Mid-Year Report, 2007 & The Estate of Wang

s we reach the halfway point of 2007, estate planners stand at the crossroads of the year, amidst a flurry of intriguing new ideas, proposals, and other developments that may have an affect on long-term wealth management.

Congress has been asked to prohibit the patenting of estate-planning techniques. The Dow reached a milestone in April. New constitutional arguments regarding same-sex marriage may change estate planning forever. Michigan is considering an estate tax. And tax guidance on many subjects may be on the way. Let's see which items warrant substantive planning adjustments and which are merely midsummer nights' dreams.

Patenting Techniques

Should the patenting of estate-planning techniques such as the SOGRAT be prohibited?

On July 13, 2006, testifying before the Subcommittee on Select Revenue Measures of the House Committee on Ways and Means on behalf of the American College of Trusts and Estate Counsel (ACTEC) and the Patenting Estate Planning Techniques Task Force created by ACTEC in 2005, attorney Dennis I. Belcher encouraged Congress to prohibit the patenting of estate-planning techniques.¹

Conflicts over the new techniques were noted. A tax advisor who publishes a newsletter recommended a patented technique…only to be warned by the patent holder that any use of the technique would require the permission of the patent holder. The tax advisor's attorney considered the high cost of defending a patent infringement lawsuit or prosecuting a suit to invalidate the patent and concluded that the technique in question should not be mentioned to clients without also mentioning the patent and the need to secure permission. In another circumstance where a SOGRAT was utilized, the patent holder filed a lawsuit, which is currently pending.

The ACTEC Task Force, which has members from the American Bar Association, the American Bankers Association, and the AICPA, found several aspects of these conflicts objectionable.

First, an individual should not be permitted to "privatize a tax reduction technique authorized by the United States government."

Second, patented techniques create a chilling effect on the use of techniques the government has authorized.

Third, it should be "against public policy to allow a patent of a tax reduction technique because the patent prevents taxpayers from exercising their right to minimize their taxes within the limits of the law."

Fourth, costs to taxpayers will be increased by either having to pay a fee to use estate-planning techniques or by having to consult attorneys due to the potential for a patent infringement lawsuit upon using such techniques.

With 48 tax techniques patented already and another 81 such patents pending, there is the potential for a proliferation of patents in other areas of tax law that may hinder taxpayers in many contexts and increase the chances of mistakenly infringing upon a patented tax technique.

And many existing techniques could end up being patented: "It is possible that an estate-planning technique will be discussed and will have widespread use, but a patent examiner would not have knowledge of the prior use of the technique and mistakenly award a patent for the technique."

Great GRATs: By the way, don't look now but another recent article has again made the case for the long-theorized all-powerful GRAT mechanism. Writing for Tax Analysts in May, 2007, Harry F. Lee argues that GRATs designed to produce no taxable gifts do not violate public policy and endorsed the idea of "front-loading short-term zero-out GRATs."

Economic Rebound

If the major market indices are to be believed, the economy is headed in the right direction. The Dow Jones industrial average closed above 13,000 in April and the Standard and Poor's 500 surpassed 1,527 for the first time since March, 2000. The Nasdaq composite index is at a six-year high as well.

Same-Sex Marriage

Same-sex marriage may transform estate planning as we currently know it. Although only a small portion of married couples are currently same-sex, planning must allow for the potential for any heir to marry…or divorce. Could a gay heir end up paying alimony, making asset protection planning necessary? Inheritance rights for children of same-sex couples raise numerous issues.

In May, 2007, the Connecticut Supreme Court considered a case filed by eight couples in 2004. The plaintiffs argue that same-sex civil unions provide inferior financial, social, and emotional benefits and that denial of same-sex marriage is a violation of equal protection and due process under the Constitution. Specifically, there are federal tax rules, Social Security beneficiary rules, veteran's benefits, and other rules that apply only to married couples and not civil unions. Making medical decisions on behalf of a civil-union partner may not always be possible after crossing state lines.

Another legal ruling to watch for will answer the question of whether gays and lesbians should be treated as a protected group that is vulnerable to discrimination and lacking in political power.

Prior to 2007, Massachusetts was the only state to approve same-sex marriages while civil unions or partnerships had been approved in California, Connecticut, Maine, New Jersey, Vermont, and Washington. New Hampshire is to follow suit in January and Hawaii extends certain rights to same-sex couples. California's legislature approved same-sex marriage but it was vetoed by Governor Schwarzenegger. Outside of the United States, same-sex marriage is recognized in Belgium, Canada, the Netherlands, and Spain.

Over the past two years, 45 states have considered actions for or against same-sex marriage, 19 by constitutional amendment and 26 with statutes. Just recently, a New Jersey Supreme Court decision based on the State constitution may have set the stage for the expansion of rights under civil unions or same-sex marriages to provide equal protection of law to those affected. The Senate spent three days debating the issue without taking action.

The nation's laws will not turn on the decision now awaited from Connecticut's Supreme Court. In fact, Connecticut's legislature is already considering a same-sex marriage law but currently lacks the votes and faces a veto from the Governor.

However, as clearly apparent, there is a steady movement toward greater rights for same-sex unions and marriages. As more such unions are permitted, will resistance to full marital rights for same-sex couples result in limits on inheritance rights for all unions? As society changes, estate planning will need to be on the front lines making adjustments.

Replacing Estate Tax Revenues

Picture yourself in the following dilemma. You are the Governor of the big state in the industrial "tax belt" of the nation. Thanks to various tax cuts and economic downturns, your state is now facing severe revenue shortfalls. Most of your constituents are either a) paying high taxes already, or b) don't have any money.

If only you still had that $198 million per year that the federal government used to provide, thanks to the state death-tax credit. Hey, wait a minute…

For Governor Jennifer Granholm of Michigan, who got nowhere with an idea to impose a 2% tax on most services, a tax on estates of wealthy Michigan decedents has taken center stage. The proposed tax of between 8% and 16% could generate $119,000 million initially and more in the future. And the wealthy deceased are a constituency that isn't very vocal and rarely votes.

Eighteen states and the District of Columbia currently impose some kind of estate tax.² Other states still longing for the death-tax revenues lost after the 2001 "repeal" was phased in may be inclined to follow suit. But with Congress now heading towards reform of the estate tax rather than repeal, there is some potential for a return of the state death-tax credit. Such an approach may help re-unify the approach to death taxes taken in most states. Without the return of the state death-tax credit, diversified approaches to death taxation may be promulgated and forum shopping may become more prevalent.

Tax Guidance To Follow

Speaking before the American Bar Association's Tax Section in May, 2007, representatives from the Treasury indicated the arrival of regulations and guidance on several issues of relevance to estate planning practitioners:

Fiduciary income tax issues.

Regulations on qualified severance under section 2642 were revised to conform to Congressional intent.

A guidance project for family trust companies on the use of trust assets without having to include them in the greater estate. This guidance is being prompted because the high number of private letter rulings in this area is taxing the resources of the Service (pun intended).

Sample forms for charitable remainder trusts to go along with the sample forms that already exist for charitable lead trusts.

Adjustments to gift taxes when the grantor's uniform credit is still available.

Procedures for the issuance of declaratory judgments on the values of gifts.

TECHNICAL REFERENCES

¹ Mr. Belcher's statement to Congressional Subcommittee is available online: http://waysandmeans.house.gov/hearings.asp?formmode=printfriendly&id=5107. Footnote 7 of the presentation made this editor's day by citing Good GRATS and Great GRATS - And an Interview with Robert C. Slane, The Estate Analyst (April, 2006).

² Other states have inheritance taxes. About 25 states have no death tax whatsoever. See, The Estate Analyst, "Should I Move My Estate?" (March, 2005).

The Estate of Nina Wang

Nina Wang, one of Asia's wealthiest women, died April 3, 2007, leaving an estate with enough twists and turns to rival that of Anna Nicole Smith.

Though ranked as the 204th wealthiest person in the world (and 35th wealthiest in Asia) by Forbes in 2006 with an estimated worth of $4.2 billion, Mrs. Wang was notoriously frugal, reportedly spending less than $650 a month on her needs. On the other hand, the woman who was called "Little Cutie" and who was known for having her hair in pigtails and wearing mini skirts, was also known to be cautious to the point of paranoia and traveled with as many as 50 body guards.

Nina Wang had reason to be fearful. In 1983, her husband Teddy Wang was hijacked while driving his Mercedes and held for eight days. Ransom of $11 million was paid and Teddy Wang was returned in an iron box by the side of the road.

The Wangs were childhood playmates who renewed their friendship when they were 11 and 15, respectively, and who married in 1955. Teddy Wang was the son of Din-shin Wang, who founded a paint and chemical empire. Teddy and Nina Wang moved to Hong Kong and the business became Chinachem Group, a successful pharmaceutical company. By the 1980s, the Wangs were part of Hong Kong's "glitterati."

But in 1990, Teddy Wang was hijacked while driving the very same Mercedes. Kidnappers demanded $60 million. Although more than half was paid in a first installment, this time there would be no return. Teddy Wang was allegedly taken out to sea in a sampan and dumped in the ocean. His body was never found and he was declared legally dead in 1999.

That set the stage for the battle of Teddy Wang's estate, which pitted Nina Wang against her 91-year-old father-in-law, Din-shin Wang, in an eight-year probate battle.

Three wills were put forth. The first was a 1960 will that divided the estate equally between Teddy Wang's wife and father. The second, a 1968 will, allegedly made after Teddy Wang hired a detective and discovered that his wife was having an affair, left the estate to Din-shin Wang. A third, a handmade 1990 will written a month before his second kidnapping, left Teddy Wang's entire estate to Nina Wang.

"No financial or property interests can go to anyone from my family, the Wangs. They have all been disappointing," Teddy Wang allegedly wrote. The will was in Chinese with the exception of a final handwritten love note to Nina Wang in English that read, "One life, one love."

Din-shin Wang filed criminal charges that his son's handmade 1990 will had been forged. In 2002, all of the family's dirty laundry, real or imagined, was hung out to dry during a 171-day trial that was replete with charges of adultery, kidnapping, forgery, and murder. Along with charges about Nina Wang having an affair, there was testimony about Teddy Wang having an affair and photos of various women surfaced when his safe deposit box was opened. There was even evidence about Din-shin Wang having affairs and using opium.

The trial court agreed with Din-shin Wang, albeit long-windedly, in a 500-page decision that concluded that the 1990 will had been forged and probably by Nina Wang. An initial appeal of the ruling was rejected in 2004 but in 2005, the Court of Final Appeal overturned the 2002 decision.

In the 17 years since Teddy Wang's second and final disappearance, Nina Wang guided Chinachem Group as "Chairlady" and made the company into a major property developer. Her $4.2-billion fortune was not seriously threatened by the probate battle; Teddy Wang's estate was valued at $128 million.

Epilogues: Two of Mrs. Wang's wills have been published in the media. A 2002 will left her estate to a charitable trust. A 2006 will leaves the entire estate to Nina Wang's feng shui consultant, Chan Chun Chuen, 48.

Nina Wang had no children. Her brother and two sisters have challenged the 2006 will and filed a writ to uphold the 2002 will. The charity issued a statement: The members of the board of Chinachem Charitable Foundation Limited ... are committed to upholding her wishes, which to the best of their knowledge have been expressed in her 2002 will and include the collection and use of her estate for charitable purposes."

The 2002 will calls for the charitable trust to be supervised by the United Nations Secretary general, the Chinese premier, and the leader of Hong Kong. Awards similar to the Nobel prizes were to be set up. Cash was also to be provided to her family.

Rumors that Teddy Wang may not be dead after all arose after an obituary of Nina Wang was published without a traditional black box around the name of her predeceased husband.

Finally, an account Mrs. Wang had with $27 million has spawned a fraudulent e-mail scam.