Listen Up 2011, 2012 & 2013 U.S. Estates – Don’t Miss Out on the Portability Election

The clock is quickly ticking away for the estates of certain married U.S. taxpayers who died between January 1, 2011 and December 31, 2013.

What will happen to these estates when the clock strikes midnight on January 1, 2015?  They will no longer have the ability to make a “late” portability election with regard to the federal estate tax exemption.

What is the Portability Election and How is it Made?

Portability started with the passage of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.  Under this law, a surviving spouse was allowed to add their deceased spouse’s unused federal estate tax exemption to their own exemption and apply the combined exemptions (up to a total of $10 million in 2011 and $10.24 million in 2012) to gifts made during life and/or transfers made after death. Portability was supposed to disappear in 2013, but the American Taxpayer Relief Act of 2012 made it permanent for deaths occurring in 2013 and beyond.

In order to make the portability election, the executor of the estate must timely file a federal estate tax return (IRS Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return) and include the portability calculation.  Form 706 is timely filed if it is filed either (i) within nine months after the date of death, or (ii) by the last day of the period covered by an extension, whichever is later.

What Are the Special Rules for Making the Late Portability Election?

The uncertainty surrounding the future of portability coupled with the June 2013 U.S. Supreme Court decision in the case of Windsor v. United States (which held that Section 3 of the Defense of Marriage Act is unconstitutional and prompted Treasury and the IRS to issue a ruling that same sex married couples will be treated as married for all federal tax purposes, including making the portability election) led to a lot of confusion and inevitably the failure of many executors to make the portability election.

In response to this confusion, Rev. Proc. 2014-18 was issued in early 2014 which allows an executor to make a “late” portability election on or before December 31, 2014 if the estate meets the following criteria:

  1.  The taxpayer must be the executor of the estate of a decedent who was survived by a spouse; died between January 1, 2011 and December 31, 2013; and was a citizen or resident of the U.S. on the date of death; and
  2. The estate was not required to file a federal estate tax return; and
  3. The estate did not file a federal estate tax return; and
  4. A person permitted to make the portability election on behalf of the decedent files a federal estate tax return on or before December 31, 2014; and
  5.  The person filing the federal estate tax return states at the top of the return that it is being “FILED PURSUANT TO REV. PROC. 2014-18 TO ELECT PORTABILITY UNDER § 2010(c)(5)(A).”
What Should You Do?

If you’re not sure if making the “late” portability election applies in your situation, hurry up and check with your estate planning attorney or accountant because the clock is ticking!

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Writer Tom Clancy’s Will Demonstrates Clear and Present Danger of Estate Planning for a Blended Family


OK, I admit it.  Back in the day I read all the Tom Clancy novels – The Hunt for Red October, Red Storm Rising, Patriot Games, Clear and Present Danger, The Sum of All Fears – and saw all the movies (and yes, I read the books before I watched the movies).  How else would I have learned about Russian MiG 29s,  U.S. F-14 Tomcats, CENTCOM, and PACOM?  But while Mr. Clancy’s stories were full of international espionage and meticulously detailed military information, unfortunately his last will and testament and particularly his second codicil, drafted by a Baltimore estate planning attorney, lacked the precision of his own writing.

Mr. Clancy died from heart failure on October 1, 2013, at the age of 66.  He left behind his wife, Alexandra Clancy, a young daughter, and four adult children from his first marriage.

Mr. Clancy’s will and two codicils were filed for probate in Baltimore City, Maryland, on October 10, 2013.  The probate docket indicates that the author signed his 21-page will on June 11, 2007, and two short codicils totaling a mere three pages on September 18, 2007 and July 25, 2013.

According to a partial estate inventory filed in January 2014 and a supplemental inventory filed in September 2014, Mr. Clancy’s estate is estimated to be worth $83 million.  His largest asset was a 12% ownership interest in MLB’s Baltimore Orioles, estimated to be worth $65 million; he also had multiple real estate holdings (including a $7 million estate overlooking the Chesapeake Bay which went to his wife through joint ownership), $10 million in business interests, and, while it may seem odd it’s certainly not unexpected, a rare, operating World War II tank.

While several of the real estate holdings passed to Mr. Clancy’s wife through joint ownership with rights of survivorship (along with other jointly held investments which are not part of the probate estate), Mr. Clancy’s intent for the remainder of his property was for it to be divided among three distinct trust “buckets”:

  1. One-third in a marital trust for the benefit of his wife;
  2. One-third in a  family trust for the benefit of his wife and all his children; and,
  3. The balance in trusts for the benefit of his four adult children as well as grandchildren.

This sounds like a reasonable plan for the author’s blended family, doesn’t it?

But lurking in this type of plan for a blended family and a substantial $83 million estate is the impact of estate taxes – both federal and Maryland (when Mr. Clancy died, the federal estate tax exemption was $5.25 million and the Maryland estate tax exemption was a measly $1 million).  The total estate tax bill is estimated to be $16 million, and the Personal Representative of the estate, Baltimore estate planning attorney J.W. Webb (who drafted the July 2013 codicil – more on that below), has taken the position that trust bucket #2 (the family trust) should pay $6 million of the tax bill and trust bucket #3 (the children’s trusts) should pay $10 million of the tax bill (note that trust bucket #1, the marital trust, is designed to defer payment of estate taxes on its value until after Alexandra Clancy’s death).  But according to the “Petition for Declaratory Judgment, Construction of Will, and Removal of Personal Representative” filed in early September by Alexandra Clancy’s attorneys, the widow believes that the intent of the July 2013 codicil was to confirm that trust bucket #3 – the trusts for the benefit of Mr. Clancy’s four children from his first marriage – should pay the entire $16 million estate tax bill, thereby leaving trust bucket #2 completely intact.  Mr. Webb has so far declined to comment on the petition and has until October 17 to file his response.

International intrigue?  Not even close, just a typical day in probate court, and yet another example of celebrity estate planning gone wrong.  In addition to the questionable language in the July 2013 codicil, had Mr. Clancy created and funded a revocable living trust instead of relying on a will and some codicils as the governing documents of his estate plan, then the intimate details of the writer’s final wishes would have remained a private family matter.  In fact, this surprised me since 10 years ago I practiced as an estate planning attorney in Bethesda, Maryland, and my firm was (and still is) a firm believer in revocable living trusts.  And since this was (and still is) the case for other Maryland estate planning firms, why an estate planning attorney with a big Baltimore firm would use a will instead of a trust is beyond me.

Aside from this, the Clancy estate battle also demonstrates how tricky it is to plan for a blended family.  What was the author’s true intent?  Unfortunately we will never know, and after significant time and money have been spent, a probate judge will end up making the final decision.

Prince Harry Inherits £10 Million From Princess Diana’s Estate

When Diana, Princess of Wales, died on that warm August night in Paris in 1997, she left behind two young princes and an estate valued at approximately £21 million. And of course a woman of her stature had a last will and testament which she signed in June 1993 and then modified with a first and only codicil in February 1996. The original will and codicil left the young princess’s estate in equal shares to the young princes when each child reached the age of 25.

Since both princes are well over the age of 25 (William Arthur Philip Louis, known as Prince William, is currently 32, and Henry Charles Albert David, known as Prince Harry, just turned 30 on September 15), one would think that they had already received their inheritances a while ago, but not so fast. Apparently the executors of Princess Diana’s estate, her mother, Frances Ruth Shand Kydd, and her oldest sister, Lady Elizabeth Sarah Lavinia McCorquodale, didn’t like the provisions of the will because they were able to obtain a secret “variation order” from the High Court of Justice in December 1997. Under the terms of “The Arrangement,” as it is referred to in the court order, the will was modified to provide that Princess Diana’s estate wouldn’t be distributed outright to her sons until each reached the age of 30.  This was certainly sneaky and wouldn’t happen in the U.S. since notice would be required to be given to all parties interested in an estate if the executor didn’t want to follow the terms of the will.

In any case, as a result of “The Arrangement,” back in June 2012 when Prince William turned 30, he inherited a lump sum of £10 million, or about $16 million U.S. dollars.  And when Prince Harry turned 30 on September 15, he also inherited a lump sum of £10 million.  The princes also received some of their mother’s personal items on Harry’s 30th birthday, including her wedding gown, personal letters, jewels, and the score and lyrics to Elton John’s version of “Candle in the Wind” which he performed at the princess’s funeral.

Photo: By Glyn Lowe (http://www.flickr.com/photos/glynlowe/8723778475/) [CC-BY-2.0 (http://creativecommons.org/licenses/by/2.0)%5D, via Wikimedia Commons

3 Reasons It Takes So Long to Receive an Inheritance

Usually the first thing that the beneficiary of an estate or trust asks is when they can expect to get their inheritance check. Unfortunately sending out the inheritance checks is the very last item on the “to do” list of the personal representative or trustee.  Why?  Because the personal representative or trustee has to fulfill all of the duties and responsibilities that are required for settling an estate or trust before handing the assets over to the beneficiaries.  Otherwise,the personal representative or trustee can be held personally liable for any unpaid bills and taxes.

Even with a simple estate or trust, the duties and responsibilities of the personal representative or trustee can be tedious and will delay the final distribution of the assets.  What can be so time-consuming about settling an estate or trust that will cause the plans you have for your inheritance to be put on hold?  Consider the following:

  1. Probate takes time and money. Probate is necessary when a deceased person leaves behind assets that are titled solely in the individual’s name without any beneficiary designated.  This is true even if the deceased person created a revocable living trust provided that the trust was not fully funded at the time of death.  Probate is a state court process that takes time and money and will delay the delivery of your inheritance check.
  2. Tax returns have to be filed and taxes have to be paid.  The personal representative or trustee is responsible for filing the deceased person’s final income tax return(s) and paying any taxes that are due.  Aside from this, the estate or trust may owe state estate taxes or inheritance taxes or federal estate taxes, in which case these returns must be filed and these taxes must be paid.  Finalizing tax returns and paying any taxes due will delay the delivery of your inheritance check.
  3. Beneficiaries have their own agenda. Even though the beneficiaries of an estate or trust usually want to get their inheritance checks in their hands as soon as possible, they don’t always act quickly or follow instructions.  Inevitably there will be at least one beneficiary who drags their feet when asked to provide information or sign and return legal documents or who will skip a signature and require documents to be resent.  One disengaged beneficiary will spoil it for the rest and delay the delivery of your inheritance check.

For additional information about why settling an estate or trust takes so long and what to do with your inheritance, refer to the following:

Photo: © MCA Records

3 Tips for Making Your Estate Plan Your Decision

Many people struggle with all of the decisions that they have to make when putting together their estate plan: Who should get what? When should they get it? Who shouldn’t get anything? Who should be the executor? Who should be the trustee?

All of these decisions can be overwhelming, even for someone who has what is considered a “normal” family, but they don’t have to be.  In the wise words of Jerry Cantrell of Alice in Chains, it’s your decision.

If you’re stressed out about how to plan your estate, then don’t despair.  Here are three tips for making your estate plan your way:

Tip #1 – Don’t be afraid to disinherit someone. It’s your money, so you can choose to leave it, or not leave it, to whomever you want. But beware – being bullied into making your estate plan a certain way by a certain individual and not the way you really want it (for instance, leaving everything to one child to the exclusion of others at the insistence of that one child) will result in family discord.  If you really want to disinherit someone, then that’s your prerogative, but if someone bullies you into disinheriting someone else, then in extreme cases this could amount to “undue influence” and lead to an ugly will or trust contest. If you truly want to disinherit someone, then work closely with your estate planning attorney to insure that not only will your final wishes be carried out, but your plan will be bullet proof from challenges.

Tip #2 – Choose your executor and trustee wisely. Here are the traits you should look for in your executor and trustee:  loyal, fair, practical, trustworthy, organized and tough.  If you choose a person who has most of these traits, then your final wishes will be fulfilled, but if you choose a person who has only one or two of these traits, then your final wishes will take a back seat to their own agenda.  Better yet, choose a corporate trustee, such as a bank or trust company, to put these important jobs in the hands of professionals.  Otherwise it may be way too easy for Uncle Bob to skim some off of the top or for your loved ones to convince Uncle Bob to disregard your wishes.

Tip #3 – Listen to your estate planning attorney.   While a good estate planning attorney will listen intently so that he or she can learn about your greatest concerns and challenges when it comes to planning your estate, you should also listen to your estate planning attorney because he or she can offer some good advice and solutions to ease those concerns and overcome the challenges. And while sometimes what your estate planning attorney says may not be what you want to hear, your attorney’s advice, which comes from years of experience in similar situations, may very well head off a family feud or a will or trust contest.