In my previous post, I wrote that contrary to media reports, it was highly likely that the Michael Jackson Family Trust did not distribute his assets to his mother and children outright. Various sites reported that the mother “gets” 40%, the three children receive 40% between them, and charities receive 20%. But his estate had to pay estate tax, and if 40% of his assets — potentially over $100 million — were distributed outright to his 79-year-old mother, there would be another round of estate tax on her estate when she died.
Everything I write here is speculation, as the Trust had not been released at the time.
Most people don’t expect to die before their parents. I can assume that when drafting his will and trust, Michael Jackson felt the same way. He loved his mother and wanted to take care of her for the rest of her life if he predeceased her. But giving her the money outright would be a tax disaster — and a bad idea for other reasons I will discuss in a later post. The solution is to leave the property to her in a trust with the right structure.
Without getting too technical: when a person dies, their estate is taxed on property they own, and ownership is largely determined by control. If Katherine Jackson received the property directly, she controls it. If it was distributed to a trust in which she is the sole trustee with unfettered access to principal, she still controls it.
But if the property goes to a trust in which an independent trustee determines when and for what purposes assets are distributed to her, then upon her death the trust property will not be subject to estate tax a second time. Katherine Jackson could even serve as trustee herself, as long as her power to withdraw is limited to what are known as ascertainable standards — health, education, support, and maintenance. Assets she withdrew and still owned at death would be taxable; what remained in trust would not.
Proper planning lets you take care of a parent in absolute comfort for the rest of her life, and then pass whatever remains to the next generation without a second round of estate tax.
In a future post I’ll discuss the non-tax reasons this type of planning makes sense for everyone, not just those with large estates — including protecting assets from an heir’s creditors and controlling the ultimate disposition of what’s left.