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 (we're 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.
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 a 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.
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 Outdated dispositive schemes, formula clauses that don’t work, and fiduciaries that are no longer advisable can increase the likelihood of estate administration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 It’s not only outdated tax and legal matters that can torpedo your plan, its failing to address ever-changing family dynamics.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 of what they were five 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 three 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. 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.
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 than 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 contractual arrangements 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 2nd 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.
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.