I have an on-again, off-again client who passed away a couple of weeks ago. He was a life-long bachelor who disliked most of his family with a passion and left no children behind.
He also owned about 750 apartments that were housed in over 80 buildings. Before I describe this case, let me say that I wasn’t consulted.
If I had been, this story would be completely different.
We’d asked him for fifteen years to do something about his estate planning. A month ago, unbeknownst to me, he contacted an attorney and completed the following…
First, he created a Grantor Trust naming his long-term employees as the main beneficiaries and was able to transfer two-thirds of his properties into the trust before his death. Second, he completed a will giving everything not inside the trust, to the trust.
The problems are almost too numerous to describe, but here we go…
1 – The properties still inside the estate must now be probated. Probate is nothing more than the process of retitling assets into the name of the new owners, in this case the trust. This is an extremely expensive and time-consuming process.
2 – Moving assets into a Grantor Trust does remove them from probate, but it doesn’t take their valuation out of the estate. All of his properties will be included for estate tax purposes.
3 – Federal Estate taxes are currently 40% of everything over $14M. Assuming a current valuation on the properties of $150M, that’s $54.4M in taxes.
4 – Illinois has a graduated estate tax system that tops out at 16% over $10M. Assuming the same valuation as at the Federal Level, according to the State of Illinois Website, this tax would come to $23,446.800.
5 – My client was carrying $47M in debt on his properties.
6 – The buildings aren’t cashflow rich. Month after month, once all of the mortgages, repairs, payroll, and other bills are paid, the bank balance doesn’t increase significantly. The lack of cash flow makes financing out of this issue impossible.
7 – Federal and State of Illinois Estate Taxes are due nine months after the date of death. Extensions are possible for as many as ten years in some instances.
8 – For planning purposes, we can assume that if a property is sold, between the realtor and other closing table costs, the trust will lose about 5.5% of the sales price of any property sold.
The only way that the estate taxes are going to get paid on this will be for his beneficiaries to liquidate the estate. Once I do the math, before any other costs, settling this estate will cost $133,096,800.
That’s before…
Legal Costs. Estates of this size are normally contested. Someone’s brother’s, sister’s, cousin’s, niece, that no one’s ever heard of get’s wind of this and hires a lawyer.
Accounting Costs. There are still open income tax years to be filed. Again, this was an on-again, off-again client who didn’t send in work when requested.
Income Tax. Given the fact that he’d owned many of his properties for more than 27.5 years, he was running out of depreciation. Also, because he wasn’t up to date on his returns, he was unable to do cost segregation studies which would have significantly increased his depreciation allowance and decreased his income taxes.
Time. Liquidating that many buildings in a shorter amount of time means that they won’t go for top prices. The interest rate climate we find ourselves in will also decrease the selling prices.
After it’s all said and done, the beneficiaries are probably going to get nothing, nada, zilcheroni. And they’re probably going to be forced to work the next two or three years cleaning up this estate to receive that zero payout.
Let me leave you with this…
If I’ve ever written a cautionary tale before, it’s this one.
This man worked his entire life scrimping and saving, building an empire, and the banks, the lawyers, and the government are going to end up with all of it.
History is littered with stories like this.
Wrigley Field is no longer owned by the Wrigley Family because when William Wrigley Jr died, they had to sell off almost everything except the chewing gum factor to settle his estate. Graceland is no longer owned by the Presleys for the same reason.
Most people don’t want to deal with their estate planning issues. Doing so forces all of us to face our own mortality.
But I implore you, don’t wait until it’s too late. Begin working on this today.
When you have questions, you know my number.
We’re all going to get through this. Let’s get through it together.
Accounting Solutions Ltd. stands ready to complete our mission and purpose of protecting you, your family, and your business. Whether you need Payroll Services, or Accounting and Tax Work, you have but to ask. I’m here and I remain,
Sincerely yours,
Chris Amundson
President
Accounting Solutions Ltd.
773-267-7500
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