For decades estate attorneys have been driven by a prime directive, a primary motivating cause that overcomes all other client desires: Minimizing estate taxes. I believe this is a huge mistake, and a recent court decision highlighted by a stern millionaire patriarch, celebrities, a free-living playboy, and an irrevocable trust shows us why.
Today it takes a decent amount of money ($11.4 million or more) to face a federal estate tax when you die, and there are also certain irrevocable trusts, including GRATs and GRUTs, that further minimize or eliminate estate taxes. So, for many of us this article is not relevant, but for those who it is, it should come as no surprise that estate attorneys have traditionally focused on saving their uber-wealthy clients money on estate taxes why sacrificing future control of these assets.
It is in this context that we recently learned of the story of Damian Hurley, the “illegitimate” child of Elizabeth Hurley and Steven Bing, son of real estate heir Peter Bing who created some of these tax savings trusts.
Peter’s father (and Damian’s great-grandfather) created a significant family fortune investing in real estate and left much of his estate to his son Peter (grandpa), who in turn created an irrevocable trust for the benefit of his children and future grandchildren. Irrevocable trusts are just that – irrevocable – so once money enters the trust you are often left with few options to modify the trust or remove money from the trust. In addition, you cannot serve as both a trustee and beneficiary of these types of trusts. Basically, the IRS is saying that if you are willing to give money under a legal instrument that you cannot change in the future AND divest yourself of substantial control and receipt of the funds in the future, they will allow additional estate tax savings.
Fast forward a few years. Steven, a future heir and beneficiary to this trust, does what any wealthy child of privilege does: He has a one-night (many nights?) stand, and this guy lucks out by having this love tryst with none other than actress and model Elizabeth Hurley! Way to go! He also pursues his lusty yearnings with other women and, in turn, fathers at least two illegitimate children: Damian (Elizabeth’s son) and Mary (another woman’s son). Patronage is after ward proven by genetic testing.
Fast forward another 17 years. Mary, who has no relationship with her father Steven, gets smart and makes a move to assert her rights under the trust as a granddaughter of Peter. Peter tells the trustee of the trust not to give her (or any other illegitimately sired grandchild) any of the trust funds, claiming that only legitimate grandchildren should receive funds despite the unambiguous, general language referring to his descendants. The trustee, who is legally required to be a disinterested third party, of course follows his meal ticket instead of his fiduciary duty by following Peter’s instructions and refuses to distribute any funds to Mary. Mary contacts a lawyer.
So we have a controlling, responsible grandpa (Peter) who doesn’t approve of his son’s pursuit of creating illegitimate children, whose irresponsible playboy son (Steven) likes to father children and then run for the hills, and fathers at least two illegitimate children (Mary and Damian) whom grandpa has no relationship with. We have a trust that is created to save money on estate taxes and leave money to grandpa’s children and grandchildren, and a straw-man trustee claiming to be independent who is instead following grandpa’s instructions.
Guys, I have a news flash for you: When your…biological material…creates a child, that child is yours unless someone else goes out of their way to state they are the father, or the father is a legitimate donor through a clinic and had no direct consent to the conception. And nothing makes an estate attorney salivate more than the words “legal interpretation” when the facts of the case are so clear; and if you add hundreds of millions of dollars to that legal interpretation you will have an opportunity to see what an actual bucket of attorney saliva looks like.
It took a judge all of 10 minutes and a sneak peek at Instagram to rule that, yes, a biological grandchild is a biological grandchild and that – considering the trust did not leave any room for legal interpretation – Mary (and, thus, Damian, who had done absolutely nothing to this point) was entitled to trust funds. Peter’s insistence that his grandchildren should be excluded under the trust because they had no relationship with their father were thrown out like spoiled yogurt, and the good guys won. To Steven’s credit, even though he had no relationship with these children, he disagreed with his father’s declarations, and nothing says “rebel” like running around having consequential relations with supermodels and disobeying the family patriarch.
Many people read this story because of the celebrity aspect: Elizabeth Hurley’s son, an aspiring super model in his own right, whose mother is already a multi-millionaire, shall be entitled to receive even more money just for the luck of having a family with a large trust. And remember, it wasn’t even Damian exerting his rights, it was Mary, and he just got to tag along on the ride.
What struck me was either how much some attorney screwed up decades ago, or the degree Peter’s values changed since the original drafting of his trust which did not allow for such updates. It is possible that at the time the trust was drafted he didn’t care (or, more likely, didn’t even consider) if his son would have illegitimate children, so the trust was absolutely silent on legitimacy. Next, the trust clearly limited the trustee’s discretion as to when to give money to beneficiaries (otherwise, the trustee could have said “This grandchild isn’t ready to receive trust funds” in perpetuity); such discretion might have allowed the trust to be decanted by the trustee, but during the trust’s drafting Peter clearly wanted to maintain as much power over the trust’s distributive pattern as possible.
In summation: An attorney convinced a client to save money on estate taxes by creating an irrevocable trust, the client decided he wanted to limit the trustee’s discretion as much as possible by providing for all biological children and grandchildren, circumstances changed so he told the trustee to stop following the obvious language of an irrevocable document, and two individuals received the inheritance they were legally-entitled to.
Morals of the story: Saving money on estate taxes may be less important than controlling funds held in a trust, consider allowing greater independent trustee discretion regarding distributions, and wear a condom if you don’t want to tick off your controlling parent.