Death and Taxes - The Blog

Lapsed Legacies and the Anti-Lapse Statute, Part 1

Most estate planners try to draft Wills for flexibility, but circumstances can and do obviously change.  As a result, we occasionally have to deal with cases where a decedent's wishes simply can't be honored -- or aren't known -- because of events that occurred after the decedent signed his Will.

Some important concepts in dealing with these situations are the Four A's: ademption, advancements, anti-lapse and abatement.  Today I'll deal with anti-lapse.

A gift to a beneficiary under a Will is said to have "lapsed" if the beneficiary does not survive the creator of the Will (aka the "testator").  For instance, if I sign a Will leaving my entire estate to my son, but my son dies the week before I do, then the gift to my son lapses.

The easiest solution to the problem of a lapsed gift is to use some foresight in drafting your Will.  If I am leaving property to someone, I should plan for the possibility that my beneficiary won't survive me.  For instance, I could say "I give my entire estate to my son if he survives me, or if he doesn't survive me, to my sister if she survives me."

If I don't plan ahead, the executor of my estate will need to consult the Illinois Probate Act to deal with this situation.  Section 4-11 of the Act addresses this situation and is commonly referred to as the "anti-lapse" statute.  This section states in relevant part that, if a beneficiary is a descendant of the testator, the gift will pass to the descendants of that descendant.  That sounds a little confusing, so let me share an example:

I leave my entire estate to my son under my Will

My son predeceases me, leaving three children of his own

Upon my death, my son's three children (my grandchildren) will receive my entire estate pursuant to the anti-lapse statute

The key language in the anti-lapse statute occurs at the beginning: "Unless the testator expressly provides otherwise in his will."  In other words, if I don't like my grandchildren, I should change my Will so that my property goes elsewhere if my son predeceases me.

Frank Lloyd Wright and the Life Estate Agreement

Back in August, I wrote about the battle between the Cook County Public Guardian and preservationists.  The Public Guardian handles the financial affairs of 91-year-old Carolyn Howlett, who has Alzheimer's Disease.  Mrs. Howlett owns and lives in the carriage house of the Avery Cooney estate, which was designed by Frank Lloyd Wright.  The carriage house roof is in disrepair, and the Public Guardian wanted to fix it cheaply, so that Mrs. Howlett could continue to live there.  However, historic preservation groups wanted the roof to be repaired in a (more costly) way that preserves the building's character.

A solution to this impasse was finally reached, and the Riverside/Brookfield Landmark has the details here.  Essentially, the carriage house has been sold to a third party, but Mrs. Howlett retains a life estate in the house.  As a result, she can stay in the house for the rest of her life, and the third party becomes the owner at her death.

This is a good solution, and one that doesn't get used as often as it should.  Here, it's a real win for Mrs. Howlett: she gets to stay in her home, the roof is fixed, and her estate gets some money from the sale.  Note that the fair market value of a house with a retained life estate is less than the fair market value of a house with no such retained life estate.  How much less?  Presumably the parties to the transaction consulted actuarial tables to determine Mrs. Howlett's life expectancy, and then used an agreed-upon interest rate to figure the present value of the buyer's future interest. 

More on Mortgage Fraud

I spoke about mortgage fraud previously, here, and gave some examples of how it can work.  However, one type of mortgage fraud (or attempted mortgage fraud) that I have started to encounter quite often involves ordinary buyers who may not even know that they're doing something wrong.  Let me give an example:

Mr. and Mrs. Smith want to buy their first home.  They both have jobs, but no money for a down payment or closing costs.  They find a home they like, with a purchase price of $260,000, and go to a mortgage broker for a loan.  The mortgage broker (or their realtor) suggests that Mr. and Mrs. Smith (a) get a 100% loan for the home and (b) ask the seller of the home, Mrs. Jones, for a $10,000 credit at closing.

The problem really isn't with the above arrangement per se; rather, it's with the above arrangement if such arrangement isn't disclosed on the settlement statement for the transaction.  That settlement statement should accurately reflect the substance of the transaction, but too often parties (including closing agents, realtors, and attorneys, all of whom should know better) are willing to fudge the details in order to get a deal done.  For instance, if the lender won't allow the $10,000 credit on the settlement statement, then the closing agent may issue two proceeds checks to the seller (one for $10,000, one for the rest of the seller's proceeds), and the seller will sign the $10,000 check over to the buyer.  Regardless of the intent of the parties, that's mortgage fraud.

Anna Nicole Smith Goes to the Supreme Court

Sounds like the world's worst reality show, doesn't it? (Especially if said reality show were to involve Ms. Smith being appointed to the Supreme Court -- think of all the hi-jinks that would ensue!)  In actuality, her probate litigation case (which I discussed last month) is going before the Court -- the details are here.

Probate Finality: Exhuming a Body in Texas

The Texas Supreme Court will soon be hearing arguments about whether the body of John G. Kenedy Jr., a wealthy rancher, should be exhumed.  At issue is a claim that Mr. Kenedy had a daughter by his maid (and, of course, that this daughter is entitled to a portion of Mr. Kenedy's estate).  The claim is opposed by the charities that inherited Mr. Kenedy's assets, on the basis of two pretty sensible arguments (as set forth in this article):

"There are two main thrusts. One is that the estate proceedings (in probate court) are final and have been final for over 50 years," said Alice lawyer Buster Adami, who represents the [John G. Kenedy Jr. Charitable Trust], which benefits primarily Catholic charities. "The second point is that in 1948 there was a final judgment in a district court case of John Kenedy's will, and it was made final."

Even assuming that paternity is proven, can probate proceedings really be re-started and/or overturned more than 50 years after they were initially completed?  I would hope the answer is "no."  One of the biggest benefits to the probate process is finality -- once the process is completed, the recipient of a decedent's property doesn't have to live in fear that he or she will have to give back an inheritance because of a new beneficiary or claimant.  For instance, Illinois bars all claims against a decedent's estate filed after the two-year anniversary of the decedent's death, and requires that a Will contest be brought no later than six months after the Will is admitted to probate.

The Chicago Outfit and Real Estate

Oak Park (where I live and have my office) is mostly known for its two most famous residents, Frank Lloyd Wright and Ernest Hemingway.  But Oak Park and River Forest (the village next to it) have also been home to lots of famous gangsters.  Yesterday I attended "Welcome to the Neighbor Hood," a guided trolley tour of gangster homes in Oak Park and River Forest.  During the course of the tour, I learned a couple of interesting points from the real estate side of things:

1. It's hard to track where gangsters lived because many of them took title to their homes using land trusts (or had a third party take title for them).

2. If they decide to sell, the owners of a gangster's home may be able to extract a premium in terms of price.  Of course, the amount of the premium depends largely on the fame of the gangster.  Despite its humble appearance, Sam "Momo" Giancana's home at 1147 South Wenonah in Oak Park could probably be sold for quite a bit of money, because Mr. Giancana was very famous (he dated Phyllis McGuire of the McGuire Sisters and briefly shared a mistress with JFK) and because he was murdered in the basement of the home.  The homes of lesser or forgotten gangsters may attract no premium at all.  By the way, if you're interested in buying a gangster's home, 1407 North Ashland in River Forest (a huge ranch home, complete with walk-in vault in the basement) may be on the market soon -- the home was built for and occupied by Anthony "Joe Batters" Accardo.  However, the asking price is said to be around $2 million.

The "Welcome to the Neighbor Hood" tours have been so popular that they've been expanded to a number of different dates, but the last group of tours will be held next weekend (here is the info -- you'll want to call and make sure spots are still open).

The Estate Tax and Katrina

Pity those "poor" folks pushing for repeal of the estate tax.  They're up against a wall (so to speak), as Hurricane Katrina forces the nation to really look at and think about poverty.  The pro-repeal folks' solution?  Find someone who (1) perished in the Hurricane and (2) is subject to the estate tax. 

So far the search has been unsuccessful.  Time.com has the story here.

The Great MLS Battle

A couple of months ago (here), I wrote about Missouri's new law aimed at eliminating discount real estate brokers.  Similar laws have passed in other states, and the fight over discount brokers is now becoming a fight over the Multiple Listing Service (or MLS) -- Bankrate.com has the details here.

The MLS is a realtor-created database of homes that are for sale -- realtors who represent home buyers use it to find homes that might interest their clients.  Discount brokers use (or, by some accounts, abuse) the MLS in two particular ways:

1. They allow home sellers to pay them a small fee in order to get a listing in the MLS

2. They allow home buyers to pay them a small fee in order to be able to search the MLS on their own

On the one hand, I under the realtors' point -- they created the MLS, and should be able to control (or limit) access to it.  On the other hand, realtors need to understand that any attempt to limit information in the internet age is a fool's errand.  Realtors can either adopt, or go the way of the dodo bird (and the travel agent).

Preemptive Use of the Slayer Statute

I've talked about slayer statutes at some length on this blog -- these statutes prevent a person who causes someone's death from inheriting property of the person they killed.  In the case described here, something a bit different is taking place.  Kenneth E. Simon is still alive (albeit suffering from terminal liver disease), but his sons are trying to have his marriage annulled by proving that Mr. Simon's wife, Anne, tried to have him murdered.  The goal here is to prevent Mrs. Simon from inheriting any property from her husband.

This case raises a lot of interesting questions, particularly about the reach of the slayer statute.  For instance, it appears to me that the Uniform Probate Code only disinherits a person who "feloniously and intentionally kills the decedent."  In other words, it only applies if a murder plot is successful. (In the above case, even if we accept that Mrs. Simon tried to murder Mr. Simon, we have to concede that she wasn't successful.)  Does that really make sense?  Shouldn't a person who attempts a murder also be disinherited?

Illinois tries to expand upon the narrow scope of the Uniform Probate Code -- it also prevents inheritance by a person convicted of the financial exploitation, abuse or neglect of an elderly or disabled person.

Advancements

Most estate planners try to draft Wills for flexibility, but circumstances can and do obviously change.  As a result, we occasionally have to deal with cases where a decedent's wishes simply can't be honored -- or aren't known, or change -- because of events that occurred after the decedent signed his Will.

Three important concepts in dealing with these situations are ademption, advancements, and abatement.  Today I'll deal with advancements.

Can you receive your inheritance in advance?  In Illinois, the answer is "yes," so long as (1) the person making the gift states (in writing) that it is intended to be an advancement or (2) the person receiving the gift acknowledges (in writing) that it is an advancement.

The effect of calling a gift an advancement is that the gift reduces the value of the recipient's interest in the gifter's estate.  An example might help:

Frank Fallon, a widower, has four kids, and Frank's Will leaves his estate to his kids in equal shares.  In 2004, Frank's son Joey has some financial trouble, and Frank gives him $200,000 as an advancement.  When Frank dies in 2005, his estate has a value of $1 million.  Under Frank's Will, each of Frank's kids would receive 1/4 of his estate (or $250,000).  However, as a result of the advancement, Frank's estate is deemed to have a value of $1.2 million ($1 million plus the $200,000 advanced), with each kid receiving $300,000.  Because Joey has already received $200,000 as an advancement, he is entitled to only $100,000 more from the estate. 

One final point: under Illinois' law of advancements (found in §2-5 of the Illinois Probate Act), the recipient of an advancement cannot be forced to refund any part of it, even if the amount of the advancement exceeds the recipient's share of the estate.  For instance, if Frank had given Joey $600,000 as an advancement, and then died with an estate of $1 million, Joey would not have to refund the difference between the advancement and his share of the estate ($400,000).