Did Samsung’s Chairman Have an Estate Plan for his $20.7 Billion Fortune?

Samsung Electronics Co. Chairman Lee Kun-hee, South Korea’s richest man, had an estimated fortune of $20.7 billion. Most of this was his stakes in four Samsung units, according to the Bloomberg Billionaires Index. The country’s inheritance tax is as high as 60% on inherited shares for large shareholders and 50% on real estate and other assets. That could mean a tax bill of about $10 billion for Lee’s family.

Fortune’s recent article entitled “After Samsung chairman’s death, his heirs are facing a $10 billion tax bill” says that Lee’s heirs are unlikely to sell stock to finance the taxes.

Share sales can cause issues because they would reduce the family’s control over the company. Many choose to make the cash payment over five years. Cash can be prepared through means, such as dividends or salaries. That’s how Chairman Koo Kwang-mo, who took over the reins of LG Group in 2018 after his father’s death, is doing it. He and his family are paying their $817 million inheritance tax over five years.

Lee Kun-hee’s ownership included a 4% holding in the world’s largest producer of smartphones, televisions, and memory chips, as well as 21% of Samsung Life Insurance Co., which owns the second-biggest chunk of Samsung Electronics.

Lee’s only son, Jay, has been leading the company after a heart attack incapacitated his father in 2014. If he inherits all of his father’s shares in Samsung Electronics and Samsung Life Insurance, he may use dividends and financing from family members for the taxes. It’s also possible that the family will use personal financing.

The younger Lee has legal troubles from the controversial merger of two Samsung affiliates in 2015 that led to his control of the group. Although he holds less than 1% in Samsung Electronics, through the merger, he secured a 17% control in Samsung C&T Corp., which in turn directly owns 5% of the tech company.

He’s awaiting a final ruling on a bribery case that sent him to prison in 2017. He is facing a separate trial on financial-fraud charges, including stock-price manipulation to facilitate his succession.

Jay denied any wrongdoing. He has made a personal apology for the recurring corruption scandals at Samsung and pledged not to hand down leadership to his children.

Reference: Fortune (Oct. 26, 2020) “After Samsung chairman’s death, his heirs are facing a $10 billion tax bill”

Cornelius Vanderbilt Created an Estate Plan, but Should I?

AJC’s recent article entitled “Why Vanderbilts should inspire you to create an estate plan” explains that when Cornelius Vanderbilt died, his son, William, inherited most of the fortune and nearly doubled it within a decade. However, after that came a drop in the cash, and after just a few decades, the fortune had been spent. Therefore, none of Vanderbilt’s descendants stayed among the wealthiest people in the country.

When 120 Vanderbilt family members recently gathered for a reunion at Vanderbilt University, not one was a millionaire. In a century, the largest estate America has ever known had dwindled to next to nothing.

Let’s look at why this happens and how you can prevent this from happening to your estate.

America is currently in the midst of the greatest transfer of wealth ever. An estimated $59 trillion will be transferred to heirs, charities and taxes between 2007 and 2061. However, roughly 70% of wealth transfers aren’t successful. This means that sometimes heirs get practically nothing. There are three reasons for this failure:

No trust and communication among heirs because they’re all concerned about their share.
Heirs are unprepared to inherit an estate, which may include managing investments or a business. In many cases, other family members don’t know how it works.
Heirs have no clue where the money should go and what purpose it should serve because no one is thinking long term about what is best for the family assets.

It’s common for business owners to believe that an estate plan is enough to keep everything in order, but they don’t consider their business. This is the reason why succession planning is vital. This planning determines what happens to the business itself and lays out the strategy, so it continues to operate smoothly after it’s passed to the heirs.

Let’s look at some tips for dealing with estate planning that should make for a smooth transition:

Create a plan. If you die without a will, state probate law will determine who gets your assets. This may not be what you want. Talk to an experienced estate planning attorney to be certain that everything is drawn up correctly.

Discuss the issues with your heirs. Talk to your family about the financial details. Make sure that your heirs know the details of your estate, so they can start to manage and oversee it once you die.

Get heirs involved in the process. Likewise, heirs can help plan based on their knowledge, future availability and expectations. By planning now, no one will be caught unaware about what to do with the estate.

Ready your heirs. Educate your heirs on how to manage and oversee your assets, especially if you have a succession plan for a business. Discuss the company’s mission and vision, and what you want the company to achieve.

Organize your financial documents. Get all financial documents in a single location and label everything clearly to help out your heirs. Keep this in a safe location, and let your heirs know where it’s located. Your attorney should also have a copy of your will, estate plan and succession plan (if applicable).

Get help from experts. Help forge a relationship between your heirs and your financial team, which may include a financial adviser, an estate planning attorney and an accountant. This will allow your heirs to know who to call, if things get complicated. It’ll also help to prepare them for what they’re supposed to be doing, once they get their inheritance.

Communication is the key. Talking with your experts and your heirs will make certain that everyone understands each other’s roles, regardless of whether it’s a small business or a multimillion-dollar empire.

Reference: AJC (Sep. 25, 2020) “Why Vanderbilts should inspire you to create an estate plan”

Does My Estate Plan Need an Audit?

You should have an estate plan because every state has statutes that describe how your assets are managed, and who benefits if you don’t have a will. Most people want to have more say about who and how their assets are managed, so they draft estate planning documents that match their objectives.

Forbes’ recent article entitled “Auditing Your Estate Plan” says the first question is what are your estate planning objectives? Almost everyone wants to have financial security and the satisfaction of knowing how their assets will be properly managed. Therefore, these are often the most common objectives. However, some people also want to also promote the financial and personal growth of their families, provide for social and cultural objectives by giving to charity and other goals. To help you with deciding on your objectives and priorities, here are some of the most common objectives:

Making sure a surviving spouse or family is financially OK
Providing for others
Providing now for your children and later
Saving now on income taxes
Saving on estate and gift taxes in the future
Donating to charity
Having a trusted agency manage my assets, if I am incapacitated
Having money for my children’s education
Having retirement income; and
Shielding my assets from creditors.

Speak with an experienced estate planning attorney about the way in which you should handle your assets. If your plan doesn’t meet your objectives, your estate plan should be revised. This will include a review of your will, trusts, powers of attorney, healthcare proxies, beneficiary designation forms and real property titles.

Note that joint accounts, pay on death (POD) accounts, retirement accounts, life insurance policies, annuities and other assets will transfer to your heirs by the way you designate your beneficiaries on those accounts. Any assets in a trust won’t go through probate. “Irrevocable” trusts may protect assets from the claims of creditors and possibly long-term care costs, if properly drafted and funded.

Another question is what happens in the event you become mentally or physically incapacitated and who will see to your financial and medical affairs. Use a power of attorney to name a person to act as your agent in these situations.

If, after your audit, you find that your plans need to be revised, follow these steps:

Work with an experienced estate planning attorney to create a plan based on your objectives
Draft and execute a will and other estate planning documents customized to your plan
Correctly title your assets and complete your beneficiary designations
Create and fund trusts
Draft and sign powers of attorney, in the event of your incapacity
Draft and sign documents for ownership interest in businesses, intellectual property, artwork and real estate
Discuss the consequences of implementing your plan with an experienced estate planning attorney; and
Review your plan regularly.

Reference: Forbes (Sep. 23, 2020) “Auditing Your Estate Plan”

What Estate Planning Documents Do I Need for a Happy Retirement?

Estate planning documents are made to help you and your family, in the event of your untimely demise or incapacitation.

These documents will give your family specific instructions on how to proceed.

The Winston-Salem Journal’s recent article entitled “4 Must-Have Documents for a Peaceful Retirement” looks at these critical documents in constructing an effective estate plan.

Power of Attorney (POA). If you become incapacitated or become unable to make your own financial decisions, a POA will permit a trusted agent to manage your affairs. Have an estate planning attorney review your POA before it’s executed. You can give someone a limited POA that restricts their authority to specific transactions. You can also create a springing POA, which takes effect only at the time of your incapacitation.
Will. About 40% of Americans actually have a will. Creating a valid will prevents you from leaving a mess for your heirs to address after you die. A will appoints an executor who will manage your affairs in a fiduciary manner. The will also details your plan for the distribution of your property. Make certain that your will is also in agreement with other documents you’ve set up, so it doesn’t create any questions.
TOD/POD Designation Forms. A Transfer-on-Death (TOD) or Payable-on-Death (POD) designation lets you to assign your investment accounts to a named beneficiary. The big benefit here is that accounts with a named TOD/POD beneficiary pass directly to that person when you die. Any accounts without a TOD/POD beneficiary will be subject to the terms of your will and will be required to go through the probate process.
Healthcare POA/Advance Directives. These are significant health-related documents. A healthcare POA allows your named agent to communicate your wishes to medical professionals, if you are unable. They also include instructions as to whether you want to have life-saving measures performed, if you have a cardiac or respiratory arrest. These healthcare documents also remove the need for your family to make difficult decisions for you.

Reference: Winston-Salem Journal (Sep. 20, 2020) “4 Must-Have Documents for a Peaceful Retirement”

Dividing Pablo Picasso’s Estate, a Disaster

Picasso left behind 1,885 paintings, 1,228 sculptures, 7,089 drawings, as well as tens of thousands of prints, thousands of ceramic works and 150 sketchbooks when he passed away in 1973. He owned five homes and a large portfolio of stocks and bonds. “The Master” fathered four children with three women. He was also thought to have had $4.5 million in cash and $1.3 million in gold in his possession when he died. Once again, Picasso did not leave a will. Distributing his assets took six years of contentious negotiations between his children and other heirs, such as his wives, mistresses, legitimate children and his illegitimate ones.

Celebrity Net Worth’s recent article entitled “When Pablo Picasso Died He Left Behind Billions Of Dollars Worth Of Art … Yet He Left No Will” explains that Picasso was creating art up until his death. Unlike most artists who die broke, he had been famous in his lifetime. However, when he died without a will, people came out of the woodwork to claim a piece of his valuable estate. Only one of Picasso’s four children was born to a woman who was his wife. One of his mistresses had been living with him for decades. She had a direct and well-documented influence on his work. However, Picasso had no children with her. Dividing his estate was a disaster.

A court-appointed auditor who evaluated Picasso’s assets after his death said that he was worth between $100-$250 million (about $530 million to $1.3 billion today, after adjusting for inflation). In addition to his art, his heirs were fighting over the rights to license his image rights. The six-year court battle cost $30 million in legal fees to settle. But it didn’t settle for long, as the heirs began fighting over the rights to Picasso’s name and image. In 1989, his son Claude sold the name and the image of Picasso’s signature to French carmaker Peugeot-Citroen for $20 million. They wanted to release a sedan called the “Citroen Xsara Picasso.” However, one of Picasso’s grandchildren tried to halt the sale because she disagreed with the commission paid to the agent who brokered the deal—but oddly enough, the consulting company was owned by her cousin, another Picasso.

Claude created the Picasso Administration in Paris in the mid-90s. This entity manages the heirs’ jointly owned property, controls the rights to exhibitions and reproductions of the master’s works, and authorizes merchandising licenses for his work, name and image. The administration also investigates forgeries, illegal use of the Picasso name and stolen works of art. In the 47 years since his death, Picasso has been the most reproduced, most exhibited, most stolen and most faked artist of all time.

Pablo Picasso’s heirs are all very well off as a result of his art. His youngest daughter, Paloma Picasso, is the richest, with $600 million. She’s had a successful career as a jewelry designer. She also enjoys her share of her father’s estate.

Reference: Celebrity Net Worth (Sep, 13, 2020) “When Pablo Picasso Died He Left Behind Billions Of Dollars Worth Of Art … Yet He Left No Will”

What If a Sole Beneficiary Wants to Share?

That doesn’t sound like a bad idea, right?

However, Morningstar’s recent article entitled “3 Strategies to Consider When Sole Beneficiaries Want to Share the Wealth” says that there are a few hurdles to clear, such as the IRA administrator’s policies, income tax consequences, transfer tax consequences and the terms of the decedent’s will.

Here’s a scenario: Uncle Buck dies and leaves his IRA to his niece, Hope. Buck’s will leaves all his other assets equally to all three of his nieces: sisters Hope, Faith and Charity. However, the three agree that Buck’s IRA should be shared equally, like the rest of the estate. What do they do?

The Easy Way. Hope keeps the IRA, withdraws from it when she wants (and as required by the minimum distribution rules), pays the income tax on her withdrawals and makes cash gifts to Faith and Charity (either now or as she withdraws from the IRA) in an agreed upon the amount. It would mean giving her two sisters ⅓ of the after-tax value of the IRA. There is no court proceeding or issue with the IRA provider. There are no income tax consequences because Hope will pay the other girls only the after-tax value of the IRA distributions she receives. However, there’s a transfer tax consequence: Hope’s transfers would be considered as gifts for gift tax purposes because she has no legal obligation to share the IRA with the other nieces. Any gift over the annual exclusion amount in any year ($15,000 as of 2020) will be using up some of Hope’s lifetime gift and estate tax exemption. This easy answer may work well for a not-too-large inherited IRA.

The Expensive Method: Reformation. If there is evidence that Buck made a mistake in filling out the beneficiary form, a court-ordered reformation of the document may be appropriate. Therefore, if Hope, Faith, and Charity have witnesses who would testify that the decedent told them shortly before he died, “I’m leaving all my assets equally to my three nieces,” it could be evidence that he made a mistake in completing the beneficiary designation form for the IRA. The court could order the IRA provider to pay the IRA to all three girls, and the IRS would probably accept the result. By accepting the result, the IRS would agree that the nieces should be equally responsible for their respective shares of income tax on the IRA and for taking the required distributions, and that no taxable gift occurred. However, as you might expect, the IRS isn’t legally bound by a lower state court’s order. If the reformation is based on evidence, the parties may want the tax results confirmed by an IRS private letter ruling, which is an expensive and time-consuming task.

The In-Between. The final possible solution is a qualified disclaimer. Hope would “disclaim” two thirds of the IRA (and keep a third). A qualified disclaimer (made within nine months after Buck’s death) would be effective to move two thirds of the IRA (and the income taxes) from Hope without gift taxes. A qualified disclaimer involves a legal fee but no court or IRS involvement. As a result, it can be fairly simple and cost-effective. However, there may be an issue: when Hope disclaims two thirds of the IRA, that doesn’t mean the disclaimed share of the IRA automatically goes to the other nieces. Instead, the disclaimed portion of the IRA will pass to the contingent beneficiary of the IRA. Hope needs to see where it goes next, prior to signing the disclaimer. If there’s no contingent beneficiary named by Buck, the disclaimed portion will pass to the default beneficiary named in the IRA provider’s plan documents. That’s typically the decedent’s probate estate. If the disclaimed portion of the IRA passes to the uncle’s estate, and Hope is a one-third beneficiary of the estate, she will also need to disclaim her estate-derived share of the IRA. A “simple disclaimer” can be complicated, so ask an experienced estate planning attorney to help.

Even if Hope disclaims two thirds of the IRA, so that it passes to Faith and Charity through the estate, the other girls won’t receive as favorable income tax treatment as Hope. Hope inherits her share as designated beneficiary, while an estate (the assumed default beneficiary), which isn’t a designated beneficiary, can’t qualify for that.

Reference: Morningstar (Aug. 13, 2020) “3 Strategies to Consider When Sole Beneficiaries Want to Share the Wealth”

Do I Have to Accept an Inheritance?

Most people don’t use a disclaimer because they’re not entitled to other assets to offset the value of the asset disclaimed. They don’t get to decide who gets their disclaimed asset.

MarketWatch’s recent article entitled “Can I reject an inheritance?” explains that the details can be found in Internal Revenue Code §2518. However, here are some of the basics about disclaimers.

In most states, a qualified disclaimer can be filed within nine months of an asset owner’s death. This disclaimer is irrevocable. Therefore, once it’s done, it’s done. This can create problems with IRAs because they have beneficiary designations, and the death claim can be processed with a few forms. As soon as the funds are transferred to an inherited IRA, disclaiming is no longer an option.

When a person disclaims an asset, the asset is distributed as though that beneficiary had died prior to the date of the benefactor’s death. Therefore, with an IRA, it is pretty simple. If you disclaim all or a part of the IRA, the funds pass on, based on the beneficiary designation.

The IRA usually has a secondary beneficiary named. If the beneficiaries in line to inherit the account are who you would want to inherit the account, disclaiming should transfer the account to them. However, if they’re not who you want to get the funds, you have little leverage to do anything about it.

If there are no other beneficiaries and you disclaimed, the money goes back into the decedent’s estate.

The funds would go through probate and be directed based upon his will. If there was no will (intestacy), the probate laws of the decedent’s state will dictate how the assets are distributed.

Having an IRA go through an estate is inefficient, time consuming and adds additional costs beyond the taxes.

All these drawbacks can be avoided, by properly designating beneficiaries.

Being wise with your beneficiary designations, also provides flexibility in your estate plan.

For example, you can set up beneficiary designations to purposely give an inheritor the option to disclaim to other family members, which is done when the primary beneficiary can disclaim to a family member that is in greater need of funds or is in a lower tax bracket.

Reference: MarketWatch (Aug. 25, 2020) “Can I reject an inheritance?”

State Laws Have an Impact on Your Estate

Nj.com’s recent article entitled “Will N.J. or Florida’s tax laws affect this inheritance?” notes that first, the fact that the individual from Florida isn’t legally married is important.

However, if she’s a Florida resident, Florida rules will matter in this scenario about the vacation condo.

Florida doesn’t have an inheritance tax, and it doesn’t matter where the beneficiary lives. For example, the state of New Jersey won’t tax a Florida inheritance.

Although New Jersey does have an inheritance tax, the state can’t tax inheritances for New Jersey residents, if the assets come from an out-of-state estate.

If she did live in New Jersey, there is no inheritance tax on “Class A” beneficiaries, which include spouses, children, grandchildren and stepchildren.

However, the issue in this case is the fact that her “daughter” isn’t legally her daughter. Her friend’s daughter would be treated by the tax rules as a friend.

You can call it what you want. However, legally, if she’s not married to her friend, she doesn’t have a legal relationship with her daughter.

As a result, the courts and taxing authorities will treat both persons as non-family.

The smart thing to do with this type of issue is to talk with an experienced estate planning attorney who is well-versed in both states’ laws to determine whether there are any protections available.

Reference: nj.com (July 23, 2020) “Will N.J. or Florida’s tax laws affect this inheritance?”

Trusts: The Swiss Army Knife of Estate Planning

Trusts serve many different purposes in estate planning. They all have the intent to protect the assets placed within the trust. The type of trust determines what the protection is, and from whom it is protected, says the article “Trusts are powerful tools which can come in many forms,” from The News Enterprise. To understand how trusts protect, start with the roles involved in a trust.

The person who creates the trust is called a “grantor” or “settlor.” The individuals or organizations receiving the benefit of the property or assets in the trust are the “beneficiaries.” There are two basic types of beneficiaries: present interest beneficiaries and “future interest” beneficiaries. The beneficiary, by the way, can be the same person as the grantor, for their lifetime, or it can be other people or entities.

The person who is responsible for the property within the trust is the “trustee.” This person is responsible for caring for the assets in the trust and following the instructions of the trust. The trustee can be the same person as the grantor, as long as a successor is in place when the grantor/initial trustee dies or becomes incapacitated. However, a grantor cannot gain asset protection through a trust, where the grantor controls the trust and is the principal recipient of the trust.

One way to establish asset protection during the lifetime of the grantor is with an irrevocable trust. Someone other than the grantor must be the trustee, and the grantor should not have any control over the trust. The less power a grantor retains, the greater the asset protection.

One additional example is if a grantor seeks lifetime asset protection but also wishes to retain the right to income from the trust property and provide a protected home for an adult child upon the grantor’s death. Very specific provisions within the trust document can be drafted to accomplish this particular task.

There are many other options that can be created to accomplish the specific goals of the grantor.

Some trusts are used to protect assets from taxes, while others ensure that an individual with special needs will be able to continue to receive needs-tested government benefits and still have access to funds for costs not covered by government benefits.

An estate planning attorney will have a thorough understanding of the many different types of trusts and which one would best suit each individual situation and goal.

Reference: The News Enterprise (July 25, 2020) “Trusts are powerful tools which can come in many forms”

When Exactly Do I Need to Update My Will?

Many people say that they’ve been meaning to update their last will and testament for years but never got around to doing it.

Kiplinger’s article entitled “12 Different Times When You Should Update Your Will” gives us a dozen times you should think about changing your last will:

You’re expecting your first child. The birth or adoption of a first child is typically when many people draft their first last will. Designate a guardian for your child and who will be the trustee for any trust created for that child by the last will.
You may divorce. Update your last will before you file for divorce, because once you file for divorce, you may not be permitted to modify your last will until the divorce is finalized. Doing this before you file for divorce ensures that your spouse won’t get all of your money, if you die before the divorce is final.
You just divorced. After your divorce, your ex no longer has any rights to your estate (unless it’s part of the terms of the divorce). However, even if you don’t change your last will, most states have laws that invalidate any distributive provisions to your ex-spouse in that old last will. Nonetheless, update your last will as soon as you can, so your new beneficiaries are clearly identified.
Your child gets married. Your current last will may speak to issues that applied when your child was a minor, so it may not address your child’s possible divorce. You may be able to ease the lack of a prenuptial agreement, by creating a trust in your last will and including post-nuptial requirements before you child can receive any estate assets.
A beneficiary has issues. Last wills frequently leave money directly to a beneficiary. However, if that person has an addiction or credit issues, update your last will to include a trust that allows a trustee to only distribute funds under specific circumstances.
Your executor or a beneficiary die. If your estate plan named individuals to manage your estate or receive any remaining funds, but they’re no longer alive, you should update your last will.
Your child turns 18. Your current last will may designate your spouse or a parent as your executor, but years later, these people may be gone. Consider naming a younger family member to handle your estate affairs.
A new tax or probate law is enacted. Congress may pass a bill that wrecks your estate plan. Review your plan with an experienced estate planning attorney every few years to see if there have been any new laws relevant to your estate planning.
You come into a chunk of change. If you finally get a big lottery win or inherit money from a distant relative, update your last will so you can address the right tax planning. You also may want to change when and the amount of money you leave to certain individuals or charities.
You can’t find your original last will. If you can’t locate your last will, be sure that you replace the last will with a new, original one that explicitly states it invalidated all prior last wills.
You purchase property in another country or move overseas. Many countries have treaties with the U.S. that permit reciprocity of last wills. However, transferring property in one country may be delayed, if the last will must be probated in the other country first. Ask your estate planning attorney about having a different last will for each country in which you own property.
Your feelings change for a family member. If there’s animosity between people named in your last will, you may want to disinherit someone. You might ask your estate planning attorney about a No Contest Clause that will disinherit the aggressive family member, if he or she attempts to question your intentions in the last will.

Reference: Kiplinger (May 26, 2020) “12 Different Times When You Should Update Your Will”

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Did Samsung’s Chairman Have an Estate Plan for his $20.7 Billion Fortune?