So asked Reverend Cleophus James of Jake and Elwood Blues in “The Blues Brothers”. Yet, James Brown now sings the blues. He died over 8 years ago at age 73, on December 25, 2006, and his estate remains unsettled, lost in darkness, with his body not permanently interred at the intended memorial. Caught in estate litigation of Dickinsonian proportions, with personal representatives who were appointed, then resigned and were either dismissed and reappointed, one wonders whether any funds will be left for the charitable beneficiaries of his estate, as his estate preambles through the legal system. .
Mr. Brown, the “Godfather of Soul”, lead a complicated life, including numerous marriages, children, accusations of alleged drug use, and alleged domestic violence. While one would think that his estate plan documents, or possible lack thereof, would be equally complex or unplanned, he did leave a will and irrevocable trust, which left substantial portions of his wealth to provide scholarships to needy children. However, despite the passage of over 8 years, the trustees have allegedly not distributed scholarships via the charitable trust to needy students. Instead, the South Carolina State Attorney General intervened in the matter in an allegedly unprecedented scope. Ultimately, the South Carolina Supreme Court overruled the decision of the Attorney General, to prevent the implementation of the Attorney General’s proposed changes to Mr. Brown’s dispositive intentions.
This summer, the Court sent the matter back to the local South Carolina probate court, which has yet to enter a final decision, due to various claims. Why the matter did not promptly proceed to the local probate court for a trial to resolve all issues and so a decision could be rendered, remains unclear.
Of further complexity, the value of Mr. Brown’s estate remains unknown. This remains a critical factor for determination of reasonableness of fees of the various professionals, which could ultimately further deplete the estate.
Presumably, Mr. Brown’s estate continues to earn millions of dollars a year in royalties. An unknown factor remains regarding the allocation of the income earned after his passing. If the executors/trustees could not or failed to distribute to the net income to the charitable beneficiaries/charitable trust their share of the income, then almost certainly the IRS, on behalf of the U.S. Treasury and possibly state or local governments, will receive substantial income tax revenues from and estate, instead of deducting said funds for charities from income earned.
Many individuals do not understand that an estate or trust, just like a person or corporation, must pay income tax, unless the estate distributes the income to the beneficiaries or the funds pass to a qualified charitable beneficiary, such as a charitable trust or other like organization. When such distribution occurs, the income received by the beneficiaries/charitable trusts generally results in deductions at the estate level, with non-charitable individuals and entity generally then considered to have received income to the extent the funds distributed exceed principal.
A qualified charity receiving income from a qualified charitable entity generally does not have to pay any income tax. But, when the income is accumulated and not distributed, the U.S. Treasury levies an income tax on estate income over $600 ($100 exemption for certain trusts) , with the maximum income tax currently generally set 39.5% for all income over $12,150 in a year. By contrast, income allocated to qualified charities, is not generally subject to income tax. The foregoing does not even factor in any state or local income taxes. Thus, Mr. Brown’s estate ligation has exposed his estate to substantial income tax due to the lack of prompt settling of his estate.
How could some of the above-discussed issues have been avoided?
A family settlement agreement prepared before Mr. Brown’s passing in which he fully disclosed all assets, debts, income and expenses and had all heirs and beneficiaries execute, agreeing to the disposition he intended, may have limited litigation after his passing. While to some extent this was attempted, at least with the individual claiming to be his spouse; as she is now a party to the estate litigation, presumably the agreement was not sufficient for some reason.
Failing such an agreement being practical, or possible, years before Mr. Brown’s passing he could have retained an independent appraiser to value his estate, and eventually transferred, while he was alive and in good health, assets to one or more types of irrevocable charitable trusts, such as a charitable remainder annuity trust. Some funds/assets might have been allocated directly for the scholarship fund he intended to create, while others funds/assets could have been allocated for the individual beneficiaries he intended to benefit from his estate. Indeed, transference of highly appreciated assets to one or more such trusts may have resulted in substantial reduction in taxes, either income taxes and/or estate taxes.
Of course, the funding while alive of charitable bequests or other gifting of assets to heirs in advance of one’s passing requires a willingness to live on less income and to accept one’s mortality. Moreover there are tax consequences. There are potential gift taxes, depending on the sums in question. Also, when a person dies, the cost basis to determine capital gain is normally the date of death of the asset in question, which is known as a “step-up” in cost basis. This means in effect that if you wait until you die, and have a highly appreciated asset, when sold, at death there may be little to know capital gains tax. But, if there asset had been transferred to a non-qualified charity while alive, there might have been substantial capital gain taxes. There are a variety of charitable trusts that when used can minimize or eliminate the capital gain tax in question. Accepting one’s mortality, and careful planning, can then minimize the possibility of disputes.
Here is an article by Adam S. Bernick, Esquire who is of counsel with my firm. This article was originally published in Upon Further Review on January 22, 2015.