Or, Why Probate Isn’t Always a Bad Thing.

The name James Sheppard probably did not ping on most people’s radar before 2007. In that year Sheppard became the talk of the proverbial “estate planning” town, all because he did something that is relatively common: died intestate, meaning without a will. His estate now has the dubious honor of taking the lead role in a Wisconsin Supreme Court case, something few estate’s can claim.

Case Background

While Sheppard, the co-founder of Cousins Submarines Inc., had numerous assets, it is two Payable on Death (POD) accounts which are the focus of Estate of Sheppard v. Schleis. Sheppard named his god-daughter, Jessica Schleis, as the recipient of the two accounts, totaling over $3 million. This allowed those accounts to avoid probate, but it did not prevent them from being considered for Federal estate tax purposes.

Schleis was a minor at the time of Sheppard’s death, so her parents petitioned the circuit court to be appointed her Guardians in the estate proceedings. On the recommendation of their attorney, Schleis’ parents signed an agreement to set aside fifty percent of the account assets to pay “required estate taxes.” As part of the Guardianship proceedings, a Guardian ad Litem (GAL) was appointed for Schleis to represent her interests. The GAL concluded that Wisconsin and Federal estate taxes would not attach to the POD accounts, but instead were an obligation of the estate.

Acting on the information from the GAL, and after retaining another attorney, Schleis’ parents withdrew the entire balance of the POD accounts. Sheppard’s estate then brought suit against Schleis and her parents to recover the estate taxes generated by those POD accounts.

The circuit court granted summary judgment in favor of Schleis, reiterating the holding in a prior case that it is the obligation of the Estate and the personal representative to pay any inheritance taxes. Since there were no estate taxes “required” to be paid from the POD accounts under state law, the Agreement between the Estate and Schleis’ parents was unenforceable. The Estate appealed and elected to bypass the Court of Appeals. The Wisconsin Supreme Court handed down a unanimous decision declaring the Estate solely responsible for the federal and state estate taxes generated by the POD accounts, approximately $1.5 million, and affirmed the Circuit Court’s conclusion that the Agreement did not create an obligation to pay estate taxes because the POD accounts were not required to pay any estate taxes under federal or Wisconsin law.

The Supreme Court acknowledged that in many other states non-probate assets pay their pro rata share of estate taxes. However, Wisconsin applies the burden-on-the-residue rule. In essence, the probate estate shoulders the burden of estate taxes generated by assets inherited by a beneficiary outside of probate unless the decedent states differently in his Will or other testamentary document.

The Lessons of the Case

This case highlights the consequences of non-probate transfers, in the context of estate taxes, and of not stating your desires in your will. Many people elect to make a POD or Transfer on Death (TOD) designation on their accounts, and even on some property. It can be a useful tool when planning your estate. However, it can also cause some unintended consequences which could have easily been avoided with advice from an estate planning attorey. People typically leave the residue of their estate to those most important to them, such as their children or grandchildren. In an estate where substantial assets have POD designations, there may not be very much money in the estate, after taxes and other expenses. In Wisconsin, this requires that non-POD and TOD assets be sold to provide the estate with enough money to pay the final expenses, including estate taxes. Is this the result that Sheppard wanted when he made those POD designations? As he did not take the time to execute a will, we will never know.

Duxstad & Bestul practices estate planning, probate, real estate and business law in both Green County and Lafayette County, Wisconsin.