Death and Taxes Blog

Probate takes time, especially a probate a complicated as Michael Jackson's. And when probate lasts a really long time, the spouse and/or dependent children of the decedent are at risk of being unable to reach money that they will (hopefully) inherit. In these cases, you have to proceed a little differently than you would typically, where you collect assets, pay all claims, and then (only then) make distribution to the beneficiaries.

Enter the concept of an allowance, or what's know in Illinois as a child's award or spouse's award. This is what attorneys for Katherine Jackson are discussing in this article.

In Illinois, spouse awards and child awards are discussed in Article XV of the Probate Act. Note the amount to pass to the surviving spouse:

a sum of money that the court deems reasonable for the proper support of the surviving spouse for the period of 9 months after the death of the decedent in a manner suited to the condition in life of the surviving spouse and to the condition of the estate...

Two other points:

1. Illinois law doesn't allow for an award to a dependent parent of a decedent (the above article seems to indicate that, to the surprise of no one, Katherine Jackson was dependent on her son for support). But it would allow Katherine to receive money as guardian of the minor children (and for their benefit).

2. A spouse or child award is considered a 2nd class claim against the decedent's estate under Article XVIII of the Probate Act. A 1st class claim is a claim for "[f]uneral and burial expenses, expenses of administration, and statutory custodial claims" -- those are the only types of claims that would take precedence over a spouse or child award.

I don't often link to TMZ, mostly because I don't often think that TMZ has anything perceptive to say. But they do on the Katherine Jackson potential contest of Will situation (link here). Just to explain: Michael Jackson's trust evidently has a "no contest" clause, which disinherits anyone who attempts to contest its terms. Katherine Jackson is now asking the Court if an attempt to challenge the appointment of the co-trustees would be viewed as a "contest."

Here's the quote from the article:

Here's what's bugging some family members and the lawyers representing the estate ... the will gives Katherine 40% of Michael's estate, so she can't be upset about that. The will names Katherine guardian for the children .. again, that's what she wants. And the named executors -- John Branca and John McClain -- are Michael's longtime, trusted advisors and friends.

So why would Katherine object to the will or the executors? A lot of people who are in the middle of it all feel Katherine is being manipulated and doesn't really understand the implications of mounting a legal challenge.

A few notes:

1. The article talks about provisions of the Will (the "no contest" clause, the fact that the Will gives Katherine 40% of the estate). But those provisions are actually in the trust. (The Will does, however, name Katherine as guardian.)

2. Judges tend not to like "no contest" clauses. The concern is that such clauses could be used to "fireproof" a Will signed under suspicious circumstances. Because there is a public interest in making sure a Will is in fact valid, Illinois courts typically don't enforce "no contest" clauses.

3. That being said, the sentiments in the TMZ article appear to be correct. There's simply no good reason for Katherine to contest her son's Will or trust. The concern is that she doesn't know what she's doing, or that she some (false) sense of entitlement. This TMZ article focuses on the latter concern, mentioning that Katherine wants a "seat at the table." Barring other information, I don't know of any judge who would agree with her.

This CBS News article talks about the tax burden on Michael Jackson's estate. The estate has to deal with a few problems:

1. Determining the amount of all of Mr. Jackson's debts.

2. Determining the value of all of Mr. Jackson's assets. This is particularly hard to do because the value of some of these assets fluctuates with Mr. Jackson's popularity (which is currently high). And how do we value Mr. Jackson's public image?

3. Liquidating Mr. Jackson's assets so that debts and any taxes (including estate taxes) can be paid.

The article notes that Mr. Jackson also set up an insurance trust. From the article:

Jackson's estate may have planned for a big estate tax bill. He had an insurance trust in his name as of Aug. 26, 2003, according to a financial document addressed to the singer and obtained by the AP. Insurance trusts are often set up by estates to pay federal estate tax.

I think the statement that the insurance trust is "in his name" is misleading; they probably mean just that Mr. Jackson set up such a trust with his children or others as beneficiaries (and someone other than Mr. Jackson as trustee). There are a couple of major advantages to creating such a trust:

-because the trust wasn't owned by Mr. Jackson at his death, the trust assets (typically this would be the proceeds from one or more life insurance policies on Mr. Jackson's life) are not included in his estate for estate tax purposes.

-because the life insurance proceeds are liquid, the trustees of the insurance trust can purchase illiquid assets from Mr. Jackson's estate or trust, so that the estate or trust has money it can use to pay bills.

I talked more about insurance trusts in a four-part series a couple of years ago:

Part One
Part Two
Part Three
Part Four

I've talked previously about citations in the probate context (here is an introduction). These actions are usually brought by the personal representative, to find out about (and, if successful, re-acquire) property held by a third party that rightfully belongs to the estate. There are two different types of citations:

-citation to discover information (like a discovery deposition, but much broader in scope; Judge Malak, who I cite below, states that "a citation to discover... is a total 'fishing expedition'")

-citation to recover assets (you ask the court to rule on who owns certain property)

Usually you file your citation to discover, and then, using the information you have gleaned from that citation, you file your citation to recover. But HOW you file your citation to recover is important. Here's Cook County Probate Court Judge Jeffrey Malak's take (this is from his chapter in IICLE's Litigating Disputed Estates, Trusts, Guardianships, and Charitable Bequests, available for sale here):

The proper order to be entered upon completion of a citation to discover... is that the citation is discharged. If the petitioner is in position to file an amended petition to recover assets, leave to do so may be granted at the time of such discharge. If the petitioner is not in a position to amend to a recovery citation, he or she may request that at a later time, but new service will be necessary. (Emphasis added)

I've placed those last five words in bold because they're important. It's a pain in the butt to serve the respondent in a citation action. You have to do it with the citation to discover, so why do it again? When you go in to discharge the citation to discover, do what Judge Malak indicates, and go in with a motion for leave to amend the citation to discover and turn it into a citation to recover. Then you won't need to serve the respondent a second time. (One more cite: amending a citation to discover -- to turn it into a citation to recover -- is specifically allowed under the Estate of Chernyk case, 485 N.E.2d 1169 (1st Dist. 1985).)

Today there was a court hearing in Michael Jackson's estate. Some details, from MSNBC:

1. There's a 1997 Will as well as a 2002 Will. The 1997 Will only comes into play if the 2002 Will is found to be invalid.

2. Given the temporary nature of the appointments of John Branca and John McClain, as well as the fact that they are referred to as "administrators," I have to believe that we are talking about a scenario involving what are known (in Illinois, at least) as "administrators to collect." This is a special kind of personal representative, appointed when assets are in danger of wasting and time is of the essence.

3. In choosing a temporary administrator or administrator to collect, courts usually honor the wishes of the decedent in choosing his or her own executor. That's why the court appointed Mr. Branca and Mr. McClain and didn't appoint Mr. Jackson's mother.

4. Mr. Jackson's mother is concerned about Mr. Branca and Mr. McClain's "financial leadership" and potential conflicts of interest, but the fact of the matter is that Mrs. Jackson and the other beneficiaries have a lot of safeguards in place. Mr. Branca and Mr. McClain must post a bond and ask for court approval of transactions they undertake.

Why would Debbie Rowe seek to become guardian of her two children with Michael Jackson? (Article here) Three words: follow the money.

Mr. Jackson's trust is (in part) for the benefit of his children. I would presume that he wanted them to be supported in the lifestyle to which they've become accustomed. As a result, becoming guardian of Mr. Jackson's children means joining them in their posh lifestyle.

It also seems unlikely that a judge will allow it. Why?

1. Judges don't like to separate children. Would a judge really grant guardianship of two children to Ms. Rowe, and guardianship of the other child to Mr. Jackson's mother? Doubtful.

2. My understanding is that Ms. Rowe, as part of her divorce settlement, agreed to relinquish all rights to raise the children.

I posted a link to Mr. Jackson's Will yesterday.

A few thoughts:

-This is what's known as a pourover Will. Mr. Jackson has a trust called the Michael Jackson Family Trust (the "Trust"), and any assets owned by him in his own name at death pass to (pour over into) the Trust. This is the same setup that many of my clients have, for a couple of reasons:

1. It's private. The Will is a public document, and must be filed with the court. The Trust isn't. We've heard rumors about the beneficiaries of the Trust (his children and charities), but those are just rumors. In most cases, no one will EVER know the identity of trust beneficiaries (although I suspect we will get confirmation of the terms of the Trust in Mr. Jackson's case).

2. If Mr. Jackson took steps to put his property into the Trust (by changing title and beneficiary designations), then no probate proceeding will be needed.

-Mr. Jackson nominates his mother (and if she can't act, Diana Ross) as guardian of his minor children. The word "nominates" is there for a reason -- a judge has final control over who becomes guardian. From what we currently know, a successful challenge to this Will seems unlike (as I'll explain below), but the guardianship will be one potential area of litigation. Mrs. Jackson as guardian will need to work with the trustees of the Trust to get money for the children -- will this relationship work?

-John Branca, John McClain, and Barry Siegel are appointed as co-executors, but the rumor is that Mr. Siegel at some point signed a document by which he declined to act. (Note: that's music executive John McClain, NOT John McCain, and NOT John McClane, the character Bruce Willis portrayed in the Die Hard films. John Branca is an entertainment lawyer; Barry Siegel is an accountant.) I would assume that Mr. Branca and Mr. McClain will be trustees under the Trust as well.

-I really, really hate provisions like Article VI, which reads:

Except as otherwise provided in this Will or in the Trust referred to in Article III hereof, I have intentionally omitted to provide for my heirs. I have intentionally omitted to provide for my former wife, DEBORAH JEAN ROWE JACKSON.

What in the world does this mean? Under California law, Mr. Jackson's heirs are his children (see Section 6402 here -- "the entire intestate estate if there is no surviving spouse or domestic partner, passes as follows:... To the issue of the decedent"). By all accounts, he is not seeking to disinherit them. Why is this here?

-From what I've read thus far, I'm having a hard time figuring out how anyone could mount a serious Will contest or trust contest. According to Time, the Trust assets are to be "shared between his mother, who gets 40%, his three children, who together get 40%, and charities for children, which would receive 20%."

As I've said previously, you can challenge a Will on two basic grounds: incapacity (you lacked the ability to execute a Will) or undue influence (someone made you sign a Will that doesn't reflect your wishes).

An undue influence claim is hard when the beneficiaries of your Will or trust are what you might call the "natural objects of your bounty" (the people to whom a typical person would leave money). Set aside that this is Michael Jackson, and just say he's a random 50-year-old single person with three kids. Is it reasonable for him to leave his property to his mother, children, and charity? Yes. Contrast this with a Will contest case I once brought, where my client's grandmother left my client nothing in the Will, and instead left everything to her deceased son's best friend. Hmmmm. Now THAT is suspicious. I'd be equally suspicious if Mr. Jackson's Will left everything to one of his many "advisors," but it doesn't seem as though that's what happened.

You could also claim lack of capacity. That makes sense -- it strikes me that Mr. Jackson could have been mentally ill for quite some time -- but there's an "action" problem here. If Mr. Jackson was incapacitated from at least 2002 on, why didn't you (the person contesting his Will) step in and seek a guardianship for him? Why did you do nothing, but then come forward only when you were disinherited?

We also need to know more about prior Wills, if any. If the 2002 Will gets thrown out, what does the prior Will say? If there is no valid prior Will, then Mr. Jackson's property would pass solely to his children as his only heirs.

Hey, I like the internet as much as anyone (really!). But one problem I have is that there are very few places to turn in order to really understand an issue. A lot of the problem is reliance upon secondary sources. So, when my client asks, "can I take advantage of this new $8,000 credit for first-time homebuyers," I run across 100,000 websites providing a vague summary of the law. But I have actual, specific questions -- where is the ACTUAL law?

So, let me offer some links to primary sources on this issue:

1. The credit is found in the American Recovery and Reinvestment Act of 2009 (the "2009 Act"), which is here as a PDF. More specifically, it's in Section 1006 of the 2009 Act. The above PDF has 407 pages; Section 1006 is on pages 202-203.

2. The credit found in the 2009 Act is really just an extension of the $7,500 credit for first-time homebuyers found in the Housing and Economic Recovery Act of 2008 (the "2008 Act"), available here as a PDF. The credit is discussed in Section 3011 of the 2008 Act, found on pages 235-238 of this PDF (which has a total of 260 pages).

3. Both the 2008 Act and the 2009 Act amend the Internal Revenue Code (the "Code"), in large part by (essentially) creating a Section 36 to the Code. Here is a link to a new PDF of how Section 36 should now read, with the provisions of both Acts integrated into it. Deletions from or additions to Section 36 by the 2009 Act are indicated by a strikethrough or bolding, respectively.

4. You use Form 5405 to apply for the credit.

It's here. Analysis to come.