Basic Principles of Estate Planning Within the Context of Jewish Law

Basic Principlesof EstatePlanningWithin theContext ofJewish LawBy K. Eli AkhavanIn Shariah-Compliant Wills—An Overview, Prob. & Prop.58, Jan./Feb. 2011, Omar T. Mohammedi highlighted theessential issues of which practitioners need to be aware indrafting wills intended to conform with Islamic law. Jewishlaw, the halakha, also places certain limitations on an individual’stestamentary freedom. Practitioners with clients who wishto synthesize their Jewish religious beliefs with testamentaryflexibility face unique and complex challenges. The followingarticle familiarizes attorneys with the basic principles of Jewishinheritance law and provides them with an overview ofthe techniques that can be employed to resolve potential disparitiesamong three competing influences: (1) religious law,(2) testator intent, and (3) secular law.Basic Structure of Jewish LawThe halakha is derived from two sources: the Old Testamentand the Oral Law. The Oral Law was originally transmittedverbally from generation to generation but has been canonizedin the mishna and the gemara (popularly known as theTalmud). The mishna delineates general principles underlyingthe laws of the Old Testament, while the gemara provides theiStockphoto60 n July/August 2011

details and analytical framework of thosegeneral principles through debate anddiscussion. Jewish rabbinic scholars haveprovided the codification of these rulesover the course of many centuries. The Jewishlegal system provides the flexibility forthe modern-day application of halakha, andestate planning in the current legal and taxclimate is no exception.Laws and RegulationsGoverning InheritanceThe rules governing Jewish inheritancelaws are found in the Book of Numbers27:8–11 and the Book of Deuteronomy21:17. Under halakha, a decedent’s propertytransfers automatically to certain beneficiaries,even without a will. In fact, the halakhadoes not allow for the transfer of propertyto persons other than those enumeratedby Jewish law. In other words, a will thatdesignates beneficiaries other than thoseallowed by Jewish law is invalid for thepurposes of halakha.Beneficiaries inherit under the halakhabased on a system of different levels ofpriority. A person of a first order of prioritywho survives the decedent inherits thedecedent’s entire estate. If no member ofthe first order of priority is alive at the timeof the decedent’s death, then the linealdescendants of that person inherit that person’sshare on a per stirpes basis. If neitherthe first order of priority person nor hisdescendants survive the decedent, then theestate passes on to the next level of priority.The order is as follows:1. Son (the eldest son receives a doubleportion, under a version of primogenitureinheritance),2. Daughter,3. Decedent’s father,4. Paternal brothers,5. Paternal sisters,6. Paternal grandfather,7. Paternal uncles,8. Paternal aunts, and9. Paternal great-grandfather.This order of priority continues for eachprevious generation.A decedent’s wife does not have a shareof inheritance in her husband’s estate.Instead, an individual’s wife is entitled(1) to receive the pre-fixed amount asprovided for in her antenuptial agreement(the ketubah) or (2) to be supported fromthe decedent’s estate until she remarries.Furthermore, although daughtersare not beneficiaries if the decedentis survived by sons, daughters areentitled to payments for their weddingexpenses, and the estate is obligated topay minor daughters certain levels ofsupport. If someone who is not entitledunder Jewish law takes possession ofthe decedent’s property (for example,A testator whowishes to bequeathhis estate while notcompromising hisobservance of halakhamay confrontcertain hurdles.through estate litigation in surrogate’scourt), the halakha deems such a personas stealing from the estate.The halakha has fairly complex rulesfor property owned by a woman beforeand after marriage, which are beyondthe scope of this article. Accordingly,unless otherwise noted, the followingdiscussion assumes that the testator isthe husband and not the wife.Potential Issues in Complyingwith HalakhaA testator who wishes to bequeath hisestate while not compromising his observanceof halakha may confront certainhurdles. For example, if a married individualhas a wife, a son, and a daughter,and he bequeaths his entire estate to hiswife or to his daughter, he would beviolating halakha. Alternatively, a marriedindividual with a son and daughtermay not want to bequeath his entireestate to his son without providing forhis daughter and also may not want hiswife to be solely reliant on the antenuptialketubah agreement or paymentsfrom his estate. Even if an individualdies intestate, the local jurisdiction willin all likelihood distribute his assets in amanner not consistent with halakha, andthis may not be in conformity with thedecedent’s intent.Estate Planning Techniques inCompliance with HalakhaThe following are four techniques thatallow a testator to comply with halakhaand yet maintain some level of testamentaryflexibility: (1) inter vivos gifting,(2) transfers to revocable trusts,(3) the doctrine of dina d’malchuta dina,and (4) estate indebtedness through apromissory note. See generally BenjaminC. Wolf, Resolving the Conflict BetweenJewish and Secular Law, 37 HofstraL. Rev. 1171 (2009).Inter Vivos GiftingGenerally, the halakha allows an individualto make inter vivos gratuitoustransfers as he pleases. Based on thisprinciple, one recommended techniqueis to execute a deed of gift throughwhich an individual transfers his propertyas he deems fit. Isador Grunfeld,The Jewish Law of Inheritance: Problems &Solutions in Making a Jewish Will 102–03(1987). The deed of gift would contain aprovision that the deed is to be effectiveone hour before the donor’s death andthat the deed is revocable at any time.The primary benefit of this method isthat it allows a testator to dispose of hisassets as he wishes while being in fullcompliance with halakha. According tohalakha, however, an individual cannotmake a gift of property that he does notown. As such, if the testator acquiresany property after executing a giftdocument, another deed of gift must bedrawn to cover the new property. Thiscan impose an excessive burden on thetestator. Furthermore, an individualmay not want to effectively transfer hisentire estate during his lifetime becauseof tax planning concerns.Transfer to a Revocable TrustAnother method suggested is for thetestator to create a revocable trustwhereby he would be the trustee andbeneficiary while he is alive, and hiswife and children would be the beneficiarieswhen he dies. Jonathan Porat,Kosher Revocable Trusts: The JerusalemTrust Form, at www. jlaw.com/Articles/revocable.html. Because the testatordoes not retain title to the property, thistechnique is effectively the same as intervivos gifting. The halakha views anytransfer of property through a revocablen July/August 2011 61

trust as occurring outside the jurisdictionof the default inheritance laws.The revocable trust technique ismost effective when all of the decedent’sproperty has been transferredto the trust. Any property remainingoutside the trust would be subject tothe inheritance halakha. As such, an individualmust continuously transfer allof his assets to the revocable trust forthe technique to work, and for a varietyof reasons this may be impracticable.Doctrine of Dina d’Malchuta DinaThe halakha recognizes the principleof dina d’malchuta dina, which literallymeans the “law of the land is the law.”The doctrine generally has been interpretedto mean that the secular lawgoverning an individual’s jurisdictionalso governs that individual’s civil andmonetary activities for the purposesof halakha. For example, according tomany rabbinic scholars, compliancewith the local jurisdiction’s tax laws ismandatory under halakha. One of theforemost and most-renowned authoritieson the application of halakhato modern times was Rabbi MosheFeinstein. Rabbi Feinstein authored aresponse in which he opined that thedoctrine of dina d’malchuta dina operatesto bind a testator’s secular willon his heir for purposes of halakha.See Rabbi Moshe Feinstein, Responsa,Iggros Moshe, Even Ha’Ezer § 104. Accordingto Rabbi Feinstein’s opinion,there would be no need for a testatorto employ any techniques or methodsother than drawing up and executinga will.Although reliance on Rabbi Feinstein’sopinion would be the simplestmethod to resolve the conflict betweenhalakha and secular law, this methodis not the recommended technique toadopt for two reasons. First, the majorityof rabbinic scholars disagree withRabbi Feinstein and maintain that thesecular law does not trump the inheritancelaws of halakha. Second, evenRabbi Feinstein himself maintained thathis opinion should only be applied expost facto, when someone already haspassed away with a will. Ex ante, however,an individual optimally shouldavoid relying on the doctrine of dinad’malchuta dina.Estate IndebtednessA highly recommended technique thatcan be used to help a halakha-observantclient is the estate indebtedness method.See Rabbi Feivel Cohen, Treatise,Kuntrus Midor L’Dor (1987); and Wolf,Resolving the Conflict Between Jewish andSecular Law, supra. Under this method,an individual executes a standard willin combination with a promissory noteto an individual who would not be anheir under halakha. The note would providefor an obligation far in excess of theprojected value of the estate and wouldbe payable within a moment before thetestator’s death.This technique’s effectiveness arisesfrom the fact that the note would conferto the beneficiaries under halakha the optionof either paying the debt from theestate or consenting to the terms of thetestator’s will. Similar to an in terroremclause, this “option” would compel thebeneficiaries under halakha to agree tothe distribution scheme under the willbecause otherwise they would receivenothing from the estate because of thevalue of the debt obligation.Because this technique incentivizesthe beneficiaries under halakha toconsent to the inheritance scheme ofthe secular will, the beneficiaries underthe secular will are not considered tohave stolen from the beneficiaries underhalakha. The halakha does not recognize“theft” when there is consent.The estate indebtedness methodavoids the major practical drawbackof both the revocable trust and giftingmethods because there is no requirementto continuously fund the trustor execute deeds of gift for propertyacquired after such transfer or execution.This method also can be especiallyattractive to most estate planningpractitioners because it operates intandem with a standard will drawnby U.S. attorneys, and the method canbe combined seamlessly with othercomponents of the client’s general estateplanning.Mechanics of Executinga Debt on the EstateThe estate indebtedness technique iscommenced by the testator and hisattorney drawing up a debt instrumentwith the names of the obligor and theobligee in addition to the amount of thedebt. It should be noted that halakha generallydoes not allow for the imposition ofinterest in this context and therefore therecannot be any stated interest. In addition,the halakha requires that the testator performa symbolic physical act of acquisitionto demonstrate his pledge to create the noteof indebtedness. This act is called the kinyansudar and generally involves (1) the testator’sverbal declaration of accepting a debton himself, (2) the receipt by the testator ofan object, such as a pen or handkerchief,from a third party, and (3) the raising of theobject to the height of approximately onefoot. See Cohen, Kuntrus Midor L’Dor, at 18.The testator then signs the debt instrument,encloses it with his will, and entrusts thewill with his attorney or agent.Potential Issues with the EstateIndebtedness MethodThe Surviving HusbandThe halakha provides that if a husband surviveshis wife, he has first order of priorityin inheriting her estate. Accordingly, anyindebtedness on her estate would be subordinateto the husband’s inheritance claim.As a result, the efficacy of the wife’s estateindebtedness as a technique to avoid halakhaviolations is substantially minimizedif her husband survives her. One way toresolve this potential problem is for the husbandto execute a second note of indebtednessin which he would assume a debtin favor of his and his wife’s heirs, whichwould be payable only on his wife’s deathand conditioned on his own acceptance ofthe estate distribution scheme delineated inthe wife’s will.Obligations Under HalakhaThat Exceed the Estate’s ValueThe estate indebtedness method may notallow full compliance with an individual’sreligious obligations in certain situations.Under the halakha, when a wife survivesher husband, his estate must cover eitherthe wife’s (1) food, shelter, clothing, living,and medical expenses until she remarriesor (2) the value of her antenuptial agreement.These religious obligatory paymentsmay exceed the amount bequeathed by thetestator to his wife in his will (assumingthat he did not leave his entire estate to hiswife). The same issue presents itself whena decedent’s minor children survive him.Halakha requires that the minor daughters’62 n July/August 2011

food, shelter, clothing, medical care, andcost of living expenses be covered bythe estate. This obligation may exceedthe daughters’ share in the estate asprovided by the secular will.Because these issues are religious innature and can require creative, outsidethe-boxthinking to help avoid intrafamilylitigation and dispute, one notedrabbinic authority on Jewish inheritancelaws has suggested that, in addition toexecuting the will and the promissorynote, the testator also should executea letter instructing his beneficiariesand descendants to consult appropriaterabbinic authorities about how toproceed in such situations to complywith halakha.Potential Income andGift Tax ConsequencesSome practitioners have expressedconcern that adverse tax consequencescan arise from the estate indebtednessmethod. See, e.g., Aryeh Weil & MartinShenkman, Wills Halacha and Inheritance,in Beth Din of America Halachic WillMaterials 6 (2008), at www.bethdin.org. In particular, there are four federalincome and gift tax concerns:1. Cancellation of Indebtedness. Thedebt forgiven by the beneficiariesmay give rise to cancellation ofindebtedness income to the estate.2. Imputed Interest. Because no interestrate is stated in the promissorynote, there may be imputed interestimplicating IRC § 7872 and causingtax liability to the beneficiaries.3. Gross Income. Issuing a note infavor of an heir could be includableas gross income for the heir.4. Gift Tax. If the note is not gross incometo the heir, the note could bedeemed a gift to the heir resultingin potential gift tax liability for thetestator (although valuing such agift may prove somewhat difficult,if not unprecedented).The key issue is whether the InternalRevenue Service would considerthe promissory note as valid debt forfederal income and gift tax purposes.See Wolf, Resolving the Conflict BetweenJewish and Secular Law, supra. Althoughthere is no authoritative guidance onthe matter, it would appear that thepromissory note would not be considereddebt because in most jurisdictions,consideration is required for the debt tobe enforceable, and it is highly unlikelythat a court would rule that there wasconsideration in this context.ConclusionAlthough this article does not serve as asubstitute for consulting with a competentrabbinic authority, it highlights theissues and techniques of which practitionersshould be aware when draftingwills for clients wishing to observe thehalakha.It should be noted that many sophisticatedestate and asset protection plansinvolve techniques such as grantor retainedannuity trusts, qualified personalresidence trusts, family limited partnerships,and intra-family loans, all ofwhich frequently require interest to bepaid. Interest is generally forbidden tobe collected or paid under the halakha. nLAW FIRM SPONSORSArcher & Greiner PCBallard Spahr LLPDuane MorrisFrost Brown Todd LLCGordon Fournaris & Mammarella PAHolland & Knight LLPIvins Phillips & Barker, CharteredMcArthur Franklin PLLCLeClairRyanLevin Schreder & Carey Ltd.McGuireWoods LLPRichards Layton & Finger PARobinson & Cole LLPStone Pigman Walther Wittmann LLCWinston & Strawn LLPSECTION OF REALPROPERTYTRUST &ESTATE LAWYour Source for Successn July/August 2011 63

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