“Legendary was the Xanadu where Kubla Kahn decreed his stately pleasure dome.” Legendary too were the colossal errors made by Mary Kane in this celebrated classic movie which follows a journalist as he tries to uncover the meaning of Charles Foster Kane’s last words.
Jim Kane and Mary Kane ran a Colorado boarding house in the late 19th century. A defaulting boarder paid his bill with the deed to an abandoned mine thought to be worthless. The Kanes’ fortunes quickly turned when gold was discovered in the mine. Presumably to give her son a better life, Mary Kane decides to sign guardianship of the Kanes’ five-year-old son, Charles Foster Kane, to Walter Parks Thatcher and an unnamed bank. Thatcher tells Mr. and Mrs. Kane that “The bank’s decision in all matters concerning his education, his place of residence and similar subjects will be final.” The bank will also assume full management of the mine, paying $50,000 annually to Jim and Mary or their survivor for their lifetime. The principal and all money earned will be administered by the bank in trust for Charles Foster Kane until his 25th birthday, when the principal and accrued income will be turned over to him.
Charlie gets the money, spends wildly, and invests heavily in the newspaper business. He initially enjoys meteoric success but later finds his empire bankrupt. Thatcher ultimately regains control of Charlie’s assets. Charlie goes on to live a life of material excess, divorcing twice and leaving human wreckage in his wake. Charlie dies alone, clutching a snow globe and muttering the word “Rosebud.” (You didn’t think we would give away the secret, did you?)
A devastating story.
What should have happened
One blustery snowy day, Jim Kane arrived for a scheduled consultation with Wendy & Jen. Mr. Kane advises that he and his wife, Mary, recently came into some money unexpectedly. They rented out a room in their house during a recent ski tournament, and the renter paid his bill with a pair of old k2 skis and the deed to an abandoned mine thought to be worthless. To their surprise, the mine was a literal “gold mine” and they are now millionaires.
Mary, however, is unable to handle the responsibility of this sudden change of fortune. She wants to sell the mine (worth $30 million, generating net annual income of $2 million) and the boarding house (worth $800,000, generating $30,000 net annual income) to a bank. Jim sheepishly admits that Mary wants to give their son Charlie to the bank as well. It seems that Charlie is a handful, and Mary somehow believes that a financial institution can stand in for a parent’s love and discipline.
After a theatrical double-take, Wendy & Jen question Jim about what he wants. Jim confirms that he loves his son, and the pair spend hours riding sleighs, playing soldiers, and having snowball fights. Jim is befuddled by his wife’s plan and explains that she offered him $50,000 a year to sign some papers. Jim tells Wendy & Jen that Mary started taking advice from a man named Thatcher who showed up after their good fortune was plastered on the local news station.
Wendy & Jen immediately tell Jim that they are not family law attorneys and advise him to seek the guidance of one to address the marital and custody matters.
Jim shows Wendy & Jen the papers Mary presented him, which were drafted by Thatcher.
The first document is a private annuity contract which contemplates Jim and Mary paying Thatcher$1.5 million in exchange for a joint immediate-pay annuity which would pay a combined $50,000 a year to them or their survivor for the rest of their lives. However, the documents state that the annuity will terminate if Jim and/or Mary ever speak with or attempt to see Charlie ever again.
In another document, Jim and Mary transfer the gold mine and the boarding house to a trust. The trust names Thatcher as trustee and directs him to pay out as much of the principal and income as the trustee deems necessary for Charlie’s health, education, maintenance, and support. The trust fully distributes to Charlie outright when he reaches the age of 25. The trust terms state that Thatcher is entitled to an annual commission, which is determined by an undisclosed proprietary formula.
There are also documents which grant Thatcher irrevocable guardianship of Charlie’s person and property, and wherein Jim gives up all rights, title and interests he may have in the gold mine and boarding house (while retaining all tax liability for the anticipated transfer).
Wendy & Jen strongly admonish Jim to not sign any of these documents because the Thatcher Papers are beyond inappropriate and may even be illegal.
Focusing specifically on the proposed trust, Wendy & Jen advise Jim that the trust, as drafted, will create a gift tax and give Charlie a significant carried-over basis in the gold mine (because they received it in exchange for satisfaction of a $30 debt) and the boarding house (which is valued at $0 due to some questionable income tax deductions). With this exceptionally low basis, there will be a huge capital gains tax due when Charlie or the trustee eventually sell the gold mine and/or the boarding house. If the assets are not sold (and assuming 25-year-old future Charlie doesn’t blow through the trust), when Charlie dies, the remaining value will be included in his estate and taxed at the future estate tax rate.
After Wendy & Jen patiently explain the so-called “Thatcher Papers,” Jim smartly refuses to sign any of the documents and swiftly files for divorce from Mary.
It is later revealed that Thatcher is a notorious conman, also known as Slugworth, who is wanted by the FBI in connection with defrauding marijuana dispensaries and CBD lounges in the tri-state area. Thatcher/Slugworth was last seen in a hot air balloon in the New Mexico vicinity heading south.
Jim is awarded full custody of Charlie, and Mary’s parental rights are terminated, in part because she tried to sell her son. Jim and Mary come to a property settlement where Mary takes title to the boarding house, and Jim takes title to the gold mine and funds a commercial annuity guaranteeing Mary an annual income for her life.
At the divorce party, Jim asks Wendy & Jen about estate tax planning. Wendy & Jen tell Jim about Grantor Retained Annuity Trusts (GRATs) and Charitable Retained Annuity Trusts (CRATs), which can be used to gift highly appreciated assets (like the gold mine which was received for $30 and is now worth $30 million) in trust with reduced gift tax liability. The calculation and term of the annuity payments are tailored and can be crafted to fit his individual situation and needs.
Wendy & Jen also tell Jim about irrevocable life insurance trusts (ILITs), whereby Jim can create a trust which purchases insurance on his life. Upon Jim’s death, the proceeds from the policy will be excluded from Jim’s estate and can provide cash and liquidity that Charlie may need to pay the taxes on the estate.
As part of these planning discussions, Wendy & Jen introduce Jim to their partner, Lou Vlahos, author of the TaxSlaw blog. Together they help Jim create a balanced estate plan which reduces his estate tax liability and provides for Charlie. Lou also helps Jim restructure the mining company.
Jim later meets and marries Candace O’Hara (after they sign a binding pre-nuptial agreement). Jim and Candy raise Charlie in a loving family.
Charlie graduates college and spends several years as a professional snowboarder. He later opens Candy-Kane Enterprises with his snowboard winnings and some seed money Jim loaned him. Candy-Kane Enterprises builds state-of-the-art sleds, skis, and snowboards. The Rosebud motel proves so successful that Charlie uses the profits to open the lucrative and deeply philanthropic candy company, Jim Dandy Inc.
Jim and Candy live long and fulfilling lives on their large estate indulging in perpetual home renovations, with Charlie and his family as neighbors. In Jim’s honor, Charlie creates a private foundation which supports young families and teaches financial literacy.
Life is sweeter when you save the drama for the movies.