As we enter the New Year, it’s a good time to revisit your estate plan. The big question is whether your will, trust, power of attorney, and advance health care directive accomplish your personal objectives. Guidance from an estate planner will help you review your plan in light of tax and other changes in the legal landscape, as well your evolving personal circumstances.
Consider also the possibility of family conflict, upon your incapacity or death, over the administration of your trust and estate. A “fire danger” sign provides the perfect illustration. What’s the risk of fire, i.e., litigation in a California probate court, involving your estate plan? To further embrace the metaphor, what might you do, as a “fire prevention approach,” to reduce the possibility of divisive and expensive conflict?
Some clients tell me they are unsurprised to end up in trust and estate litigation with siblings, cousins or others in light of long term family disharmony. Others say that they never saw it coming as everyone got along just fine until the elder’s passing. In any event, while there are many risk factors, I’ll touch on some of the more likely and flammable hazards below.
- Unequal Distributions to Children. Although we have a right of testamentary freedom to choose who will receive our assets, leaving unequal shares to adult children often causes hurt feelings and sparks controversy. An explanation from the parent, communicated during the parent’s life or in a writing available at the parent’s death, may help the disfavored adult child (and a probate judge if litigation occurs) understand the rationale for the lesser share. Consider what you might do to avoid unhappy surprises.
- “Loose Ends” Between Parents and Children. Often a parent has murky economic ties with one or more adult children. Perhaps it is a “loan” with respect to which the child signed a promissory note, but the child stopped making monthly payments years ago and now contends that the parent forgave the loan. Or maybe the parent allowed the child to reside rent free in a family property for many years. Or the parent promised the family business to the child who ran it for many years but did not clearly document the transition. Any such “loose ends” can cause acrimony. Can you tie them up?
- Allocation of Illiquid Assets. Many trusts and estates include real estate and other assets that are not publicly traded. Such assets might be sold so that there is only cash to divide, distributed out on a pro rata basis with each beneficiary becoming a co-owner, or allocated on a non pro rata basis such that each beneficiary takes full ownership over one or more assets. Beneficiaries often disagree as to which of these approaches to take. While a probate judge can resolve deadlocks, perhaps you can structure your trust so as to provide a clearer path to get assets out to your beneficiaries.
- Blended Families. Many trust and estate disputes involve blended families in which Mom or Dad want to provide for a second (or third or fourth) spouse during that person’s lifetime, to the disappointment of the children from a prior spouse or spouses. If the surviving spouse is put in control over the trust assets, the stepchildren may be too quick to find fault. Explore with your estate planner how potential friction might be reduced.
- Failure to Follow Trust Terms. Many marital trusts require the surviving spouse to take certain actions following the death of the first spouse, such as funding a subtrust with the deceased spouse’s share of the assets. If such funding does not timely occur, or if the surviving spouse later commingles the assets, it may become difficult to sort out years later who is entitled to what. Such accounting and reallocation issues tend to increase in difficulty the longer the surviving spouse outlives the deceased spouse. Evaluate whether the trust structure you have will be practicable to administer when you are gone.
- A Successor Trustee Who Is Unable or Unwilling to Act Properly. Family members nominated to serve as successor trustees may not be well suited to take on the fiduciary role. They may lack the time to focus on the administration of the trust or the impartiality to be fair to all beneficiaries. They may refrain from seeking the legal and accounting guidance that they need. Selecting a private professional fiduciary or bank trust department to serve as successor trustee may reduce the risk of conflict. Don’t feel obliged to select a close family member to serve as your successor trustee – maybe he or she is not the best choice.
- Co-Trustees May Disagree. Some estate planners discourage their clients from naming adult children to serve as successor co-trustees because of the risk of conflict between them. Indeed, we often litigate disputes amongst sibling co-trustees. If you have named two or more successor co-trustees, you should revisit whether they will be able to cooperate. While picking one family member over another may cause resentment, trust administration may proceed more smoothly with one person in charge.
Firefighters teach us that maintaining “defensible space,” by clearing vegetation from around a home, is essential to improving its chance of surviving a wildfire. The same concept applies to estate plans. An unresolved loan to an adult child is akin to a flammable pine tree too close to the side of a house. By proactively surveying and addressing such risks, we can strive to avoid conflicts that might undermine our plans.
Fireproofing your estate plan should be a joint effort. An experienced estate planner can help you identify potential hot spots and suggest what to do about them. Yet, since only you know the unique features of your family forest, you should share them with your attorney so that he or she can work with you to mitigate litigation risk.
Jeffrey Galvin is an attorney with Downey Brand LLP, based in Sacramento. He litigates trust and estate cases in Northern California, including disputes involving trust and probate administration, contests of trusts and wills, and financial elder abuse claims.