Well, Downton Abbey seems to be a never-ending fount of lessons on estate planning. This season isn’t failing to disappoint. The new season is starting off with a bang. This first episode was jam packed with estate planning issues: the simple issue of just getting something done, taxes, holographic wills, and dealing with a minor who has potentially inherited substantial wealth. Let’s get started because we have a lot to talk about.
The season opens with Lady Mary grieving the loss of her husband (Matthew, a lawyer) after having just given birth to their son and being married for only about a year or so. Just prior to his death, Matthew inherited a large sum of money which he used to save Downton Abbey. Last season we learned that the Earl of Grantham, Lady Mary’s father, was a terrible money manager. He had invested all of his wife’s sizable fortune in one venture which utterly failed. This loss of money put the family in the position of being forced to have to leave Downton Abbey. Matthew’s inheritance saved the family from “down-sizing”. This first episode gives us three great estate planning lessons.
Lesson 1: What constitutes a Will
We find out about an hour into the show that Matthew left a “letter” in which he states he should have made a proper Will since they have a baby coming and he inherited a significant amount of wealth but life kept getting in the way. The letter states he wants Mary to be his sole heir since they do not know if the baby will be a boy or girl. The question that arises is whether or not the letter is a Will. If so, this may mean the money will be taxed twice before his son George, will inherit. The “letter” was signed by Matthew and witnessed by two of his clients. The first episode ends with Lord Grantham informing the family that the “letter” Matthew left naming Lady Mary as his sole heir was a valid Will.
There are four basic requirements for a Will:
- it must identify the testator
- must be written with testamentary intent
- testator must have testamentary capacity
- the document is executed with the proper testamentary formalities
A holographic Will is a Will written entirely in the hand of the decedent (the dead person). The “letter” Matthew wrote qualifies as a holographic Will. There are two main requirements for a valid holographic Will:
- the document must be wholly in the testator’s handwriting
- must be signed by the testator
The testator must still have testamentary intent and capacity. Texas law does not requirement that it be witnessed or notarized. Texas is one of few states that accepts a holographic Will. Although the risk of forgery is much higher with a holographic Will, this isn’t the biggest problem with them. The most vexing issue with a holographic Will lies in construing the terms of the Will when it is time to probate it. Although it sounds easy and inexpensive to go the holographic Will route, in all likelihood, it will end up costing your estate more money to probate a holographic Will as well as increasing the probability of creating a great deal of family discord.
Lesson 2: When Do Parents get to Manage their Minor Child’s Money
Let’s assume that instead of leaving a Will naming his wife, Lady Mary, as his sole heir, Matthew left no Will. Under the law at the time, his male heir would inherit Matthew’s wealth and not Lady Mary. Along with his grandfather, the Earl of Grantham they would own 5/6ths of Downton Abbey. Lady Mary only has a life estate-she gets to enjoy the use of Downton for her lifetime but is not an owner. The Earl thinks it is his duty and right to manage the money of his grandson. Lady Mary is so grief stricken that she can’t seem to think about it. However, she is gently-sometimes not so gently-encouraged to start taking an active role in managing the changes her late husband put in place to make Downton profitable. In so doing, she would be stepping into the role of guardian/conservator of her son’s fortune.
This brings up the question of what rights does a surviving parent have when it comes to managing the fortune of their minor child. I’m sure that if you are a parent you are thinking the answer is simple, you as the parent get to manage the money. If only that were so. Texas law states that a parent is the natural guardian of the person of a minor but not the guardian of the estate (money or property). A parent can manage the money legally but only after you have been appointed by the court to serve as the guardian of the estate of your child. However, it is not automatic that the court will appoint a parent to serve in that role. The court will look at a number of factors such as the proposed guardians ability to properly manage the funds and whether or not it is in the child’s best interest that the parent be appointed. Lord Grantham thinks he should manage the money, assuming Master George is the actual heir to the Crawley fortune. But, when we look at Lord Grantham’s track record of managing his wife’s fortune (he lost it) a court might not think he is a suitable guardian of the estate for Master George.
As the guardian of the estate, you are not serving in the role of parent, you are serving as a fiduciary with some specific responsibilities concerning the use and investment of the child’s money. A parent serving as the guardian of the estate is not relieved of their duty to provide economic support for the child. This means, that you can not use the child’s money to provide for the needs of the child. You as the parent still have that duty.
Lesson 3: The Tax Man Doesn’t Always Ring Twice
In lesson 1 above we had the situation of Lady Mary being the sole heir. During the time and in the place in which this story is set, there was no law allowing spouses to leave money to one another without having to pay an inheritance/death tax. For Lady Mary, this means that upon actually getting the money from her deceased husband’s estate, she will have to pay a significant tax. When she died and left her money to her son George, he would be taxed on his inheritance. Thus, the tax man rings twice in this scenario.
Under our federal law, spouses can give an unlimited amount of money to each other upon death. We call this the unlimited marital deduction. It is a wealth preservation tool. We also have an estate tax exemption for 2014 of $5.34 million. This means that an individual can gift up to $5.34 million without having to pay taxes on the gifted amount. For sums gifted over the $5.34 million, there is a 40% tax rate applied. Ouch!!
In today’s fairly favorable estate planning world, Lady Mary would inherit her husbands money tax free. Depending on what type of estate planning she did, she could transfer some of her wealth to her son during life (gifting to George the annual exclusion amount- $14,000 in 2014), thus removing it from her estate. Proper gifting strategies can be very effective in decreasing the amount of taxes paid by an estate at death.
Finally, the tax man doesn’t always ring twice under current tax laws. Although some strategies may seem inexpensive and easy now, they can often leave more of a mess upon your death. To preserve your wealth for you family, it is imperative to engage in estate planning. I will be watching this season of Downton Abbey for more great estate planning lessons.