2001 Lane Reports

Estate Planning Lessons Learned From The Anna Nicole Smith Case

Thursday, February 1, 2001
by Joshua S. Kreitzer, J.D.

Anna Nicole Smith, the model who at age 26 married an 89-year-old multimillionaire, was once again in the news in recent months when a bankruptcy court in California awarded her a judgment of approximately $450 million, representing what the court found was supposed to have been her share of her late husband's estate. As unusual as the circumstances surrounding this case may seem, the case highlights some generally applicable legal principles.

Anna Nicole's late husband, J. Howard Marshall II ("J. Howard") was said to be the richest man in Texas. J. Howard had two sons from his first marriage, J. Howard III and Pierce. J. Howard had established a living trust (also known as an inter vivos trust) in 1982, long before he met Anna Nicole. J. Howard was also the trustee of this trust, and his son Pierce and Pierce's family were the sole beneficiaries of the trust; however, the trust was revocable, and thus J. Howard retained the right to revoke the trust and reclaim the trust's assets for himself during his life, or amend the trust and make someone else a beneficiary. He transferred to the trust his majority interest in a corporation that in turn owned an interest in Koch Industries, Inc., one of the largest privately held corporations in the United States. J. Howard's trust thus indirectly owned approximately 16% of the stock in Koch Industries, an interest now estimated to be worth over $2 billion.

Anna Nicole and J. Howard met in 1991 and married in 1994. As an inducement to marry him, J. Howard promised to leave her half of what he had. Prior to the marriage, J. Howard asked an attorney to arrange a gift to Anna Nicole to be measured by the increase in value of the Koch Industries stock from that date on, and he also requested that another attorney prepare a trust for her benefit. This gift was never completed, however, because Pierce fired one attorney and conspired with the other attorney to prevent the drafting and execution of the documents. Later, when Pierce learned of his father's marriage to Anna Nicole, he contacted the second attorney to take action to prevent her from receiving any of the assets in J. Howard's trust. The attorney devised a plan to make J. Howard's trust irrevocable, thus guaranteeing that Pierce and Pierce's family would eventually receive the stock held in the trust.

Pierce and the attorney met with J. Howard to review a document described as a "Post Nuptial Fine Tuning of Estate Plan," containing proposed amendments to the living trust. J. Howard signed the document, but the amendment to make the trust irrevocable was not part of the document that J. Howard signed; the bankruptcy court found that Pierce had the page with that amendment inserted into the document later, likely after J. Howard's death.

Because substantially all of J. Howard's wealth was held in the living trust, of which Anna Nicole was not a beneficiary, she received no inheritance upon J. Howard's death. After a judgment in a lawsuit was entered against her for over $800,000, she filed for bankruptcy protection in California, where she now lives. In the bankruptcy case, she declared that among her assets were her claims against her husband's estate and against Pierce for tortious interference with her expected inheritance or gift from J. Howard.

Tortious interference with an inheritance or gift occurs when one person intentionally prevents another by fraud, duress, or other tortious (wrongful) means from receiving from a third person an inheritance or gift that he or she otherwise would have received. The Bankruptcy Court found that Anna Nicole had a reasonable certainty that she would have received a substantial gift or inheritance from J. Howard, had it not been for Pierce's conduct. As evidence that Pierce had engaged in tortuous conduct, the Bankruptcy Court specifically cited Pierce's firing one of J. Howard's attorneys and conspiring with another to prevent the gift to Anna Nicole, and Pierce's inserting of an amendment to the trust into a document that J. Howard had already signed.

The bankruptcy court measured Anna Nicole's damages as half of the increase in value of the Koch Industries stock from the date of the marriage until the time of trial, or almost $450 million, less any amount that she receives in the probate case of J. Howard's estate. Anna Nicole was also awarded $25 million in punitive damages. According to Lawyers Weekly USA, this verdict was the largest any individual won in the United States in the year 2000. (Anna Nicole has since withdrawn her claims in the probate case. The bankruptcy case remains subject to appeal by Pierce.)

Anna Nicole's case was decided based upon the law of Texas, but Illinois residents should note that some of the legal principles involved also apply in Illinois. For example, had Anna Nicole and J. Howard been Illinois residents, she could not have prevented assets in her husband's living trust from passing to Pierce when J. Howard died, even though, in Illinois, a spouse has a marital right to share in the probate estate of his or her deceased spouse. The Probate Act of 1975 provides that a surviving spouse who is dissatisfied with what the deceased spouse's will has provided for him or her may renounce the will. If the surviving spouse renounces the will, he or she will receive one-half of the deceased spouse's estate if the deceased spouse is not survived by any descendants (children, grandchildren, etc.). If the deceased spouse is survived by descendants, then the surviving spouse's share is lowered to one-third. Such a provision in effect gives a surviving spouse a specified minimum share of his or her spouse's estate. However, the right to renounce a will only gives the surviving spouse rights to property included in the deceased spouse's probate estate; property that the spouse transfers during his or her lifetime is not subject to the statutory marital right.

In general, under Illinois law, an owner of property has an absolute right to dispose of the property during his or her lifetime in any manner he or she desires, even if the transfer of the property is for the purpose of minimizing or defeating his or her spouse's statutory marital interest in the property transferred or conveyed. The surviving spouse cannot challenge the transfer or conveyance unless the transaction is a sham and tantamount to a fraud on the survivor's marital rights.

Furthermore, under Illinois law, transfers into revocable trusts are considered valid in the absence of an intent to defraud. Under the Lifetime Transfer of Property Act, an otherwise valid transfer of property (for example, to a trust) by a living person is not considered illusory just because the transferor retained any power or right with respect to the property. Consequently, the fact that the creator of a trust retained the right to amend or revoke the trust, or change the beneficiaries of the trust, is not sufficient to invalidate the transfer of property into the trust.

However, like the Texas courts, Illinois courts also recognize a cause of action for tortious interference with a gift or expectancy, based upon the same general requirements as described in the Anna Nicole Smith case. Note, however, that the plaintiff may not bring a lawsuit for tortious interference with an expectancy if he or she has the opportunity to file a will contest which would provide him or her with an adequate remedy.

What lessons can those of us who are unlikely to qualify for the Forbes 400 learn from this case? If you are getting married, especially if either you or your spouse has been previously married or has children from a previous relationship, be aware of the possibility that your spouse may have transferred some of his or her property into a trust — and you will not be able to receive that property unless you are a beneficiary of the trust. If the trust is revocable, your spouse may amend the trust to make you a eneficiary. If the trust is irrevocable, you should be aware that your spouse will not be able to alter the terms of this trust except through a court order, which would usually require the consent of all beneficiaries. And, finally, never attempt to use fraud or deceit to interfere with someone's estate planning, or you could wind up, like Pierce, on the wrong end of a verdict.

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The Lane Report is a publication of The Law Offices of Marc J. Lane, a Professional Corporation. We attempt to highlight and discuss areas of general interest that may result in planning opportunities. Nothing contained in The Lane Report should be construed as legal advice or a legal opinion. Consultation with a professional is recommended before implementing any of the ideas discussed herein. Copyright, 2003 by The Law Offices of Marc J. Lane, A Professional Corporation. Reproduction, in whole or in part, is forbidden without prior written permission.

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