Pennsylvania Fiduciary Litigation : Pennsylvania Trusts and Estates Lawyer & Expert Witness : Patti Spencer Law Firm : Fiduciary Litigation, Planning : Lancaster, Harrisburg, Philadelphia, Pennsylvania

No word as yet about Michael Jackson's will.  According to a June 29, 2009 article in The Independent: "For reasons that remain murky, Jackson's immediate family have so far had no luck in persuading his former entourage to grant access to his will, the one document that could reveal details of how the performer wished his funeral to be conducted."

It is commonly known that Jackson had serious financial problems and was deeply in debt.  Reports vary - from $200 to $500 million in debt.  His assets are estimated by one source at $ 1 billion.  Jackson was counting on his upcoming "This Is It" tour with 50 dates over 6 months to restore his financial position.

True, the tour won't be proceeding but as blogger Harry Thomas Hackney says in his post, the estate may make a lot of money:  "Jackson’s estate may earn even more than Jackson.  Even as I write this, radio stations and TV stations are playing Jackson songs and videos and the royalties are pouring in. Itunes is probably sellng Jackson’s music at a record rate and CDs and posters are flying off the shelves at WalMart.  This income is likely to go further without Jackson to spend it faster than it comes in.  It is likely to support an army of lawyers and accountants and still be able to pay debt and a legacy for his three (3) children.  Elvis Presley’s estate earned $52,000,000.00 last year, which may be more than Jackson earned while living. "

Then there will be the custody battle.  Mail Online reports that Jackson's three children, Prince (age 12), Paris (age 11) and Prince Michael II (a/k/a Blanket) want to live with their grandparents - Joe and Katherine Jackson.  Jackson's second ex-wife, Debbie Rowe, also wants custody.

There has long been speculation that Jackson would will the rights to the 200 songs from the Beatles catalogue that he purchased in 1985 to Paul McCartney. 

An article in The National Law Journal predicts a slew of legal battles over the use of Michael Jackson's name, music and image.  Posters and T-shirts with his picture are already out there along with bootleg copies of videos and CDs.   

The June 29 article in The Independent continues:

"Friends, family and former business associates unveiled legal teams yesterday as they prepare to duke it out over everything from the shady events that led to the King of Pop's sudden death, to the billion-dollar question of how the estate should be divided and who should gain custody of his three children.

Even Jackson's forthcoming burial is the subject of legal wrangles. His parents and eight siblings, who spent the weekend at their home in Encino, are hoping to co-ordinate a private service and public memorial event that would bring hundreds of thousands of mourners to the streets of Los Angeles. "

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On March 23, 2009 the IRS announced a new voluntary disclosure program for undeclared foreign accounts. The "amnesty" program is open for six months, closing on September 23, 2009. For qualifying taxpayers who come forward and report their undisclosed foreign bank accounts and pay back taxes for six years plus interest and some penalty, the IRS agrees not to bring criminal charges or assess the 75% fraud penalty.

IRS Commissioner Douglas H. Shulman said, "offshore accounts harbor billions of dollars, and people should take notice that the secrecy surrounding these deals is rapidly fading."

On June 30, 2008 a federal court authorized the IRS to serve a "John Doe" civil summons on UBS, demanding the names of approximately U.S. clients who hold off-shore bank accounts. On February 18, 2009, UBS entered into a Deferred Prosecution Agreement with the Department of Justice and agreed to pay $780 million to the U.S. and to disclose the names of between 250-300 of its U.S. clients who had maintained secret accounts at UBS. Now the IRS has sued to enforce the earlier John Doe summons seeking the disclosures of the owners of about 52,000 UBS Swiss accounts. It is estimated that these accounts hold some $17.9 billion in assets. The 52,000 accounts are just at one bank in one country. No one knows how many other accounts in other jurisdictions and financial institutions are unreported.

In addition, UBS has notified many of its U.S. clients that their secret bank accounts will be terminated. Closing the accounts is going to put the account holders in a tight spot. They have two choices: 1) transfer the money to banks in other "bank secrecy" jurisdictions which would create a paper trail discoverable by the IRS, or 2) repatriate the funds to the U.S and come clean with the IRS.

It is not illegal to have a foreign bank account in a bank secrecy jurisdiction (Switzerland, Liechtenstein and the Cayman Islands come to mind). What is illegal is failing to disclose the accounts and failing to report the income and pay income tax. In addition to disclosing the existence of the accounts on your 1040 and reporting the income, Foreign Bank Account Reports ("FBARs") must be filed by any U.S. taxpayer who has signatory or other authority over a foreign account or accounts that have a combined value of more than $10,000 at any time during the calendar year.

For taxpayers who "come clean" under the voluntary disclosure program, they will have to 1) pay back taxes due on the undisclosed assets for the last six years; 2) pay interest on the back taxes; and 3) pay a 20% accuracy penalty or a 25% delinquency penalty for each tax year at issue.

While this may seem like a tough position, it is far less than what these taxpayers will face if they are discovered by the IRS. Most importantly, the IRS will not pursue charges of criminal tax evasion against taxpayers who voluntarily disclose their offshore assets under this new policy. There is no guarantee of no criminal prosecution, but it is a mitigating circumstance in whether or not the IRS will recommend prosecution and, obviously, the amnesty program is not going to work unless the IRS sticks to its announced policy.

In addition, the IRS will not pursue other penalties against participating taxpayers, such as the fraud penalty of 75% of the unpaid tax or the statutory penalty for willful failure to file an FBAR, which is the greater of $100,000 or 50% of the foreign account balance. Both of these penalties apply annually to undisclosed accounts and assets during the relevant tax years.

Since a taxpayer's name may be discovered by the enforcement of the "John Doe" summons against UBS or in Congressional Hearings, it would be prudent for affected taxpayers to begin the process of determining whether the voluntary disclosure policy is available and appropriate for their particular circumstances. As IRS Commissioner Shulman forewarned, "having the IRS find you could mean a much heavier price than coming forward on your own."

Before making a voluntary disclosure, each case should be considered by a qualified tax advisor, giving consideration to the particular circumstances of each case. Voluntary disclosure is not a guarantee of no criminal prosecution. Experts recommend that the taxpayer’s attorney contact the local IRS district office. Without disclosing the taxpayer’s name, the attorney should explain the facts and circumstances to the IRS to determine if the IRS will agree not to prosecute. This disclosure should only be done with a high-level IRS official or counsel.

Taxpayers with offshore noncompliance should take advantage of the amnesty and come forward. The situation is going to get worse, not better.

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Fear-mongers have used the inter-vivos trust, also called revocable living trust, to sell books, trust kits, trust documents and other products and services. They often do this without regard to the individual’s tax and personal objectives. They scare the client by telling them that probate is a dreadfully complicated and horrendously expensive process. Then they offer to "save" the client: If you buy our estate plan which gives you a revocable living trust for $2,000 (or more) you will avoid all of this.

There is nothing wrong with a living trust. A living trust is a part of many appropriate estate plans. Living trusts can be beneficial depending on the type of assets you own, such as real estate located in several states. In addition, if you want someone else to manage your financial affairs, perhaps because you travel frequently, having a trustee of a living trust may offer fewer problems than relying on a Power of Attorney document.

But for other people, it can be a waste of money and time, or worse, it can actually defeat their intentions. In their attempt to save their heirs the perceived expense, time and loss of privacy caused by probate, other problems arise.

In fact, probate fees, themselves, are quite modest. For example, in Lancaster County, a will for a decedent with a $ 1 million probate estate can be admitted to probate for less than $300. Notice must be published in two newspapers, each costing cost about $60.

Avoiding probate by using a trust does offer some privacy. A will when probated becomes a public record which can be viewed by anyone. However, even where there is no probate property, the inheritance tax return is filed with the Register of Wills, so much of the financial information may be available to the public. In Lancaster County, inheritance tax returns are available for public inspection, whether or not the estate was probated.

Living trusts are sometimes promoted as a way to avoid excessive court supervision. However, with a living trust, you eliminate protections given to heirs in probate proceedings. A successor trustee of a trust may find it easier to succeed in illegally misdirecting your assets than would a will’s executor. Some states, Pennsylvania being one, subject wills to very little court supervision, therefore avoiding probate for this reason may be risky

A living trust does not always eliminate the need for probate. If you don’t transfer all your assets to the trust (and some assets - such as your everyday checking account or car don’t work well inside a trust) your estate will still need to be probated.

The main problem with living trusts is that they are marketed as an estate planning cure-all when they are not. Unscrupulous profiteers have discovered that preying upon fears, especially of the elderly, in regards to the estate planning process has led to the creation of estate mills.

What is a trust mill? As described by the American College of Trusts and Estates Counsel, trust mills are organization which promote the indiscriminate marketing of inter-vivos by non-lawyers; often with the assistance of local counsel. Typically trust mill organizations consist of insurance agents, financial planners, stock brokers, and other individuals who are not lawyers, but who prepare estate planning documents from various forms. Sometimes these documents are sent to local counsel for "attorney review."

A trust mill promotes its product door-too-door, on TV, radio, in seminars, workshops, and through the mail Prices can range from $25 for a do-it-yourself kit to $5,000. The trust mill advertises with slogans like "Protect your assets", "Leave more to your heirs", and "Avoid the Agony of Probate". The trust mill makes exaggerated claims of reduced taxes, exaggerates the cost of probate and the need for privacy. The prices for these living trust packages often far exceed the legal fees that would be paid to a lawyer for a true estate plan.

"Don’t Trust Trust Kits," says the Michigan Bar Association. Get it. Their web site, www.michbar.org, lists some warning signs to make consumers beware of a living trust scam:

Many states have taken action against trust mills on grounds of consumer fraud and the unauthorized practice of law. Preparing a trust in Pennsylvania requires a lawyer. Pennsylvania Attorney General issued a Consumer Advisory in July 2001 about Living Trust Scams, http://www.attorneygeneral.gov/press/cons_advis/July01.cfm If you have any questions, or want to file a complaint, call the PA Attorney General's Bureau of Consumer Protection hotline: 1-800-441-2555, or visit their website at www.attorneygeneral.gov.

The Federal Trade Commission has issued a warnings about living trust promoters, see

http://www.ftc.gov/bcp/conline/pubs/services/livtrust.pdf , as have the AARP, http://www.aarp.org/confacts/money/wills-trusts.html.

We haven’t even touched on abusive trust schemes that claim to save income taxes. If you hear words like "Pure," "Pure Equity" or "Constitutional" Trust - these schemes are even worse than the living trust scams. Don’t be taken in. These trusts are tickets to the federal penitentiary. If you are approached by anyone selling a "Pure Trust" or a "Constitutional Trust" or similar vehicle with a pitch that the trust is exempt from income taxes, notify the F.B.I. or the Criminal Investigative Division of the Internal Revenue Service. 

As Steve Leimberg says in his book, The New Book of Trusts, "The revocable trust (or, more accurately, the lack of an estate planning process that leads to the revocable trust) did not make matters better, but worse, just like the wrong surgery, the wrong drugs, or the right drugs in the wrong dosage, can make a patient worse, not better."

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 “For Better, For Worse; For Richer, For Poorer”

You’ve heard of the “marriage penalty” -- two people married to each other with the same income as two single people pay more taxes. Let me tell you about another “marriage penalty.”

If you file a joint return with your spouse and there is a problem and tax, penalties and interest are due, both spouses are liable individually and jointly, and the IRS may collect the owed tax from either spouse regardless of whose income, understatement or fraud was involved.

Most married couples file a joint income tax return because this gives a lower tax than filing two returns as married filing separate. (Although still not as little as two unmarried persons with the same income). The general rule for a joint return is that both taxpayers will be responsible for any taxes, interest, and penalties owed, even if only one spouse was earning the income. Married couples are not required to file a joint return. In fact, filing a joint return is an election. Since it almost always results in a lower combined tax than if each spouse files separate returns, it is routinely and almost automatically elected by married couples. If you file separately, you and your spouse can change your mind and file a joint return within three years after your original return's due date. The converse is not true. If you file jointly, you can't switch back to separate filing (unless there is enough time to do this before the due date for the return) even if your spouse agrees and wants the same thing. When you elect to file and sign a joint income tax return, you consent to joint and several liability.

Joint liability means that both spouses are liable. Several liability means that each spouse is liable for the entire amount The IRS may collect from either spouse. They may collect the tax however they think will be fastest and easiest.

Beware: even if you file separately, you can be liable for tax on your spouse's income if you live in a community property state. When you are married, all income becomes community property income and one-half belongs to each spouse. The IRS can take ½ of your paycheck to pay an old tax bill for your spouse. In any state, the IRS can collect your spouse's taxes from you if your spouse transferred assets to you in an attempt to evade taxes. Relief provisions are not available in this case because both spouses participate in a scheme to evade taxes.

Divorce does not terminate joint liability. Let’s say you were married to Spouse # 1 for 5 years and filed joint returns. You get divorced, and after a few years, marry Spouse #2. It turns out that Spouse #1 had significantly understated his income on one of those joint income tax returns. You get a notice form the IRS that you owe $10,000 in tax, interest and penalties. Unless you can qualify for one of the relief provisions described below, you have to pay the $10,000 because you signed a joint return. Often, as part of a divorce decree or marital property settlement, the spouses will make agreements about who is to pay income taxes. These agreements are not binding on the IRS. The IRS was not a party to the agreement. You can use the agreement to collect from your spouse (if he or she has anything), but the agreement is no bar to collection from you by the IRS. Chances are, if the IRS is coming after you for the tax, it’s because your ex-spouse has no assets, and the tax is noncollectable from the ex-spouse, by you or by the IRS. Before 1998, the only relief available for a spouse in this situation was if she qualified as an “innocent spouse.”

There were many rules and technicalities and this status was hard to demonstrate. In 1998, Congress amended the Internal Revenue Code to provide other mechanisms to allow you to avoid paying taxes that should have been paid by a spouse or former spouse. There are three forms of relief:  1) one is am improved version of the innocent spouse rules, 2) another has more lenient provisions, but is only available if you are no longer married or are separated from your spouse, and 3) the third form of relief is an equitable remedy that applies if it would be unfair to collect the tax from you and you didn’t qualify under 1) or 2). The 1998 new and improved version of the innocent spouse rules require that an innocent spouse must meet the following conditions to qualify: “(1) a joint return understated taxes because of erroneous claims by the requesting party's spouse, such as unreported or under reported income, or unjustified deductions or credits; (2) when the return was signed, the innocent spouse did not know or have reason to know that there was an understatement of tax. If the spouse knew, or should have known, that there was an understatement, but did not know by what amount, partial relief may be given; and (3) in light of all of the surrounding circumstances, it would be unfair to hold the requesting party liable for the understatement of tax.”

Requests for relief under any one of these three provisions is made on Form 8857, Request for Innocent Spouse Relief. Separation of liability is an allocation between the spouses of unpaid liabilities resulting from the understatement of taxes owed. Either 1) the parties filing the joint return are no longer married or are legally separated, or 2) the joint filers were not members of the same household at any time during the 12-month period before the relief is sought. If spouses transferred assets between themselves to avoid tax, this relief does not apply. If the spouse had actual knowledge of the other spouse's erroneous items on a joint return, this relief is also not available. For those situations where the innocent spouse rule or separation of liability does not apply, a third possibility of equitable relief is there. If there has been no fraud and it is “unfair” to hold the spouse seeking relief liable, the IRS can still grant relief. Various factors are considered such as separation or divorce, economic hardship, whether or not there was knowledge of the items causing the understated tax, or whether the spouse seeking relief received a significant benefit from that understatement. Don’t depend on these rules. Even these do not always provide relief. The bottom line is, if you think something is wrong with your tax return, don’t sign it. If your spouse won't file a correct return, file a separate return with married filing separately status. It may mean paying more tax in the short run, but signing a false tax return can mean paying a lot more tax in the long run.

Maybe the marriage ceremony should go like this: "You have the right to remain silent, anything you say may be held against you, you have the right to have an attorney present. You may kiss the bride."

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