NAIFA's Advisor Today Keyword(s)

 E-mail   Print  Share

The Forgotten Part of an Estate Plan

Sometimes, family conflict has nothing to do with the money, and everything to do with the heirlooms.

By John J. Scroggin, J.D., LL.M

One of the more interesting dynamics of estate planning is that in many cases, the greatest family conflict is not over a large inheritance or the placement of assets in a spendthrift trust, but who gets certain personal items.

This discord has a number of causes, including:

  • Parents may have inadvertently created a conflict by telling different children they will receive the same item. For example, we had a client who 10 years before dying told her daughter she would inherit a grandfather clock. Then, a few months before she died, she promised the clock to her son. After the mother’s death, the son started to carry the clock out of the house and he and his sister got into a horrible argument. Today, they barely speak.
  • In some cases, the battle follows a greedy child saying that “Mom said I get this.” Years ago we had a client who was heavily drugged because of terminal cancer. Right before she died, her daughter made her sign a statement indicating that all the silver, china and jewelry was to be bequeathed to the daughter. Obviously, this created a huge conflict with the other children. Luckily for the rest of the family, the document was unenforceable in Georgia.
  • Immediate family members (and sometimes remote ones) may start taking things away before any appraisal or even an understanding of what assets are in the home. The explanation is sometimes, “When I was 10, your dad said I could have his shotgun.” Often there is no evidence. In most cases the declarations also are legally unenforceable.
  • Parents may not realize that items they cared little about may be emotionally very valuable to the children. Giving something to the wrong son or daughter may cause a bitter conflict unless it’s resolved before the sick parent dies.
  • Where there are children of previous marriages, trouble often arises between the children of the prior union and the new spouse. This happens two ways. First, the surviving spouse may believe he or she should inherit all the personal property of the deceased. If so, family heirlooms or other sentimentally valued property may eventually pass to remote relatives of the second wife or husband. Second, title to the asset may be in question. Unlike real estate or securities, there is generally no title document. A decedent who says, “pass my personal property to my children” without some evidentiary proof of what he or she owns, is asking for a family row.
  • Many parents are convinced their children would never fight over their assets. But the combination of lingering sibling hurts and the trauma of mom or dad’s death can magnify small conflicts. Moreover, it is not even the children who are fighting. It may be the resentment of an in-law you never liked, pawing over mom’s stuff when she’s barely in the grave.
  • Clients will sometimes say they are not concerned because a surviving second spouse surely would “do the right thing&quo; and pass the assets to the client’s children. But there can be twists. One man’s first wife had died years before and he was remarried for 10 years. Both he and the second wife had children from previous marriages. There was an accident and he was killed immediately. The wife died the next morning. His will passed all personal property and family heirlooms to her on the assumption she would return family assets to his children. Unfortunately, her children claimed ownership because they belonged to her mother for the 12 hours she survived her husband.

Estate taxes
If an asset is in the decedent’s home, the IRS provides that in the absence of evidence to the contrary, the asset is treated solely for tax purposes as a part of the decedent’s taxable estate. The burden lies on the executor or others to prove ownership.

If an asset like jewelry or a coin collection is “given” to a family member but retained by the giver, the tax code says the gift was never completed and the asset remains in the giver’s estate. This is a problem when someone says he or she is giving away collectibles or other valuables but never actually relinquishes control.

To the extent personal property is subject to estate taxes, the client needs to deal with whomever is responsible for the transfer tax on the property. In many wills (and in some state statutes) special bequests do not pay estate taxes, effectively resulting in other residuary heirs assuming the tax cost of the special bequests of personal property.

The client’s solutions
Clients can do much to reduce the potential for conflict:

  • To make sure a particular asset goes to a certain person, the client should furnish a legally enforceable document that specifically identifies the asset. This is critical when the decedent’s plan is to give something to more remote heirs such as family friends or remote cousins.
  • Some states will enforce an external list of how the personal property will be transferred if the will makes reference to a list. Other states do not allow such a list. In those states, you either need to list the personal property dispositions in the will, or, if the executor can be trusted, to follow the legally unenforceable wishes of the deceased. Make an external list of how the assets should be distributed. In such a case the persons on the list must be named in the will as potential personal property heirs.
  • If a married couple has children from previous marriages, they should create a notebook with pictures of important assets (as defined by the families), noting the heir of the asset. Each spouse should sign a declaration irrevocably relinquishing the right to the other’s assets, except where both sign a written statement.

In addition, we recommend a making a digital or videotape record of each object and who is to receive that asset. This way, there can be little question as to which asset is being passed.

  • Clients should talk to children about which assets they want to receive upon the parents’ death.

These desires should be documented. This brings to the open any ownership conflicts and prevents any long-term damage to the children’s relationships.

  • The choice of executor is very important where the client wants to make sure these personal property dispositions happen exactly as desired. Avoid choosing one child as executor if this risks discord among the rest of that generation.
  • Some clients want to give a life estate in personal property to a spouse and then pass the property to their family. Unfortunately, this is a terribly cumbersome approach. What happens when the object breaks, is stolen, or lost? Particularly with heirlooms, it’s generally best to pass them at death to the end recipient.
  • Where estate tax may be due and the personal property has significant value, the client’s will should state clearly whether the recipients of personal property are responsible for paying the transfer taxes.

The executor’s solutions

  • As soon as the client becomes disabled, or immediately upon death, we typically advise the executor (perhaps even before an appointment) to immediately change the locks on any residence or other location holding personal property so that the executor is in control of the property.

Otherwise, some people with access will think they are entitled to what’s inside.

First, though, let each family member who has a right to participate in the disposition of personal property walk through the house, including in-laws. In many cases, the in-laws are a major source of conflict over personal property. Keeping them away from other children when they discuss a parent’s assets reduces this conflict.

After each family member has walked through the house, only the heirs are allowed back to decide on the disposal of the remaining assets. The heirs can pick straws, with the longest straw getting to choose any asset. A third party, like a lawyer, can be judge and arbitrator. In the alternative, family members can submit bids on what assets they want and the highest bid price on each can be deducted from any inheritances. What remains can be sold at an estate sale or donated to charity.

  • To minimize family conflicts, establish the date of death basis of unique assets (which the heirs may sell) and properly prepare any required estate tax, the executor should obtain an appraisal of all personal property. The appraisal should be attached to any estate tax return. If the value of the personal property is lower than would be expected for an estate the size of the deceased’s estate (e.g., $30,000 in personal property for a $4 million estate), the executor should place an explanation in the estate tax return, such as “the deceased lived in a one-room assisted care facility when she died.”

The basis in personal property steps up in fair market value at the time of the owner’s death. If the property is unique (such as art or a stamp collection), the executor should obtain an appraisal of the asset to establish its value on the date of death even if no estate tax return is due.

John J. Scroggin, J.D., LL.M., a graduate of the University of Florida law school, practices tax and estate planning at his own firm, John J. Scroggin & Associates, in Roswell, Ga. He can be reached by phone at 770-640-1101 or by email at scrogginlaw@aol.com.

 


See other articles about Estate Planning



Conference Newsletter


Contact Us   |   Reprint Permission   |   Advertise   |   Legal Notices   |   Join NAIFA   |   Copyright © Advisor Today 1999-2014. All rights reserved.

AT Blog
Product Resource
Digital Magazine
NAIFA