He remarried the following year. By the time he made a new will and created a trust he must have forgotten the divorce agreement, for he left the children less than 34% of his estate.
The businessman, Warren Billhartz, died in 2006. The following year his widow must have staged a coup, convincing her stepchildren to waive their rights under the divorce agreement. A federal appeals court summarizes:
According to the Marital Separation Agreement, the four children were to receive 50% of Billhartz’s “estate” (an undefined term), divided evenly. In the end, though, they cumulatively ended up with less than 34% of Billhartz’s assets, divided unevenly. None theless, after receiving notice of this discrepancy, all four children executed an agreement (the “2007 Waiver Agreement”), in which they accepted the lesser shares set out for them in the trust and waived all potential claims they may have been able to assert against either the Estate or the trust. The payments to the children totaled approximately $20 million; each daughter received about $3.5 million, while Ward received $9.5 million.How do federal courts enter the story? Even though the divorce agreement was not honored, it was used to claim that $3.5 million per child was a deductible payment of indebtedness rather than an estate-taxable transfer. The IRS objected but ultimately agreed to allow an estate-tax deduction for slightly more than half the payments.
Moneywise, that was good news. Familywise, it was explosive. The children finally realized what they had signed away when they agreed to accept no more than their father had left them by trust.
The daughters and the son went to court seeking their full shares of the estate, and the daughters won an additional $1.45 million each. But that meant the agreement with the IRS no longer looked so good. The children wanted it revised to allow a deduction for at least part of the additional payments. The Tax Court said no, and now the Appeals Court agrees.
Trusts and Estates saves us the trouble of spelling out the details of the story here.
Question for Jim Gust: Did Billhartz hit upon a ploy other wealthy individuals could use to do some estate-tax planning when they shed a spouse?
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1 comment:
To answer your question, the answer is "maybe." The Court of Appeals specifically noted that it wasn't addressing the legitimacy of the deduction for the children's bequests. The Tax Court never addressed the question, the whole reason for the appeal was the Tax Court's refusal to take the case in the first place (they ruled that the settlement with IRS was final).
The fact that the IRS allowed a 52.5% deduction for what the children received suggests to me that IRS considers it an uncertain question, one that they might lose. The fact that the estate accepted less than a 100% deduction suggests that they felt the same. The decision was silent on how they arrived at 52.5%, other than as a arbitrary compromise.
I wrote this case up yesterday for Estate Planning Briefs, as it happens.
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