October 23, 2015

Why Being Aware of Estate Planning is Important

Holland & Knight Private Wealth Services Blog; Wealth Strategies Journal
Scott Johnston

As we continue to recognize National Estate Planning Awareness Week for 2015, the case of Bakus v. Bakus, W.D.Ky. No. 14-CV-981 (Aug. 21, 2015) (brought to our attention by Jay Adkisson & Chris Riser) is instructive in demonstrating how the failure to have estate planning tools in place can cause complex and expensive difficulties for surviving family members. 

Here’s what the Federal District Court reported as to what may be the most underlying noteworthy of the facts: “On September 13, 2013, Scott [the decedent] died without a valid Will or testamentary device.” Further facts laid out by the Federal District Court indicate that Mr. Scott, after amassing significant wealth, was declared incompetent in 2007. By that time, his wife and his only child, a daughter, had already predeceased him by 10 years leaving two grandchildren as his only heirs. So it seems that even before being found incompetent, Mr. Scott had not undertaken any step to execute a Will or create testamentary documents despite the fact that  he had lost his wife and daughter 10 years prior; in essence he presumably had done no estate planning and, as the Federal District Court indicated, died intestate.

In 2012, Mr. Scott’s court appointed conservator, who was his son-in-law, worked diligently to effectuate a transfer of Mr. Scott’s assets in order to ”achieve substantial savings on estate taxes” (the nature and extent  of the plan is not described in the Federal District Court’s decision). In December, 2012, Mr. Bakus sought permission from the Jefferson County District Court to implement the plan. However the lower state court denied the conservator’s original motion.  It was only after Mr. Bakus sought emergency relief that Jefferson County Circuit Court allowed him to implement the plan before January 1, 2013.

The decision in this case was limited to dismissing the IRS as a party defendant, as discussed in more detail below. The only other party defendants left in this case are the grandchildren of Mr. Scott (the Bakus children) and any unknown heirs (which because of the fact that the only child of Mr. Scott was a daughter, seemingly would refer to the children of the Bakus children). Interestingly the State of Kentucky was not cited in the original declaratory relief action along with the IRS, even though Kentucky has an inheritance tax because that tax does not apply to grandchildren. 

As noted many court proceedings have been had in this matter so far. Since in all likelihood the Bakus children will not strongly pursue their side of this case (it probably would require them to pay more estate taxes if they prevail), resulting in no decision from the Kentucky Supreme Court, the rule of the  U.S. Supreme Court decision in the Bosch case will apply (“where the federal estate tax liability turns upon the character of a property interest held and transferred by the decedent under state law, federal authorities are not bound by the determination made of such property interest by a state trial court”). Therefore, in further litigation with the IRS, even if the lower court of Kentucky rules in favor of the “plan” established by Mr. Bakus, the IRS will not be bound. 

Let there be a lesson here: If Mr. Scott had put proper estate planning documents in place prior to his incapacity, including a Durable Power of Attorney allowing the agent to create and to transfer assets to estate planning vehicles, there would have been no need for his conservator to obtain authority from the Kentucky lower court to do so on his behalf in an attempt to achieve substantial estate tax savings for his family. 

With wealth comes obligation, and seemingly Mr. Scott didn’t see that estate planning was important. Clearly his son-in-law did and has been heroic in trying to effectuate an estate plan structured to save the estate tax burdens imposed. Of course, the savings will inure to the benefit of his children, but sadly the cost of obtaining such savings, if he is successful, will be many times that which would have been incurred had Mr. Scott made the effort to implement a proper estate plan in the first place.

For the record, the Federal District Court decision was made solely on procedural grounds dismissing the IRS from the case. The case, originally brought in Kentucky state court for declaratory relief in order to find that the conservator’s plan passed muster for estate tax purposes, cited the Commissioner of the IRS, as well as the individuals; the IRS, under the Federal officer removal statute, removed the case to Federal District Court. The IRS then moved to dismiss the case against the IRS, which the Federal District Court granted, sending the case back to state court for resolution involving the individuals cited in the original complaint for declaratory relief.

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