By Bruce D. Steiner
Bruce D. Steiner, of the New York City law firm of Kleinberg, Kaplan, Wolff & Cohen, P.C., and a member of the New York, New Jersey and Florida Bars, is a long time LISI commentator team member and frequent contributor to Estate Planning, Trusts & Estates and other major tax and estate planning publications.
Bruce Steiner previously commented on the lessons estate planners can learn from James Gandolfini’s, Philip Seymour Hoffman’s, Lauren Bacall’s, Tom Clancy’s, Joan Rivers’, Whitney Houston’s and Frank Gifford’s wills and Robin Williams’ insurance trusts. Now, Bruce returns with commentary about the lessons estate planners can learn from David Bowie’s will.
- David Bowie died on January 10, 2016. He was 69 years old. He was a singer, songwriter and musician, and also worked as an actor and record producer. He was a citizen of the United Kingdom and a resident of Manhattan. His legal name was David Robert Jones.
- Bowie left a large estate. Several news stories reported that he was worth $100 million. The probate petition says that the value of his probate estate was between $500,000 and $100 million.
- Bowie married Mary Angela Barnett (Angie) on March 19, 1970. He and Angie had one child, Duncan Jones, who was born on May 30, 1971, and is age 44. Duncan is married to Rodene Ronquillo, and they are expecting a child in June 2016.
- Bowie and Angie were divorced on February 8, 1980. Mr. Bowie then married Iman Mohamed Abdulmagid (Iman) on April 24, 1992. Mr. Bowie had another child with Iman, Alexandria Zahra Jones (Lexi), who was born in August 2000, and who is age 15.
- Iman was born on July 25, 1955, and is age 60. She is a model, actress and entrepreneur. In addition to Lexi, she has an adult daughter, Zulekha Haywood, from her previous marriage to basketball player Spencer Haywood.
- Bowie left a will dated August 25, 2004, and a Codicil dated May 4, 2007.
- Bowie’s will provides as follows:
- He left his tangible personal property (other than the copyrights relating thereto) to his executors to distribute in accordance with his wishes as he may have made known to them.
- He left $2 million to his friend, Corinne (Coco) Schwab. In the Codicil, he also left his shares of Opossum, Inc., to Coco.
- He left $1 million to his friend, Marion Skene.
- He left his Ulster County, New York, vacation home to Lexi.
- He left his other residences to Iman.
- He left the rest of his estate 50% in trust for Iman, 25% to Duncan, and 25% in trust for Lexi.
- Iman receives all of the income of her trust. In addition, the trustees may distribute principal to Iman for her health, education, maintenance and support. Upon Iman’s death, the balance of the trust, after estate taxes, goes 50% to Duncan if he survives Iman, or if not then to his issue, and 50% to Lexi, in trust to age 25, if she survives Iman, or if not then to her issue.
- Until Lexi reaches age 21, the trustees have discretion to distribute the income and principal to her, or to accumulate the income. Lexi receives all of the income of the trust beginning at age 21. When Lexi reaches age 25, the trust ends, and she receives all of the trust assets. If Lexi dies before age 25, the balance of the trust goes to Mr. Bowie’s then living issue.
- All estate taxes are payable out of Duncan’s and Lexi’s shares of the residuary estate.
- Bill Zysblat and Paddy Grafton Green are named as executors of Mr. Bowie’s estate, and as trustees of Iman’s and Lexi’s trusts. Bill Zysblat is the founder of RZO Productions, an entertainment business-management and tour-production company in New York. He is also a certified public accountant, and was Mr. Bowie’s business manager. Paddy Grafton Green is a commercial media lawyer with Michael Simkins LLP in London. Mr. Green renounced his appointment as executor and trustee, leaving Mr. Zysblat as the sole executor and trustee. The executors and trustees may name successor executors and successor trustees.
- He named Coco Schwab as guardian for Lexi if Iman did not survive him.
- He included an in terrorem clause, whereby anyone contesting his will would forfeit his or her interest.
Any married person has to decide upon the degree of control his or spouse should have. By leaving assets to the spouse outright, the spouse will control the disposition of those assets both during his or her lifetime and upon his or her death. If the surviving spouse remarries, he or she may provide for his or her new spouse, and the new spouse may have elective share rights. If the surviving spouse has additional children, the surviving spouse is likely to provide for his or her new children.
Since Mr. Bowie and Iman each had a child from a previous marriage, if Mr. Bowie had left Iman’s share to her outright, she could have left it to her children, including her child from her previous marriage; and she could have excluded Duncan. To protect against that possibility, Mr. Bowie left Iman’s share in a marital trust, so that upon her death, it would go to Duncan and Lexi equally.
If Iman did not have a child from a previous marriage, Mr. Bowie could have added Lexi’s share to Iman’s share, and left 75% of his estate in trust for Iman. He could then have given the trustees broader discretion to distribute principal to Iman, so that they could distribute principal to her to make gifts to or in trust for Lexi. However, since Iman had a child from a previous marriage, this would have been more difficult to accomplish.
Mr. Bowie left the rest of his estate, and the remainder of Iman’s trust, to Duncan and Lexi, subject to a trust to age 25 in Lexi’s case. This provides simplicity, avoids the compressed income tax brackets for trusts for Duncan and for Lexi after age 25, and insures a basis step-up for the assets at Duncan’s death and at Lexi’s death if she lives to age 25. However, it throws the trust assets into Duncan’s and Lexi’s estates (in Lexi’s case if she lives to age 25) for estate tax purposes, and exposes their inheritances to their creditors and spouses (in Lexi’s case if she lives to age 25).
Mr. Bowie could have provided for his children in lifetime trusts rather than outright or in trust to age 25. In that way, their inheritances would not have been included in their estates, and would have been protected from their creditors and spouses. He could have given Duncan effective control over his trust, and Lexi effective control over her trust beginning at age 25. In other words, Duncan, and Lexi upon reaching age 25, could have been a trustee, and could have had the power to remove and replace his or her co-trustee (provided the replacement trustee was not a close relative or subordinate employee). Each child could have had the broadest special power of appointment (in Lexi’s case after age 25 in the case of an exercise during lifetime), so he or she could have appointed (given or left) the trust assets to anyone he or she wanted (except the child or his or her estate or creditors).
To the extent of Mr. Bowie’s remaining GST exemption, this would have sheltered his children’s inheritances, and the income and growth thereon, from transfer taxes for several generations. We do not know whether Mr. Bowie had any remaining GST exemption, or whether he used his GST exemption during his lifetime, perhaps in 2012 when it was scheduled to revert to $1 million in 2013.
Mr. Bowie had several choices will have several choices with respect to the portion of his estate in excess of his remaining GST exemption (the “GST taxable portion”).
To the extent Duncan and Lexi will not have taxable estates, Mr. Bowie could have left the GST taxable portion to them outright. This provides simplicity, and avoids the compressed income tax brackets for trusts. It also provides another basis step-up at her children’s deaths. However, it would expose the assets to her children’s creditors and spouses.
To the extent Duncan and Lexi will not have taxable estates, Mr. Bowie could leave the GST taxable portion to them in trusts in which they will each have a general testamentary power of appointment. This provides another basis step-up at the children’s deaths, though the compressed income tax brackets for trusts will still apply. Whether the trust assets would be protected from the children’s creditors, subject to their creditors, or subject to their creditors to the extent the child exercises the power, varies depending on state law.
If the inclusion of some or all the GST taxable portion in the child’s estate might not result in any estate tax, the child could have a general power of appointment over that portion of the trust based upon a formula. The IRS has approved a formula provision in at least one private letter ruling. However, drafting the formula can be complicated, especially if a child leaves a surviving spouse.
The trustees could be given the power to grant the child a general power of appointment over a portion or all of the trust. The trustees would have to monitor this. One commentator has suggested that if the trustees have the power to grant a general power of appointment then the beneficiary is treated as already having a general power of appointment.
To the extent a child has a taxable estate, the GST tax is often preferable to the estate tax. The child could then appoint some or all of the trust assets to or in further trust for his or her grandchildren, moving the assets down two generations at the cost of only one transfer tax. If the child has a surviving spouse, he or she could postpone the GST tax by appointing the trust assets in further trust for his or her spouse.
Lexi’s trust could have been more flexible. Instead of mandating that the income be distributed beginning at age 21 and that the principal be distributed at age 25, Mr. Bowie could have given the trustees discretion to make distributions for any reason. He could have also given Lexi a special power of appointment over her trust, exercisable in favor of her issue, or a broader class of permissible appointees. If Lexi had a power of appointment, she could have appointed some or all of the GST taxable portion to or in trust for her grandchildren, thus passing the assets down two generations at the cost of only one tax.
Since Duncan is expecting a child in June 2016, only five months after Mr. Bowie’s death, Duncan will have time, once the child is born, to disclaim a portion of his share. Since the child was en ventre sa mere (in gestation) at the time of Mr. Bowie’s death, if he or she is born alive, he or she is deemed to have survived Mr. Bowie. Therefore, any property that Duncan disclaims will pass to his child. To the extent Duncan disclaims, that will make use of Mr. Bowie’s remaining GST exemption, if any. If Duncan has additional children, he can even them up with other assets. However, if Mr. Bowie did not use any of his GST exemption during lifetime, and had his entire $5,450,000 GST exemption remaining at his death, Duncan may not want to disclaim $5,450,000 net of estate taxes. Ignoring expenses and other bequests, and his remainder interest in Iman’s trust, if Mr. Bowie’s estate is $100 million, then Duncan’s share would be $25 million before estate tax, or $14 million after estate taxes.
Since Mr. Bowie’s Will did not provide for trusts for his grandchildren, if Duncan disclaims a portion of his share, the disclaimed property will pass to his child outright, subject to the executor’s power under the Will to hold the property until the child reaches age 21 or to pay it to a custodian under the Uniform Transfers to Minors Act until the child reaches age 21. Mr. Bowie might have provided trusts for his grandchildren in case a child predeceased him, or in case a child disclaimed some or all of his or her share.
The trustee may be able to fix Mr. Bowie’s estate plan to obtain some of the transfer tax and asset protection benefits that Mr. Bowie could have taken advantage of.
New York was the first state to enact a decanting statute, in 1992. The statute was overhauled in 2011. It contains two sets of decanting provisions, a more flexible set where the trustees have unlimited discretion to invade principal, and a less flexible set where the trustees have limited discretion to invade principal.
Since the trustee has unlimited discretion to distribute the principal of Lexi’s trust to her, they can decant her trust under the more flexible set of provisions. They can decant in favor of Lexi, but cannot expand the class of remainder beneficiaries. However, they can give Lexi a power of appointment, so long as it doesn’t exclude anyone other than Mr. Bowie, Iman, Lexi, or their estates, their creditors or the creditors of their estates.
If the trustee decants Lexi’s trust, the new trust need not end when she reaches age 25. By decanting Lexi’s trust, or the GST exempt portion of Lexi’s trust, the trustee can eliminate the requirement that the trust end when Lexi reaches age 25, and can give Lexi effective control at age 25. In other words, upon reaching age 25, Lexi could have the right to become a trustee, the power to remove and replace her co-trustee (provided the replacement trustee is not a close relative), and the broadest possible special power of appointment. That would also permit Lexi to effectively correct the apparent scrivener’s error whereby the remainder of her trust goes to Mr. Bowie’s issue rather than to her own issue.
If Duncan does not want to disclaim, Mr. Bowie’s executor could allocate his remaining GST exemption to Lexi’s trust. The trustee could then divide Lexi’s trust into a GST exempt trust and a GST taxable trust.
Another possibility might be for Duncan to disclaim an amount equal to one-half (or some other portion) of Mr. Bowie’s remaining GST exemption. Mr. Bowie’s executor could then allocate the balance of Mr. Bowie’s remaining GST exemption to Lexi’s trust. If Mr. Bowie did not use any of his GST exemption during his lifetime, so that he had his entire $5,450,000 GST exemption remaining at his death, Duncan may be more comfortable disclaiming some rather than all of Mr. Bowie’s GST exemption.
The trustee does not have complete discretion to distribute the principal of Iman’s trust. However, the trustee can still decant her trust, so long as the remainder beneficiaries remain the same. The trustee may extend the term of the trust, and the trustees may have complete discretion to distribute principal during the extended term of the new trust. Thus, the trustee can decant Iman’s trust to provide that after Iman’s death the balance of the trust will be divided into separate trusts for Duncan and Lexi, with each child having effective control over his or her trust. If Duncan does not disclaim, the executor could make a reverse QTIP election and allocate Mr. Bowie’s remaining GST exemption to Iman’s trust, and then decant the trust, or the GST exempt portion of the trust, so that each child will benefit equally from Mr. Bowie’s remaining GST exemption.
Estate planners can learn valuable lessons from David Bowie’s Will.
HOPE THIS HELPS YOU HELP OTHERS MAKE A POSITIVE DIFFERENCE!
About Bruce D. Steiner
Mr. Steiner is on the editorial advisory board of Trusts & Estates, and is a popular seminar presenter at continuing education seminars and for Estate Planning Councils throughout the country. He was named a New York Super Lawyer in 2010, 2011, 2012, 2013, 2014 and 2015. Bruce has been quoted in various publications including Forbes, the New York Times, the Wall Street Journal, the Daily Tax Report, Investment News, Lawyers Weekly, Bloomberg’s Wealth Manager, Financial Planning, Kiplinger’s Retirement Report, Medical Economics, Newsday, the New York Post, the Naples Daily News, Individual Investor, Fox Business, TheStreet.com, and Dow Jones (formerly CBS) Market Watch.
LISI Estate Planning Newsletter #2409 (April 28, 2016) at http://www.leimbergservices.com Copyright 2016 Leimberg Information Services, Inc. (LISI). Reproduction in Any Form or Forwarding to Any Person Prohibited – Without Express Permission.
David Bowie: https://en.wikipedia.org/wiki/David_Bowie; Iman: https://en.wikipedia.org/wiki/Iman_(model); Duncan Jones: https://en.wikipedia.org/wiki/Duncan_Jones; Matter of Gebhardt, 139 Misc. 775, 249 N.Y.S. 286 (Surr. Ct. Kings Co. 1931); Revenue Ruling 95-58, 1995-2 C.B. 191; PLR 9527024; Dave Cornfeld, 32 U. Miami Inst. on Est. Pl. ¶ 215 (1998).
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