One of the worst tragedies in estate planning involves children who, 20 years after the death of their parents, are barely talking to one another because of fights over insignificant assets or over real or perceived abuses. An important legacy that a parent should leave is the disposition of assets in a manner designed to minimize potential family conflicts. In other words, the parent should leave a legacy of relationships instead of one of conflict. Here are some useful ways of preventing future heartaches:
Disposing of personal property. The attention paid to personal property after an owner dies is often disproportionate to the attention the property receives in the pre-death estate plan and to its appraised value. For example, 10 years before her death, a client told her son he would receive an old grandfather clock. A few months before she died, she promised the clock to her daughter. After the mothers death, the son started to take the grandfather clock out of the house and the children got into a fistfight over the clock, breaking the clock in the altercation.
Here are a few things you should consider if you want to minimize conflicts like this for your clients:
- If your clients want a particular asset to go to a particular person, they should provide a legally enforceable document that passes that particular asset (defined specifically) to the particular heir.
- Your clients should talk to their heirs about the assets the heirs want to receive upon the clients death. This discussion may reveal any potential ownership conflicts, and conflict resolution by the clients may minimize any long-term damage to the heirs relationships. Your clients should document the ownership of their assets. For example, if a daughter has loaned her mother a china cabinet, the fact that the cabinet belongs to the daughter should be documented. In the absence of such contrary information, it will be presumed that the china cabinet belonged to the mother for both tax and titling purposes. Also, if a married couple has children from prior marriages, the couple might create a notebook with pictures of their important assets, noting who owns what asset.
Choosing decision-makers. Selecting decision-makers is one of the most important determinations your client can make. This step can prevent or create conflict. In choosing fiduciaries and power holders, clients often do not focus on the potential for real or imagined conflict. As an advisor, it is your responsibility to focus your clients attention on avoiding a structure that breeds conflict. Here are some situations that might create conflict:
- Using a highly emotional or control freak family member as a decision-maker will often exaggerate the trauma of a family members death or incapacity.
- When choosing a person to make decisions about property and assets for the client upon her incapacity or death, selecting a son who despises his step-parent may not be a good choice.
- Choosing someone who will take care of minor children. Because clients cannot bequeath their children, the decision can be attacked by other family members. If there are good reasons why certain family members should not obtain custody (e.g., they have a history of child or alcohol abuse), the client may want to document the concerns in a form that can be submitted to the court (i.e., an affidavit). This document is separate from the will (i.e., to limit public disclosure) and reflects the reason why the client did not select the family member. Moreover, we generally advise clients not to use the same person as guardian and trustee for minors. This reduces the possibility of real or perceived self-dealing by the guardian/trustee.
- The choice of trustee is one of the most important decisions a client can make. It is not advisable to select an estranged child to act as a co-trustee with a stepmother. The choice of a trustee for minor beneficiaries should include an evaluation of the persons financial-management capabilities and, hopefully, her ability to mentor the child in financial responsibility.
Ownership of family businesses and properties. Even though 90 percent of businesses in this country are family owned, fewer than 5 percent survive to the third generation. This low survival rate is due to poor business management, family conflicts and the confiscation of family business capital from an estate tax. Clients need to realize that conflicts are inevitable between operators of the family business and family members who are outsiders. When the owner was alive, she was able to ensure peace in the family and to serve as the benevolent dictator. Unfortunately, this powerful role disappears when the owner dies or is incapacitated. Conflicts inevitably develop as each business owner attempts to direct her own financial destiny and feels increasingly unable to do so because of the common ownership of the business with other family members.
The solution lies in setting up a structure to ensure that those in the business own and control as much of the business as possible, while giving outsiders other assets so that they can effectively control their own financial destinies. Life insurance is often a necessary part of this planning. The owner or entrepreneur must take care of this planning process when she is alive so that she can dictate the terms to family members.
Planning for divorce
When planning their estates, clients must address the possibility that they or their heirs may face a divorce. Here are some topics clients should discuss with their advisors:
- Prenuptial agreements. The key to enforcement is proper drafting of these agreements and disclosure of assets. Relinquishment of ERISA retirement benefits must be executed after the marriage.
- Divorcing heirs. Because 49 percent of all marriages in the United States end in divorce, you may advise your clients to use trust vehicles that restrict the ability of a divorced spouse to obtain part of the family money. For example, the client can use spendthrift, generation-skipping trusts to restrict the ability of divorcing spouses to put pressure on a child to place assets in a joint name before a divorce.
- Irrevocable trusts. Virtually all irrevocable trusts should be drafted with the possibility that one or more of the beneficiaries may get divorced. For example, assume a client creates an irrevocable life insurance trust. The spouse is named as a beneficiary and co-trustee and is given significant powers, such as the right to remove other trustees and a limited power of appointment to reconfigure the trust for the benefit of the couples joint heirs. The trust could provide that all rights and powers of the spouse, including her right to serve as co-trustee, immediately terminate upon either legal separation or divorce.
- Powers of attorney. Many clients have drafted powers of attorney to appoint someone to handle medical and property issues if they become incapacitated. Such powers of attorney are not generally revoked by divorce or legal separation. In many cases, the clients do not get around to revising these documents during traumatic times. Putting an ex-spouse or a divorcing spouse in charge of making decisions about medical and property issues is probably not advisable. You should strongly encourage your clients to change their powers of attorney upon the first signs of a divorce, or the power of attorney may provide that if divorce or legal separation proceedings are initiated, the right of the spouse to serve as power holder immediately terminates, and the next named successor is automatically appointed.
Estate planning is largely an art, not a science. One element of this art is planning the estate in a manner designed to minimize the often inevitable conflicts that occur when a family member dies or become incapacitated.