Robert. The Oklahoma Supreme Court concluded that the district court had subject matter jurisdiction and that Robert’s claim was for complete preemption, which the Court noted was rarely granted. The Oklahoma Supreme Court observed:

[C.A.’s] claims concerning the DSUE are rooted in Oklahoma law concerning the fiduciary obligations owed by estate administrators to potential beneficiaries of the estate. There is no indication in the federal law provisions concerning the DSUE that the Congress intended to leave no room for state law claims relating to the duties of the estate administrator, even if those duties involve a federal matter such as the election of the DSUE. Indeed, the IRS itself acknowledged that the question of what state law actions might bring a surviving spouse within the definition of executor pursuant to 26 U.S.C.A. § 2203 are outside the scope of its regulations, implicitly acknowledging the interplay between state laws concerning probate and estate distribution and the federal estate tax provisions. The complete preemption doctrine is inapplicable here and does not deprive the district court of subject matter jurisdiction in this cause.


 It is the conclusion of this Court that the district court’s order compelling Lee to file an estate tax return and elect portability is within the district court’s subject matter jurisdiction and is not preempted by federal law.

 The Oklahoma Supreme Court continued:

[C.A.] has an obvious interest in the portability of the DSUE. The determinative question, then, is not whether the antenuptial agreement between [C.A.] and [Anne] bars him from being a legal heir, but whether the agreement bars him from claiming any interest in the portability of the DSUE.

 [C.A.’s] interest in the DSUE is not barred by the antenuptial agreement he entered into with Decedent.

Given the above principles, the antenuptial agreement does not bar [C.A.’s] interest in the DSUE. The portable DSUE is not simple property acquired by one party over the course of the marriage according to existing laws in effect when the agreement was made. Itis an interest created by the federal tax code that was an impossibility at the time the antenuptial agreement between [C.A.] and [Anne] was created. The antenuptial agreement was entered into on May 24, 2006, and portability of the DSUE became an option under the federal tax code for the first time with the passage of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Pub. L. No. 111-312, § 303, 124 Stat. 3296 (2010). [C.A.] and [Anne] clearly intended a comprehensive waiver of their marital rights under the law as it existed at the time, and included reference to specific statutory provisions where necessary. However, the agreement is silent as to portability because the change in law was unforeseeable to the parties when the contract was made. Accordingly, the district court was correct in implicitly determining that the antenuptial agreement did not bar [C.A.] from asserting an interest in portability of the DSUE.

The Oklahoma Supreme Court affirmed the trial court, noting:

[Robert] argues that since the DSUE is valuable only to [C.A.], while at the same time being an estate asset under Lee’s complete control, he should be allowed to demand consideration from [C.A.] in exchange for making the election. [Robert] further argues that pursuant to 26 U.S.C.A. § 201o(c)(5), electing portability of the DSUE will extend the audit window for Decedent’s estate considerably. While 26 U.S.C.A. § 2010 requires the administrator to make the election to allow portability of the DSUE, the only person with an interest in and ability to use the DSUE, if it exists, is the surviving spouse. If the election is not made through the timely filing of an estate tax return, then it is lost.

U.S.C.A. § 201o(c)(5)(A). [C.A.] has also agreed to pay any costs associated with preparing the necessary return.

 The district court, after hearing expert testimony and considering the evidence, evidently determined that any risk to the estate was outweighed by [Robert’s] fiduciary obligation to preserve the assets of the estate and safeguard [C.A.’s] interest in the DSUE. We agree, and determine the district court did not err by requiring [Robert] to file a federal estate tax return and elect portability of the DSUE. The district court’s order was not contrary to the clear weight of the evidence or applicable governing law, and is therefore affirmed.

 Comments: The Oklahoma Supreme Court docketed and decided this case in about 39 days, which is very fast for such a court to move. It’s uncorrected (as of yet) opinion reflects that speed, at several points getting the parties’ arguments wrongly associated with a party, i.e., reversing the arguments that each party made. Given that Anne died on January 22, 2016, the Oklahoma Supreme Court’s January 24, 2017 ruling gives Robert, as administrator, about three months to file the Form 706, assuming that Robert timely filed for the six month extension.

There apparently were some conflicts of interest allegations in this case that the trial court deferred, but the Oklahoma Supreme Court’s opinion didn’t shed any light on them. Inquiring minds want to know!

This decision seems to be a correct affirmation of what apparently was a well-reasoned trial court decision. I wish that I had seen the trial court’s opinion, because it appears from the description of the trial court’s order in the Oklahoma Supreme Court’s opinion that the case was well pled and well-lawyered in that all of the issues seem to have been addressed. The trial court’s order also seems to have been very even-handed. For example, the trial court required C.A., as surviving spouse, to pay for the preparation and filing of the federal estate tax return.

One could quibble with the courts’ conclusions that the prenuptial agreement’s waiver of estate rights, which obviously predated portability as a possibility, didn’t cover portability, as well as the conclusion that the surviving spouse after the prenuptial agreement waiver had standing in the probate court. However, in light of this decision, it is imperative that estate planners revisit all pre-portability (2010) marriage contracts to permit the spouses to now consider portability. However, caution is in order on several scores. Firstly, one may be opening Pandora’s Box to revisit the entire agreement, which one spouse often doesn’t want to do. Secondly, one must consider applicable state law. Some states, e.g., Ohio, simply don’t permit amendment of marriage contracts.

An executor who is a child of a prior marriage, as was the case here, may choose not to incur the expense of filing an estate tax return and the risk of audit of the DSUE Amount solely to make the portability election for the sole benefit of surviving step-parent spouse, with some risk to the first estate. In this case, Anne died intestate, and, because of the prenuptial agreement, C.A. had no interest in her estate, including service as administrator, which he waived in the prenuptial agreement. However, it isn’t inconceivable that some of Anne’s interest in property nevertheless passed to C.A. via survivorship or beneficiary designation, all of which would have to be listed on the federal estate tax return. However, given the prenuptial agreement and that Anne died intestate, it is doubtful that there is any QTIPable property in her estate.

The use of portability with QTIP trust planning, which the IRS now acknowledges in Rev. Proc. 2016-49 can happen (essentially modifying Rev. Proc. 2001-38), in subsequent marriages where the QTIP trust property is going to pass to the descendants of the first spouse to die could visit hardship and federal estate tax exposure to those descendants where the surviving spouse used some or all of the deceased spouse’s DSUE Amount during his or her overlife and didn’t waive reimbursement of the federal estate tax on the QTIP trust, which few spouses in multiple marriage situations ordinarily do. The spouses could agree during lifetime to permit the surviving spouse to have the use of any DSUE Amount of the first spouse to die via a QTIP election in return for an agreement that the surviving spouse would waive the right of reimbursement for tax due as a result of the inclusion of the QTIP trust in the surviving spouse’s estate (or at least for that portion of the QTIP trust equal to the DSUE Amount).

I predicted some time back that there’d be boatloads of state court litigation over this issue, primarily out of blended families. The Congress and the IRS could have saved us a lot of time and trouble by giving the surviving spouse a right to make the portability election, but they didn’t, and I’m glad that they didn’t because that election can have adverse effects on the estate of the first spouse to die. Given the potential value of the DSUE Amount to whichever of the spouses survive, couples should provide relative to portability. In blended families, it is important that the couple have a frank and honest discussion about portability. The couple should provide instructions relative to it in their estate planning documents and prenuptial agreements. What should that agreement look like?

The first of the couple to die would require his or her executor to timely prepare and file a federal estate tax return and make the portability election. The surviving spouse would agree to pay all of the costs of preparing and filing the return to the satisfaction of the executor, who would agree to cooperate and provide all information concerning the deceased spouse’s assets and liabilities.

The surviving spouse would agree to indemnify, defend and hold the executor of the estate of the first spouse to die harmless from and against any and all taxes, penalties and interest arising out of making the portability election. If a QTIP election is made on the estate tax return of the first spouse to die, the surviving spouse would agree to waive reimbursement of the federal estate tax attributable to inclusion of the DSUE Amount in the surviving spouse’s estate in his or her estate planning documents and agree to pay that federal estate tax, together with penalties and interest, if the waiver is ineffective for any reason.

It’s doubtful that we’ve seen the last of these cases; as I predicted, I think that they’re just beginning. I predict that there will be different conclusions in different courts on this issue. About the best we can all do is properly advise our clients to try to avoid this mess by proactively planning for it, and stay tuned for more!

Cites: In The Matter Of The Estate Of Vose, 2017 0K 3, Case Number: 115424 (Okla. January 24, 2017); IRC Sec. 2010.

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A Few Words on Inheritance…

I thought that I’d share a few quotes and thoughts on inheritance. I find myself in this boat at present. Despite having been named executor of my mother’s estate in her will and my many years of having administered estates and trusts as a tax lawyer, I declined in favor of my youngest brother, who was more than willing and able to serve. He’ll do a great job.

It’s a simple matter that doesn’t involve a whole lot of money and is where he lives. He has a lawyer there who can handle it. I would have had to appoint an agent for service of process since I live in a different state, which is a hassle and added expense that I didn’t care to take on. I wrote the Will, which is straight-forward.

Here are the quotes:

“What you leave at your death, let it be without controversy, else the lawyers will be your heirs.” Francis Osborne.

“When we are planning for posterity, we ought to remember that virtue is not hereditary.” Thomas Paine, Common Sense.

“The meek shall inherit the earth, but not the mineral rights.” J. Paul Getty, quoted in Robert Lenzner’s, The Great Getty.

“To inherit property is not to be born–it is to be still-born, rather.” Henry David Thoreau, Journal March 5-November 30, 1853.

“He who comes for the inheritance is often made to pay for the funeral.” Yiddish proverb.

“There is nothing earthly that lasts so well, on the whole, as money. A man’s learning dies with him; even his virtues fade out of remembrance; but the dividends on the stocks he bequeaths to his children live and keep his memory green.” Oliver Wendell Holmes, Sr., The Professor at the Breakfast Table (1860).

“When it comes to divide an estate, the politest men quarrel.” Ralph Waldo Emerson, Journals (1863).

“Ubi testamentum ibi heres.” (Where there is a will, there are heirs.) Latin proverb.

“We pay for the mistakes of our ancestors, and it seems only fair that they should leave us the money to pay with.”  Don Marquis.

Say not you know another entirely till you have divided an inheritance with him. Johann Kaspar.

I will leave my children enough money so that they would feel they could do anything, but not so much that they could do nothing.  Warren Buffett.

You never really know someone until you share an inheritance with them. Mark Twain.

The absent shall not be made heir. Latin Proverb.

My nagging thought about all of this is that I’d gladly trade everything that I will receive for just one more day with each of my parents, to tell them once again how much I love them and what they meant to me. My parents gave me far more than I will inherit monetarily, and for those gifts I am forever grateful.

No one can ever take away the precious gifts of education, love and wisdom that Mom and Dad gave to me. God blessed me with exceptional parents. I know that I’m not, but I aspire to be at least half of the parent for Paul and Evan that each of my parents were to me. I’m working hard on that.

Thanks, Mom and Dad! I always will cherish the memories and the love and respect that I have with and for each of you. That’s my true inheritance, and it’s one that no Leviathan government can tax and no one can separate from me. Ever. That comforts me greatly.

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The Intersection of Estate Tax Apportionment and Blended Families: A Legal Thriller!

Facts: Novelist Tom Clancy died on October 1, 2013, survived by his second wife, Alexandra, their minor daughter, and four adult children of his first marriage.

On October 10, 2013, his estate was opened; and Clancy’s last will and testament, dated June 11, 2007, (“Original Will”), along with the codicils dated September 18, 2007 and July 25, 2013 (“Second Codicil”), were admitted to probate. J. W. Thompson “Topper” Webb, Esq., who was named in the Second Codicil, was appointed as personal representative. The Original Will and both codicils (collectively referred to as “the Will”), were drafted by the law firm of Miles & Stockbridge, P.C., where Mr. Webb is a partner.

The Original Will provided instructions on the payment of inheritance and estate taxes., and the codicils provided additional stipulations as to the disposition of Clancy’s personal and real property and his residuary estate. The Will divides the residuary estate into three shares: (1) the Marital Trust, for the benefit of Alexandra; (2) the Non-Exempt Family Residuary Trust, (“Family Trust”), for the benefit of Alexandra and their daughter; and (3) two trusts (collectively referred to as the “Older Children’s Trust”), for the benefit of Clancy’s children from his prior marriage.

In the Original Will, Clancy provided for a three-way split of his residuary estate as set forth above. However, the Family Trust was not QTIPable for several reasons, i.e., in that it terminated on the earlier of Alexandra’s death or remarriage, and it was for the immediate benefit of both Alexandra and their minor daughter.

The Original Will contained the following estate tax apportionment clause:

All estate, inheritance, legacy, succession and transfer taxes (including any interest and any penalties thereon) lawfully payable with respect to all property includible in my gross estate or taxable in consequence of my death_ shall be paid by my Personal Representative out of my residuary estate, subject, however, to the provisions hereinafter contained in Item SIXTH hereof with respect to the Marital Share therein created. [that item contained the following language: The Marital Share shall not be charged with or reduced by any estate, inheritance, succession or other tax of any kind.]

According to the Orphans’ Court opinion, the undisputed federal estate tax apportionment under the Original Will would have been:

Total Tax Liability: $26.0M


Marital Trust:

Receives: $21.25M

Tax Payment: $0.0


Family Trust:

Receives: $15.7M

Tax Payment: $13.0M


Older Children’s Trust:

Receives: $15.7M

Tax Payment: $13.0M

Two months prior to his death, Clancy signed the Second Codicil, which, inter alia, made the Family Trust QTIPable. The estate tax apportionment provision in the Original Will was not changed by the Second Codicil.

On September 5, 2014, Alexandra filed a Petition for Declaratory Judgment, Construction of Will, and Removal of Personal Representative. There were procedural disagreements as to whether the Orphans’ Court possessed the jurisdiction to entertain a petition for declaratory judgment. However, the substantive disagreement was over the proper estate tax apportionment vel non of the Family Trust.

With respect to the procedural jurisdictional issue, the Orphans’ Court sidestepped its lack of jurisdiction over declaratory judgment actions, which it held that it lacked, by interpreting the petition as a petition to interpret the will, over which it held that the court had jurisdiction.

The Orphans’ Court then turned to the substantive issue of federal estate tax apportionment.

The Orphans’ Court noted that Alexandra’s interpretation of the Second Codicil would have the following estate tax apportionment:

Total Estate Tax Liability: $11.8M


Marital Trust:

Receives: $21.25M

Tax Payment: $0.0


Family Trust:

Receives: $28.7M

Tax Payment: $0.0


Older Children’s Trust:

Receives: $16.7M

Tax Payment: $11.8M

The Orphans’ Court noted that the executor’s interpretation of the Second Codicil would have the following estate tax apportionment:

Total Estate Tax Liability: $15.7M


Marital Trust:

Receives: $21.25M

Tax Payment: $0.0


Family Trust:

Receives: $20.8M

Tax Payment: $7.85M


Older Children’s Trust:

Receives: $20.8M

Tax Payment: $7.85M

The parties disagree whether the amendment to Item Twelfth (D) of the Second Codicil (“Savings Clause”) exempts the Family Trust from estate tax liability. The Savings Clause is set forth below:

No asset or proceeds of any assets shall be included in the Marital Share or the Non-Exempt Family Residuary Trust as to which a marital deduction would not be allowed if included. Anything in this Will to the contrary notwithstanding, and whether or not any reference is made in any other provision of this Will to the limitations imposed by this Paragraph D, neither my personal representative nor my trustee shall have or exercise any authority, power or discretion over the Marital Share or the Non-Exempt Family Residuary Trust or the income thereof, or the property constituting the Marital Share or the Non-Exempt Family Residuary Trust, nor shall any payment or distribution by my personal representative of my trustee be limited or restricted by any provision of this Will, such that, in any such event, my estate would be prevented from receiving the benefit of the marital deduction as hereinbefore set forth. My Wife shall have the power at any time by written direction to compel my trustee to convert unproductive property held in the Marital Trust into income producing property. Likewise, my Wife shall have the power at any time by written direction to compel my trustee to convert unproductive property held in the Non-Exempt Family Residuary Trust into income producing property

The Orphans’ Court correctly concluded that the Family Trust as set forth in the Original Will did not qualify for the federal estate tax marital deduction. However, Orphans’ Court noted that the Family Trust was modified in the Second Codicil in order to make it QTIPable and, further, that the executor made a QTIP election over the Family Trust.

The Orphans’ Court framed the parties’ disagreement over the Savings Clause as follows:

[Alexandra] contends that the Savings Clause restricts the [executor] from requiring the Family Trust to contribute to the payment of estate taxes. [Alexandra] asserts that qualifying for the marital deduction necessarily restricts the payment of estate taxes as each payment of estate taxes causes the Family Trust to lose a portion of the marital deduction.

 In opposition, [the executor] contends that the Savings Clause only reflects an intent for the Family Trust to qualify for the marital deduction, but has no effect on eliminating the Family Trust’s liability on the payment of estate taxes. [The executor] asserts that the Tax Clause of Item Third (A) and Sixth is controlling and that the Savings Clause is only effective after the payment of estate taxes.

The Orphans’ Court spilled a lot of ink over the estate tax apportionment issue, discussing whether the Will set aside the Maryland estate tax apportionment law. On this issue, the Orphans’ Court concluded as follows:

Therefore, this Court make [sic] no determination whether Item Third and Sixth clearly and unambiguously set aside the apportionment statute, but shall accept [the executor’s] contention that Item Third and Sixth exhibit an intent to have estate taxes paid without apportionment for the remainder of my analysis, given the weight of the majority view and that the issue was uncontested by Petitioner.

The Orphans’ Court then turned its attention to the Savings Clause, concluding:

This Court agrees with Petitioner. In my view, the Savings Clause is a valid interpretive aid savings clause. The Savings Clause is applicable to the entire will and is not dependent on a court ruling or IRS determination. Instead, it is a clear expression of the testator’s intent to have the Family Trust qualify for the marital deduction.

The Orphans’ Court further observed:

[The executor] claims that qualifying for the marital deduction only ensures that the Marital Share and Family Trust are not included in the calculation of estate taxes, but has no effect on excluding them from the payment of estate taxes. This Court is not persuaded by [executor’s] attempt to distinguish qualifying for the marital deduction and the payment of estate taxes as separate issues. Rather, this Court find [sic] [Alexandra’s] construction more sound, as the cascading effect from the payment of estate taxes necessarily affects the calculation of estate taxes and causes the Family Trust to lose the “benefit” of the marital deduction, which the Savings Clause was intended to protect.

The executor appealed to the Court of Appeals of Maryland. In a 4-3 decision, the majority telegraphed its decision by beginning with the famous quote from John Maynard Keynes: “The avoidance of taxes is the only intellectual pursuit that still carries any reward,” holding in a de novo review that the Family Trust was exempt from federal estate tax apportionment.

The majority buttressed its opinion with Rev. Rul. 75-440 and the following rationale:

Moreover, were the Family Trust to bear the burden of federal estate taxes, at the time of Mr. Clancy’s death, the corpus of that trust would be subject to imposition of federal estate taxes twice, at the time of Mr. Clancy’s death as well as when Mrs. Clancy died. The establishment of the QTIP Trust in Mr. Clancy’s Will insures that the Younger Child will have to pay estate taxes when Mrs. Clancy dies. 26 U.S.C. § 2044. Certainly, as each party agrees, Mr. Clancy intended to minimize the impact of federal estate taxes in the entirety of his Will, an intent that would be eviscerated by double taxation.

Thankfully, there was a spirited and well-reasoned dissenting opinion, which pointed out:

The reading of the will urged by [Alexandra] would achieve a smaller additional tax reduction (from $15.7 million to $11.8 million), but would cast aside the plan for equal distributions from the residual despite the fact that the language of the will directing equal distributions was not amended -and skew the distributions from the residual in her favor (63% – 37%).

 The Majority opinion opts for [Alexandra’s] interpretation of the will -an interpretation in which an amended savings clause is construed to contradict basic terms of the original will that remained unchanged. However, we ordinarily read provisions of wills to be consistent unless there is no way to do so. In my view, the savings clause can be read consistently with the original will to achieve the tax savings for which codicil was intended without discarding the basic estate plan. Accordingly, I would adopt the reading of the will offered by Mr. Clancy’s Personal Representative.

The dissenting opinion concludes:

[Alexandra’s] interpretation -adopted by the Majority opinion -would skew the distribution of the residual estate significantly in her favor contrary to basic provisions of the will while reducing the estate’s tax liability somewhat more than what it would otherwise be. It does so by interpreting the Savings Clause to effect a radical change in the estate plan without any explicit direction to do so. The [The executor’s] construction of the will and codicil would treat the Savings Clause for what it is -a savings clause -and maintain the equal distribution of the residual specified in the will, both originally and as amended, while achieving the significantly reduced tax liability that is the evident aim of the Second  Codicil.

 Even assuming that the Second Codicil could mean what the Majority opinion reads it to mean -which is far from clear -we ordinarily resolve textual ambiguities in favor of consistency, not inconsistency. Where there are two possible interpretations of a provision of a codicil, one which conflicts with the original will and one which does not, our precedents favor adoption of the interpretation that does not conflict. Thus, even if the Second were ambiguous, it ought to be interpreted to be consistent with the original will rather than to contradict it.

Comment: The Orphans’ Court unnecessary statement at the outset of its opinion that the Will was inartfully drafted was uncalled for, conflicts with many of the Orphans’ Court’s own conclusions in its opinion and, in my opinion, simply is not true. In my opinion, both Maryland courts got this one wrong. In my opinion, the majority opinion out of Maryland’s highest court is very intellectually soft, especially coming from a state’s highest court. The dissenting opinion simply and elegantly blows the majority’s arguments and conclusion out of the water. This is, in my opinion, the most pernicious form of judicial meddling.

The majority’s rationale of Clancy wanting to avoid double taxation as justification for its conclusion is dubious to say the very least. Just because the testator who creates a trust that is QTIPable doesn’t require or otherwise mandate that the executor make the QTIP election over all or any part of it. The testator who creates a QTIPable trust actually cedes to his executor the discretion of whether or not to make the QTIP election. I fail to see much more sign of intent here.

The executor has to evaluate the totality of the circumstances in the QTIP vel non decision. While the QTIP election was in fact made over the Family Trust, suppose that the executor in this case had decided not to make a QTIP election over the Family Trust. In that case, there doesn’t seem to be any doubt that the Family Trust would have been burdened by its share of the federal estate tax. So how is it that making the QTIP election automatically relieves it from all of its federal estate tax burden pursuant to the Will, especially where the Will expressly burdened the residue with the federal estate tax? The majority failed to address this critical point.

I distinctly recall a number of very similar situations, i.e., large taxable estates and blended families, where my clients in every such situation expressly favored paying more federal estate tax in order to equally divide the estate between a subsequent spouse and the children from the prior relationship. The focus should have been on Clancy’s intent rather than on a tortured reading of the Will.

Sadly, both courts seemed to overlook any extrinsic evidence of Clancy’s actual intent. I doubt very seriously that he intended to slight his Older Children just two months prior to his death by skewing the distribution in favor of Alexandra and the minor child to such a significant degree. Clancy could have simply written the Older Children out before his death, but he didn’t, indeed not changing their legacies one iota. In my opinion, Tom Clancy is probably turning over in his grave with this result.

There are lessons to be learned from this case. Estate tax apportionment provisions often are included in the so-called boilerplate legalese in the document, but they might be the most important provision in that document, particularly with blended families. If you don’t address estate tax apportionment in the client’s will or trust, the state provides default estate tax apportionment rules, and you must know them!

This means that your client must describe his or her intentions to you relative to estate tax apportionment. You also can and should provide for whose share is charged with the expenses of administering the estate or trust, since those expenses can be significant. Again, client intent is critical here. After making some assumptions about tax rates and applicable exclusion amounts, there could be a significant multi-million dollar swing in what the surviving spouse and children would receive: the children or the surviving spouse will likely both fight each other and the executor and pursue your E&O carrier for that kind of change.

In this case, the will scrivener testified in favor of the Older Children’s position, i.e., equal division and higher estate taxes, which should have borne much more weight that than the courts ascribed to it. Yet the courts seemingly disregarded that testimony in favor of a very tortured reading of the Savings Clause, ascribing testamentary meaning to it since the effect of the Savings Clause changed the sharing ratios, which, in my opinion, is preposterous.

In blended families, it is not unusual for people to choose higher estate taxes over giving the surviving spouse more and their children less. In fact, it was my experience that this occurred often. Get clients to sign off on this.

Consider an example: suppose Al dies in 2016 with a $50,000,000 estate in Ohio, a state with no death tax, and a federal estate tax rate of 40%, leaving 1/2 to his surviving spouse, Beatrice, and 1/2 to his children of a prior marriage, having $100,000 in administrative expenses.

After the effect of the applicable exclusion amount, which in 2016 sheltered $5,450,000 of assets from federal estate tax, if taxes come off the top, Beatrice and Al’s children will each take $20,075,000 and $9,750,000 will go to estate taxes.

If taxes and administrative expenses come only out of the children’s share instead, Beatrice will take $25 million, Al’s children will take $17,120,000, and $7,780,000 will go to estate taxes. As you can see, the total amount of federal estate tax goes down, but it dramatically impacts the sharing ratios. In this example, there is a negative swing of $4,999,250 in what Beatrice takes, a positive swing of $2,888,750 in what Al’s children take, and an additional $1,970,000 in estate taxes paid, just depending upon how the estate taxes are apportioned. (Numbers courtesy of NumberCruncher. www.leimberg.com).

In large estates such as this one, the use of examples with real numbers in the estate planning documents themselves (as well as in the explanations) assuming a death today is helpful and can provide clear illumination of the testator’s intent as well as ample CYA for the estate planner after a death, should either the surviving spouse or the children feel that they got slighted by the federal estate tax apportionment. And this is exactly how I drafted those particular estate planning documents in these situations.

However, in light of both courts’ fixation on the Savings Clause, which all prudent estate planners include, query whether we should modify saving clauses to clarify that the testator’s intent elsewhere specifically expressed, i.e., how federal estate tax is to be apportioned, is not somehow subordinated by the savings clause? This, in my opinion, would too cute by half and should be unnecessary. However, you might run into courts like these that might not see it that way.

An expression directly of exactly how federal estate tax is to be apportioned, together with numerical examples of its operation and a statement that the testator is aware that his direction will increase the total amount of federal estate tax due, clearly, in my opinion, should override a general savings clause, which usually only is inserted out of an abundance of caution anyway. It strains credulity to consider that a marital deduction savings clause would have a substantive divisional impact, yet that is exactly what happened in the Clancy case, which is sad.

Cites: Bandy v. Clancy, 144 A.3d 802, 449 Md. 577 (2016); In the Matter of the Estate of Thomas L. Clancy, Jr., Estate Number 101962 (Orphans’ Court for the City of Baltimore), August 21, 2015; Rev. Rul. 75-440; Northeastern Pennsylvania Nat. Bank & Trust Co. v. U.S., 360 F.Supp. 116 (M.D. Pa.1973).

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