Why you do not need an Irrevocable Trust; Estate of Jack F. Jelke

Jack Jelke was the heir to his father, John F. Jelke’s Margarine Company fortune, the manufacturer of Oleomargarine.  Started in the 19th century the margarine company, Oleomargarine, was comprised mostly of food dyes and animal fat as opposed to vegetable oils.  Early on Oleomargarine hit a buzz saw in the form of the butter industry’s dairy lobbyists.  A formidable organization in Washington at the time who were threatened by the far cheaper product known as margarine.  Lobbyists for the butter industry in Washington had the Oleomargine Act of 1886 passed levying taxes and penalties specifically against Jelke for including animal fats and dyes in his products.  The act nearly sent Jelke to prison for failing to pay the tax but his sentence was commuted.  Jelke eventually succumbed to the butter industry’s pressure and removed animal fats from his margarine, in favor of what was considered the far healthier choice, vegetable oil.  Business for Oleomargarine was underwhelming until the outbreak of World War II when a global butter shortage made it nearly impossible to source the dairy product.  Americans everywhere were encouraged to abandon butter in favor of the cheaper, more abundant margarine.

In 1948 the company had grown so large that Jelke sold the margarine business to Lever Brothers for $25 million dollars.  That would  be nearly half a billion dollars in today’s value adjusted for inflation.  Having had three children, only Jack Jelke’s daughter, Lana Jelke Brody, produced an heir.  His name was Michael James Brody, Jr.  Fast forward 22 years to 1970 and Michael James Brody, Jr. became one of the wealthiest 21 year old’s in the nation when he inherited the $25 million dollar margarine fortune.

Brody became famous at the age of 21 years old when he married his girlfriend of two weeks Renee Brody.  As the two were stepping off a plane from their honeymoon in Jamaica where he had purchased each ticket so the two would have the plane to themselves, Michael James Brody, Jr. made a grand gesture.  He announced to the reporters who greeted them at Kennedy Airport of his intention to give away his entire $25 million dollar margarine fortune to anyone who would write him a letter asking him for money to establish “peace in the world”.

What followed was a whirlwind tour that would make Brody an international celebrity and land him a guest spot on the Ed Sullivan Show.  The press called him the “hippie millionaire”.  People started showing up at his house asking for contributions.  Tens of thousands of letters poured into his home from around the world asking Brody for help.

To his credit Brody began sending people checks in an effort to give away his $25 million margarine fortune as promised.  However Brody would soon learn about spendthrift trusts.  You see Brody’s grandfather, Jack Jelke, had left Brody his $25 million dollar margarine fortune in a trust, a trust whose income could only be used to live off of but which principal could not be spent or wasted.  Such mechanisms are called testamentary trusts and NY estate lawyers use them for instances just like this to prevent waste or to preserve principal for future generations.

It was not long before all of Brody’s checks started bouncing and people became disillusioned with the overnight sensation.  Brody later retracted his benevolence claiming he was high on hallucinogens when he vowed to give away his fortune and did not mean it.  Unfortunately for Michael James Brody, Jr., he found out the hard way that money alone cannot buy happiness.  Later that year Michael James Brody, Jr. was committed to a mental institution and sadly took his own life in 1973.

Do I need a Trust?

As a NY estate lawyer with two and a half decades of experience drafting NY wills and probating NY estates for New Yorkers the topic of trusts comes up rather frequently.    A trust, more specifically, an irrevocable trust is a NY estate planning tool that allows individuals to set aside money and assets to be distributed in the future for the benefit of named individuals.  The Irrevocable Trust, also referred to as Living Trusts, are designed by NY estate lawyers to separate your ownership from your property.  Let me repeat that for emphasis, an irrevocable trust is designed to take ownership and control of your own property away from you, handing control and ownership over to a third party trustee, not you.

Sounds pretty scary right?  Well because it is.  Additionally, Irrevocable Trusts are as expensive as they are complex to set up with each Irrevocable Trust receiving its own tax id number and requiring the filing of a tax return each year.  Once created Irrevocable Trusts are rather complicated to modify or invalidate.  Lastly, assets may generate capital gains tax liability on any and all appreciation within the trust at the time the assets are sold.  This capital gains tax liability would not otherwise have accrued if the assets were not placed within the trust.  On the other hand, all assets passing through probate, the process of administering a simple NY will, receive a stepped up basis thereby washing away any and all capital gains tax liability on appreciation.

So why do NY estate lawyers sell clients Irrevocable Trusts?  There are two main reasons why your NY estate lawyer should recommend trust formation.  The first reason being if your NY estate is above the allowable NYS and Federal exemption limits.  In NYS, as of the date of this article, an individual can pass $6,580,000.00 outside the NYS estate tax and for married couples it can be as high as $13,160,000.00.  At the federal level married couples can pass on nearly $26,000,000.00 without incurring any estate tax liability.  As you can see very few New Yorkers fall into this category.  The other reason NY estate lawyers may recommend trust formation is for elder law.  This is when an infirmed person might contemplate getting on Medicaid to subsidize long term nursing care.  Currently there is a sixty (60) month lookback period when applying for Medicaid which means you must place your assets into an Irrevocable Trust or gift them away sixty (60) months prior to your application for benefits.

Outside of these two main reasons, I see no advantage as a NY estate lawyer to create an Irrevocable Trust as opposed to the drafting of a NY will.  Less than one percent of New Yorkers will fall into these two categories mentioned above necessitating the costly expense and disadvantages to warrant trust formation.  Drafting a NY will with your NY estate lawyer is infinitely less expensive than trust formation and unlike trust formation, probating your NY will has many more estate tax advantages if you are within the applicable exemption amounts.  For instance assets passing through your NY will receive a stepped up basis thereby eliminating any and all capital gains tax liability on appreciation.  NY wills are cheap and easy to set up and allows the testator to retain complete control of their assets.

This brings us back to the unfortunate case of Michael James Brody, Jr., the sole heir to his grandfather’s Margarine fortune.  While Michael James Brody, Jr., was left his grandfather’s  $25 million dollar margarine fortune, the amount was not left outright to him.  His grandfather set up the bequest so that it would be funneled to his grandson in the form of a spendthrift trust.  A spendthrift trust usually allows the beneficiary to receive the income from the trust for life with designated allocations of principal at specified times when needed.  This preserves the corpus of the trust in perpetuity to prevent misuse or waste.  For anyone thinking about a spendthrift trust such as this one, the good news is your NY estate lawyer can create one cheaply within your NY will.

Within your NY will your NY estate lawyer can create what is called a testamentary trust which would do everything you want without absorbing the costs and complexities associated with trust formation.  In your NY will you can designate who will receive the interest from the trust, nominate a trustee to administer said trust and even designate allocations of principal to your beneficiary as you see fit.

As we can see from the Michael James Brody, Jr., tragedy, his grandfather was attempting to avoid a disaster by not granting this troubled twenty-one year old access to the full $25 million dollars all at once.  In a sense the trust both failed and succeeded.  Unfortunately the spendthrift trust failed in that Michael James Brody, Jr.’s short life ended abruptly in tragedy despite his grandfather regulating the amount of inheritance his grandson could access.  Nevertheless one could still argue that the trust succeeded in preserving the margarine fortune for the next generation, the son of Michael James Brody, Jr.  If you are thinking about setting up an expensive Irrevocable Trust it is best to speak to an experienced NY estate lawyer to find out what your options are first.

If you are thinking about drafting your NY will it never hurts to ask the opinion of an experienced NY estate lawyer.  Feel free to call the NY probate lawyers at The Law Offices of Jason W. Stern & Associates for a free consultation at (718) 261-2444.  Our NY probate lawyers have more than 60 years of combined NY estate law experience drafting and probating the wills for families like yours in the counties of Queens, New York, Kings, Bronx, Westchester, Rockland, Richmond, Nassau, Orange and Dutchess.



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