Prime time television in the 1980s was largely built around dudes in cool vehicles who saved the day every week in their assigned time slot. Michael Knight and Kitt (Knightrider), Stringfellow Hawke and his supersonic stealth helicopter (Airwolf), and Thomas Magnum and his Ferrari (Magnum P.I.) filled my formative years and taught me all about life’s important lessons. When it came to the coolness factor, none of these guys could hold a candle to Burt Reynolds and his ‘79 Trans Am (you know, the black one with the giant gold screaming chicken/firebird on the hood).
I was saddened to hear of Mr. Reynolds’ recent death at age 83 and have followed the stories of his estate administration with a mix of curiosity (the estate planner in me) and sadness (the10-year old in me that still thinks Trans Ams are kind of cool). Fortunately, it sounds like Mr. Reynolds thought his plan through fairly recently and that this plan was documented appropriately.
The most interesting (and therefore the most likely “click-bait” headline) aspect of Mr. Reynolds’ affairs is that he intentionally left his son out of his probate estate — his will includes language that specifically “dis-inherits” his only son from those assets passing under his will. His will also states that Mr. Reynolds established a trust for his son’s benefit during his lifetime, the administration of which is ongoing and completely separate from those assets passing under the last will.
There are a variety of reasons a person would make a gift to a child outside of his or her last will; the two most common are privacy and taxes. Mr. Reynolds’ estate is a good example of the privacy afforded by some types of trusts. In this case, the family will be filing Mr. Reynolds’ will and a schedule of all of his assets and liabilities with the probate court, which will then be part of the public record for the folks at TMZ to comb through. The gift to his son will not be part of the probate filing, nor will its administration fall under the eyes of the local probate judge. We will never know what Mr. Reynolds left his son. Trusts are private arrangements, which is a primary reason many families choose to establish them.
The second reason Mr. Reynolds may have given assets to his son’s trust while he was alive is for estate tax purposes. Consider: Mr. Reynolds established the trust for his son in 2011. If he made a gift of $1 million to the trust in 2011 and that $1 million hypothetically earned 5% over that time, the value on his date of death would have been over $1.4 million. By making the gift during his lifetime, Mr. Reynolds may have been attempting to “freeze” the value of his gift for estate tax purposes at $1 million (rather than the $1.4 that would have been included in his estate in 2018).
It is also worth noting the impact that lifetime gifts can have on state estate taxes. In Oregon, for example, the state assesses an estate tax on all assets in excess of the $1 million state exemption. The state does not assess a gift tax. So, had Mr. Reynolds lived in Oregon, gifting to the trust for his son back in 2011 would have had the effect of removing the assets from his Oregon taxable estate with zero tax implications. The federal estate tax calculation requires the taxpayer to add back most of the large gifts a person made during his or her lifetime, but the state forms do not, generally, have that sort of “claw-back.” Mr. Reynolds lived in Florida, where there is no estate tax, so this was not likely a factor in his planning (conversely, it can be a driving factor behind trust planning if your state assesses an estate tax).
Gifting to trusts during your lifetime is a commonly used strategy to “freeze” the value of your gift. Some of these trusts benefit the donors, some benefit their children, some benefit charities, and some benefit all three groups. If your net worth is in the neighborhood of the $11.2 million federal level or if it exceeds your state’s estate tax limit, contact our planning team and we can talk about some of the tools our clients are using to facilitate these gifts.
If you have a Trans Am, helicopter, or a Ferrari, we are happy to prepare some cash flow models to help you pay for the gas and/or point you in the direction of some reputable insurance providers. We also have a staff of men and women ready to assist if these vehicles need to be taken for a test drive.