EVERYTHING I KNOW about estate planning I learned in court.
As part of my litigation practice, I represent parties—often warring family members—involved in disputes over wills, trusts and family businesses. These disputes have common themes that teach important lessons about financial planning in general and estate planning in particular.
Driving these disputes is the enormous transfer of wealth—trillions of dollars—from the Greatest Generation to their children, grandchildren and great-grandchildren. Couple that wealth transfer with other demographic trends, such as longer life expectancies, rising health care costs and blended families, and disputes can easily erupt.
Lesson No. 1: Yes, You Need a Will.
A will or, in the right circumstances, a trust expresses your intentions about what will happen to property when you die. If you die without a will, your state’s laws dictate how your “probate estate”—property without a beneficiary or survivorship designation—is divided up. That usually means a minimum share to a surviving spouse and the remainder divided among children or, if you have no children, to your parents and siblings.
No matter how much you wanted to leave money to, say, your church or a close friend, there’s usually no way to enforce that desire without a valid will. If you outlive your immediate family members and don’t have a will, your property might end up going to a distant relative you never knew.
If you have minor children, a will can also identify who you want to be their guardian if you die. Without a will, a court proceeding—with the potential for prolonged and expensive disputes—might be necessary to determine who becomes their guardian and who controls any property they inherit as minors.
Lesson learned: Spend the time and money to have a competent attorney review your situation and prepare appropriate estate planning documents, and then revisit them periodically. The laws of each state vary, so the estate plan or trust created by your cousin in Florida might not make any sense—and could be invalid—if you live in Montana. Don’t be penny wise and try do-it-yourself estate planning forms or software. There’s a high probability that what you create on your own may not be valid or has ambiguities that might need to be resolved in court. The money you think you’re saving will be more than eaten up by the attorneys’ costs necessary to sort things out.
Lesson No. 2: Yes, You Need Other End-of-Life Legal Documents.
A financial power of attorney, a power of attorney for medical issues and an advance directive for health care lets you identify who’ll make important financial and health decisions if you’re incapacitated and gives directions to those folks. Without these documents, if you become incapacitated, no one has the authority to make those decisions on your behalf, and a court proceeding will be necessary to name a guardian or conservator. Sometimes, there’s a family dispute over who that should be, usually because of concerns about the competency or integrity of the person proposed.
Lesson learned: When preparing a will, most attorneys will also recommend that other end-of-life documents be prepared. Make sure you follow through on these suggestions.
Lesson No. 3: Keep Your Beneficiary Designations Updated.
Increasingly, the disposition of property isn’t governed by a will, but by beneficiary designations on bank accounts, brokerage accounts, retirement accounts and life insurance, as well as by survivorship rights (think real estate held with right of survivorship). This property is known as non-probate property. If there’s no beneficiary designation or an incorrect designation for non-probate assets, the assets will become part of your probate estate and be distributed as your will directs or, if you don’t have one, as state law directs.
Lesson learned: Make sure beneficiary designations are accurate. For instance, have you correctly named a charity? A gift to the “Breast Cancer Foundation” might generate a dispute over whether you intended to give to the Breast Cancer Research Foundation or the American Breast Cancer Foundation. Do you have a backup charity if your original charity no longer exists when you die? That’s something that happens relatively frequently with small charities, churches and synagogues.
Lesson No. 4: Make Sure the Person Holding Your Power of Attorney Can’t Abuse that Power.
Estate planners recommend having a financial power of attorney (POA), which allows someone else to act on your behalf as your authorized agent. That can be invaluable if actions need to be taken when you’re physically or mentally incapacitated, or otherwise not able to act. The POA ends upon your death.
Problem is, a POA in the hands of the wrong person can wreak havoc on your finances and your estate plan. With a broad POA, an unscrupulous agent can sell, transfer, gift or borrow against your assets and property. He or she might change the beneficiary designations on life insurance, retirement plans, and bank and investment accounts. He or she might also defeat your estate plan by selling heirlooms or property that you want to go to specific individuals, or decide to limit spending on your needs so there’ll be more for heirs. That is why a POA is often called “the most effective burglary tool since the crowbar.”
Lesson learned: Consider limitations on the powers granted, such as prohibiting gifts to the agent or his or her family. Also require periodic reporting to a third party of actions taken under the POA or require the consent of your attorney or accountant for certain transactions, such as the sale of any asset worth more than a specified sum. Alternatively, you might appoint a professional licensed and bonded fiduciary as your authorized agent.
Lesson No. 5: Be Careful with Joint Accounts.
To enable a child or trusted friend to help with bill paying, a senior will often open a joint account with that person. Usually, however, the law provides—and the terms of the account stipulate—that on the death of one of the joint account holders, the survivor becomes the account’s sole owner. If the account holds substantial assets, that might be contrary to the senior’s wishes.
Lesson learned: If you want to open an account that another person has access to for the convenience of paying bills, most financial institutions will simply present the paperwork for a joint account. Instead, ask to open an account with a power of attorney designation. The power of attorney will end at your death, and the account’s assets will then be disbursed as you direct in your beneficiary designation or, if there’s no beneficiary named, according to your will.
Lesson No. 6: Elder Financial Abuse Is More Common Than You Think.
The news often has sensational stories of celebrities who suffer financial abuse at the hands of family, friends or financial advisors. Actor Micky Rooney, philanthropist Brooke Astor and Stan Lee, co-creator of Marvel superheroes, were all victims. But abuse isn’t confined to the wealthy and famous.
A 2010 Investor Protection Trust survey that found one in five Americans over age 65 had been victims of financial fraud. A 2011 MetLife Mature Market Institute study determined this sort of financial exploitation costs seniors at least $2.9 billion a year. About half of fraud was perpetrated by strangers, while family, friends and neighbors accounted for a third of financial abuse.
The elderly are targeted for many reasons: isolation and loneliness, diminished cognition and financial insecurity. They’re often very trusting and financially unsophisticated. And, of course, managing finances can be complicated, so an offer to “assist” or “help” is often accepted.
Elder financial abuse can take many forms. A senior might be coerced into making gifts or paying someone’s debts. A senior could also be coerced into changing his or her will, trust or insurance for the benefit of one child or a caretaker. To compel such actions, the influencer might isolate the elder, withhold care or deny access to friends unless the senior agrees.
Lesson learned: Remain vigilant to signs of potential abuse. Is the parent prevented from visiting with or speaking with friends and family? Has one sibling moved in with the parent and now controls who the parent sees and what he or she does? Has the sibling, caregiver or neighbor made recent purchases of cars or gone on expensive vacations?
It’s especially difficult for out-of-state children to monitor these situations. A request that a government agency, such as Family Protective Services, makes a wellness visit can sometimes help—but it can also exacerbate the situation. Not only will the caregiver be defensive, but also the elder might conclude that his or her independence is being challenged. That reaction can be heightened if a legal proceeding is filed to try to secure a guardianship or conservatorship. If the adult child requesting the guardianship or conservatorship fails to secure it, the relationship with the parent can be irretrievably damaged and the child might be disinherited.
Lesson No. 7: Your Trust Is Only as Good as Your Trustee.
Trusts are not just for the uber-wealthy. A properly structured trust can reduce or eliminate the need for probate, which is especially helpful in those states where the probate process is time-consuming and expensive. A senior who doesn’t have the desire to manage his or her assets—or is losing the ability to do so—might put them in a trust to be managed by a child, financial advisor or professional trustee. Trusts can also be useful in ensuring that significant assets aren’t put in the full control of a young adult. For example, a trust might provide that its assets are distributed at three different times: one third when a child reaches age 35, one third at 40 and one third at 45.
Selecting the right trustee is crucial. The trustee must follow the terms of the trust and is required to act as a “fiduciary,” meaning the trustee must make decisions that are solely in the beneficiary’s best interest. Disputes often arise because trustees mismanage trust assets; commingle their assets with trust assets; invest the trusts assets in their own business ventures or other high-risk investments; fail to provide any regular accounting; “borrow” from the trust and then are (surprise) unable or unwilling to repay the loan; and refuse to use the trust assets as directed for the care and benefit of named beneficiaries.
Lesson learned: Select a trustee who understands what it means to be a fiduciary. Often, a co-trustee is named. If you do so, provide for a tie-breaking procedure if the trustees can’t agree. Make sure you name successor trustees in case the original trustees resign, become incapacitated or die. Give direction on how the trust’s assets are to be managed, particularly if the trust has a controlling interest in a business. For any meaningful trust assets, consider a professional corporate trustee. His or her fees will be a fraction of what might be spent if litigation is necessary to remove an unscrupulous or negligent trustee and recover damages.
Lesson No. 8: Even Though Your Divorce Is Behind You, Your Financial Entanglements Might Not Be.
The demographic trends show many more people are on their second, third or even fourth marriages. Surprisingly, while the number of divorces among younger people has held steady, the divorce rate for those 55 and older has increased.
Once a divorce is granted, many people fail to follow up on important financial matters. Have you changed the beneficiary designations on your life insurance, 401(k) and brokerage accounts? Many states’ laws direct that, upon a divorce, the beneficiary designation of an ex-spouse is disregarded. But what if you live in a state that doesn’t do so?
Another common dispute is failing to maintain life insurance that a divorce settlement requires for the benefit of minor children. Do you have a copy of the policy? Are you monitoring whether your ex is paying the premiums so the policy won’t lapse?
Lesson learned: Yes, you want out of the marriage, presumably as soon as possible. But make sure you have done what’s necessary to limit future financial disputes with your ex or your children. Change beneficiary designations. Get copies of all insurance policies that are required to be maintained.
Lesson No. 9: Being Part of a Family Business Can Be Wonderful—Until it Isn’t.
According to Forbes, some 90% of U.S. businesses are family-owned or controlled by a family, and family businesses account for over half of U.S. economic activity. But remember the adage “shirtsleeves to shirtsleeves in three generations”? The vast majority of family businesses don’t survive to the third generation.
Often, the business structure of a family firm is designed for tax reasons, with little thought given to management after the founder’s death. Who will run the company upon the founder’s demise? The absence of life insurance, payable to the company on the death of the founder, can cause cash-flow problems that doom the company.
Many family businesses have no corporate governance documents—no shareholder agreements, operating agreements or partnership agreements—that spell out what happens when a family member dies or wants to dispose of his or her interest in the business. Can one family member force the others to buy his or her interest at fair value, or is the family tied together indefinitely? If such documents exist, what happens when family members owning equal shares are deadlocked over an important business decision?
When a business is passed to the next generation, the child chosen to take the parent’s role may feel entitled to the same compensation as the parent who created the business. That can cause resentment among other siblings who also work in the business. A further cause for resentment: Family members who inherit an ownership interest, but don’t work in the business, can be entitled to a share of profits. Disputes are common between children who work in a business and children who don’t, because the former often think the latter are unworthy of sharing in the company’s profits.
Lesson learned: Business continuation planning, including consideration of life insurance needs, is critical. Make sure proper shareholder agreements, operating agreements or partnership agreements take into account intergenerational succession.
Robert C. Port is a partner with the Atlanta law firm of Gaslowitz Frankel LLC. He is fascinated with understanding how people deal with and manage money, especially the emerging field of behavioral finance. When not in a courtroom or before an arbitration panel, he prefers to be cycling, skiing, hiking or swimming. His previous articles were Courtside Seat and Courtside Seat (II).
This article is for informational purposes only, and should not be relied upon as—and does not constitute—legal advice. You should not act upon any information in this article without first seeking legal counsel from someone licensed to deliver advice in the relevant jurisdiction, and who understands your individual facts and circumstances.