Family Feuds

Summary: Estate litigation can be ugly! Nobody
wants their kids to fight over their estate, but estate battles are more common
than Republican Primary debates! But you can lessen the risk of antagonism and these
mud hurling brawls (were talkin’ about estate litigation not the debates). But
you have to use the Dr. Phil approach and start by getting “real.” Stop using
estate taxes, legal fees, complexity, or other excuses to avoid dealing with
the tough personal issues.

Team Up: If only your hair dresser knows for
sure, that won’t really help minimize the carnage. Here’s another reality
check. If you just hired a new estate planner, or only meet your planner every
five years (once a year is vital), how can he or she realistically get
sufficient perspective on your family’s dynamics (or dysfunction)? If you’ve
worked with the same CPA for decades, or have met with the same wealth manager
quarterly for many years, they each will have different and often deeper
insights to add to your estate planner’s own observation. Including all key
advisers at one estate planning meeting year will greatly increase the
likelihood that flashpoint issues will be identified and dealt with.

Ultimate Fighting Championship: Will your
supposedly loving kids play their version of Family Feud when you’re not here
to referee? Does “UFC” stand for Ultimate Family Carnage?  Will contests can become quite acrimonious and
generate significant legal and other fees. Surprisingly, airing family
squabbles in the public forum of a courtroom doesn’t seem to dissuade irate
heirs. Most estate fights never make it to court because it is just so costly.
But these battles can be bloodier than a UFC challenge without formal court
proceedings.

Minimizing Battles: There are lots of steps to reduce the
likelihood of battles.  While these will
vary depending on family circumstances, use these as discussion points with
your advisers:

◙ Keep your planning and documents current. Outdated
dispositive schemes, formula clauses that don’t work, fiduciaries that are no
longer advisable, can increase the likelihood of estate administration Armageddon.
Keep your planning and documents current. It’s not only outdated tax and legal
matters that can torpedo your plan, its failing to address ever-changing family
dynamics.

◙ Economic changes must be addressed. A real problem
for many heirs is the toll the recession and tepid recovery have taken on their
inheritance. If this is coupled with a poorly designed will, havoc may ensue.
If the will bequeaths large specific bequests, and asset values have declined,
what happens?  “Abatement” is the
mechanism of adjusting certain bequests in a will (and the order and proportion
of the reduction or elimination) when the bequests under the will are greater
than the assets in the estate. For example, if you provide a large list of
specific dollar bequests, but the value of your home and vacation home are only
about half what they were 5 years earlier when you signed the will, problems
could follow. Drafting a will to deal clearly and fairly with the impact of the
economic rollercoaster can minimize or avoid will contests. You can cap certain
tiers of bequests, use percentages so relative distributions remain the same
regardless of values, etc.

◙ Keep your planning consistent. If there are
inconsistencies, make it clear if they were intentional. Example: Your will bequeaths
your estate to your 3 children equally. But only your daughter Jane is listed as
beneficiary on your large IRA. Your other two kids, David and Sam, are listed
as contingent beneficiaries. Well, was it really your intent to benefit Jane
more than your sons? Was it because she lived nearby, was your caregiver, and
she is the child with the least secure financial standing? Or was it an
oversight and you had really meant to list all three children but the beneficiary
designation form from the mutual fund looked a bit confusing and you mistakenly
listed your sons as contingent beneficiaries (only to receive an inheritance if
your daughter pre-deceased) instead of as primary to share equally with Jane.
Which was it? Mistake? Intentional? A recitation in your will, re-execution
periodically of the beneficiary designation, and a letter of instruction might
all help confirm your real intent.

◙ Patterns are good for more than knitting. If you
executed a will leaving assets 60% to one child and 40% to your other child. A
year later you execute a new will adding $10,000 to a charity, but retaining
the same percentage distributions to your children. You are creating a pattern
to demonstrate consistent intent as to the primary dispositive provisions for
your estate. That reinforces what you intended and makes a challenge more
difficult.

◙ Will contracts can be used to bolster your intent. If
you and your spouse/partner have a specific dispositive approach, both of you
can sign a will contract agreeing not to change the provisions of your will.
This will prevent your spouse, following your death, from changing his or her
will and thereby undermining your previously agreed to plan. The will contract
will also serve as another means of corroborating your intent for anyone else
as well.

◙ In Terrorem clauses are provisions included in wills
that provide that anyone who challenges your will should be disinherited. If
the person considering the challenge could face the loss of a significant
bequest the In Terrorem clause will give them pause. The validity of these
provisions, and requirements for them, vary by state so be certain to review
them with your local estate planning attorney. But even if state law won’t
respect such a provision, many lawyers still include them, since they certainly
make your feelings known.

Living Trusts: Contrary to the hype that living
trusts solve every estate planning problem, and eliminate cellulite too, living
trusts can be problematic.  When a will
or living trust is challenged, it’s often for lack of capacity or undue
influence. A living trust, however, faces a tougher standard. The law generally
requires a very low level of competency to sign a will because the law wants to
facilitate peoples’ right to make a will even when they are ailing and frail. Many
people simply don’t address their final planning until the end is staring them
in the face. But a revocable trust is a contract, not a will. You must have
“contractual capacity” which is a higher standard of competency then
testamentary capacity required for a will. Example: Someone recently diagnosed with
Alzheimer’s may have sufficient capacity to sign a will, but possibly
questionable capacity to sign a complex trust. If a revocable trust would be
helpful in the circumstances, the pour-over will that accompanies the trust (transfers
all assets of the estate to the trust) should also recite the identical dispositive
provisions as the trust.  For a more complex
trust, care could be taken to corroborate sufficient competency when a trust is
being signed.

Beneficiary Designations (BD):
Substantial assets are often held in retirement accounts, how do they fit into
the will challenge UFC?  BDs are a contractual
arrangement and an heir could challenge a BD much as they would any contract.
But they can be slippery. If Mom named her latest home health aid, Snidely
Whiplash, as sole beneficiary of her IRA, the IRA passes by operation of law.
With a death certificate Snidely can probably get the IRA and roll it over very
quickly into an account in his name, pull the money from the account and gift it
to his 2^nd cousin who lives in Russia and is best known as peggy in
the Capital One commercial.  Snidely can
then move far away from Frostbite Falls, Minnesota. Will Dudley Do-Right find Snidely?
Even if Dudley succeeds, Snidely may already be judgment proof. The cost of
finding his cousin Peggy and pursuing him overseas could be prohibitive. Most
IRAs are likely well under the dollar threshold to make this battle worthwhile.
Again, proper planning, documentation and monitoring, is vital to avoid having
Peggy as your heir.

Gunslingers: If an estate of which you’re a
beneficiary or fiduciary shows even small signs that litigation might occur, involve
an estate litigator early in the process to better handle strategic decisions in
case litigation in fact cannot be avoided. Many estate and probate attorneys
are really tax attorneys and don’t have the litigation expertise of a
litigation specialist.