[Silver Lake Editors] Family Money How to Use Li(BookZZ.org)

SILVER LAKE PUBLISHINGLOS ANGELES, CA ABERDEEN, WA

Using Wills, Trusts,Life Insurance and Other

Financial Planning Tools toLeave the Things You Own

to the People You Love

Family Money

Family Money

Using Wills, Trusts and Other FinancialPlanning Tools to Leave the Things YouOwn to the People You Love

First edition, second printing 2004Copyright © 2004 by Silver LakePublishing

Silver Lake Publishing101 West Tenth StreetAberdeen, WA 98520

For a list of other publications or for moreinformation from Silver Lake Publishing,please call 1.360.532.5758. Find ourWeb site at www.silverlakepub.com.

All rights reserved. No part of this bookmay be reproduced, stored in a retrievalsystem or transcribed in any form or byany means (electronic, mechanical, pho-tocopy, recording or otherwise) withoutthe prior written permission of Silver LakePublishing.

The Silver Lake EditorsFamily MoneyIncludes index.Pages: 308

ISBN: 1-56343-744-9Printed in the United States of America.

ACKNOWLEDGMENTSThe Silver Lake Editors who have contributed tothis book are Kristin Loberg, Christina Schlank,Megan Thorpe and James Walsh.

This is the ninth title in Silver Lake Publishing’sseries of books dealing with risk and insurance is-sues that face people living in the United Statesand other developed countries. Throughout thisbook, we refer to insurance policy forms and legaldecisions from the United States—but the spirit ofthe discussion about risk and insurance can applybeyond the jurisdiction of the courts cited.

Some of the insurance policy language referencedin this book has been developed by the New York-based Insurance Services Office (ISO). ISO policyterms are updated and modified regularly. Our ref-erences to the terms are intended solely to illustratecommon issues and disputes. You may need to con-sult with a professional advisor before making deci-sions or investments related to a particular estate.

This book is intended to make the concepts andtheories of estate planning understandable to con-sumers. The Silver Lake Editors welcome any feed-back. Please call us at 1.360.532.5758 during regu-lar business hours, Pacific time. Or, if you prefer,you can fax us at 1.360.532.5728. Finally, you cane-mail us at [email protected].

James Walsh, PublisherLos Angeles, California

CONTENTS

CHAPTER 1Who Is Family?And What Does That Mean? 1

CHAPTER 2Attitudes and Aptitudes 37

CHAPTER 3The Vehicles for TransferringFamily Money 73

CHAPTER 4Types of Investments 117

CHAPTER 5Legal and Administrative Fees 149

CHAPTER 6What Happens WhenSomebody Dies 177

CHAPTER 7Taxes 211

CHAPTER 8Problems and 251Problem People

T A B L E O F C O N T E N T S

CHAPTER 9 277Inheriting Money

INDEX 303

C H A P T E R 1

1

CH

AP

TER

WHO IS FAMILY?

AND WHAT DOES

THAT MEAN?

1

This book is about accumulating and protectingintergenerational wealth. Family money. Themeans of comfort, education and freedom—not justfor yourself, but for numerous people who’ll comeafter you.

You may think only rich people—the Kennedysand the Rockefellers—need to think about familymoney. That’s not so. Middle-class people can andsometimes do leave enough money to children andgrandchildren to make their lives better. The trickis to start thinking strategically early.

In North America, at the beginning of the 21stCentury, we live in a consumer culture that arguesagainst building family money. Media and market-ers encourage you to spend what money you have—and some that you don’t. The government conspireswith this effort in two ways. First, it promises totake care of you in your old age if you’re broke whenyou get there; second, it discourages family wealthby taxing any money you have left to leave otherswhen you die.

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W H O I S F A M I L Y ? A N D W H A T D O E S T H A T M E A N ?

There are ways to get around these problems. And,despite Hollywood’s versions, most lawyers and ac-countants deal—at least in some capacity—with thisgetting around.

One big reason lawyers are often obscure about whatthey do for a living isn’t that they’re afraid of lawyerjokes; it’s that they don’t want to spend a wholecocktail party answering arcane questions about willsand probate court. This book will deal with thathard stuff: technical matters about wills, livingtrusts, tax issues and powers of attorney.

But, before we get into the details of whether you’rebetter off putting shares of the family business intoa generation-skipping or charitable remainder trust,you need to ask yourself some more basic questions.

These questions will get to the core of what con-stitutes your family—by blood, law or spirit. If itworks right, this process leads you to an understand-ing of yourself and the people closest to you. Andthis understanding helps you make the appropri-ate decisions for handling the financial assets youaccumulate—by inheritance, luck or hard work.

Of course, there are complexities in every family.Some families bring their own problems—mem-bers who make bad decisions, members who don’tget along. Other families have external problems—weak or non-existent standing under the law...out-right conflicts with social convention. And, morecomplex still, the size and shape of families changeover time. Children are born, people die, relation-ships break apart. So, any definition of “family” hasto be a multivariable proposition.

C H A P T E R 1

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To start this book, we’ll consider the fundamental

questions of what constitutes family and how that

influences the money decisions.

C O N T R O L A N D I N F L U E N C E

Leaving abstract existential musings to French phi-losopher and 20th Century author Albert Camus,we agree with the psychologists who argue that lifeis best thought of as a series of concentric circles.You are the center circle; immediate family—thepeople closest to you—make up the ring immedi-ately outside of you. Extended family and closefriends are the next ring. Casual friends and re-spected acquaintances are next. The Interior Minis-ter of Turkmenistan is on a ring somewhere fartherout.

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The concentric circles reflect the intensity of your

personal connection—physical, emotional, financial.

They also reflect your influence and control.

Most of us can control our own decisions and ac-tions—as long as there’s enough Prozac around.Strictly speaking, control ends there. Most of us caninfluence our immediate families, no matter howdysfunctional things may seem. We may have someslight influence on friends and acquaintances. As forthe Interior Minister of Turkmenistan...well, cen-tral Asia is a long way away.

What does this model of control and influence do?

First, it should help you think more clearly aboutwho fits where in the priorities of your life. Thismay not be a big deal if your life is devoted to aspouse and a few kids. But it’s more important ifyou’ve had several spouses and more kids...if yoursignificant other isn’t—legally—your spouse...or ifyou’ve raised grandchildren, nephews, nieces orother family members in your own household.

Second, it should be a reminder that your ability tocontrol diminishes sharply as you move out fromthe center. Most of the problems with family moneycome when people try to use their resources to con-trol the rings. By the time you’re finished with thisbook, you’ll have a very good idea of how bad thiscan make things. But you’ll also have a pretty goodidea of how to avoid that trouble.

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The circles should remind you of who means mostto you. Sometimes people forget. For example:In 1997, a Kentucky woman started several yearsof legal squabbles for her family by dying—andleaving all of her money to the actor CharlesBronson.

Audrey Joan Knauer had never met the man whoseHollywood career reached its peak in a series of lowbudget action movies during the 1970s (Death Wishwas the most famous of them). But she loved hiswork.

At first, Knauer’s relatives weren’t too concernedabout her will’s odd twist. They thought “all of hermoney” meant a few thousand dollars. Because shehadn’t worked in the last decade or so, her familyhad assumed she was practically broke.

As it turned out, though, Knauer—who had earneda Ph.D. and worked as a chemist in the 1970s and1980s—had numerous certificates of deposit andseveral bank accounts. In the weeks after she died,it became clear that she had more money than any-one thought—nearly $300,000, after taxes and le-gal fees had been paid. Bronson had already receivedmore than half of Knauer’s money by the time herfamily figured out what was going on.

In her handwritten will, dated April 1996,Knauer—who was 55 at the time—left all her fi-nancial assets to Bronson, whom she described as a“talented character actor.” The will stated that, ifBronson didn’t want the money, it would go to theLouisville Free Public Library.

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In the will, which had been written on a list ofemergency telephone numbers, Knauer seemed dis-contented with at least one relative. She wrote that“under no circumstances is my mother, Helen, toinherit anything from me—blood, body parts, fi-nancial assets.” This may sound extreme; but it wasa pretty effective legal document.

Knauer’s sister, Nancy Koeper, filed a lawsuit con-testing the will in late 1998. The lawsuit made acommon claim: that the money shouldn’t go toBronson or the library because the will had beenwritten when Knauer was “not of sound mind...normentally capable of making” reasonable decisions.

So, the will went into probate—the time-consum-ing process of legal review. Knauer’s sister wantedthe entire will declared illegal and the $300,000distributed to the family. The Louisville Free Li-brary wanted the will to be honored but modifiedto limit Bronson’s claims.

The case was ultimately settled out of court. Bronsonagreed to pay Knauer’s sister an undisclosedsum...but only part of the total he received. Thelibrary, which turned down an early settlement of-fer from Bronson, ended up getting nothing.

Maybe Charles Bronson meant so much to AudreyJoan Knauer that he really belonged in her innercircle. Or maybe Knauer’s family meant so little toher that they were way out in the ring with the guyfrom Turkmenistan. But, if Knauer had thoughtmore clearly about who meant what to her...even ifshe loathed her family, she probably would havegiven the library the first crack at the money. Butnot thinking clearly didn’t mean she was crazy.

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It’s hard to say what constitutes “sound mind”—as

we’ll see in more detail throughout this book. And,

for many people, it gets even harder when death

approaches. That’s why it’s important to think about

the concentric circles when you’re relatively young

and relatively healthy.

M O N E Y A N D L I F E E X P E C T A N C Y

When you start to think about family money, startby thinking about yourself—as critically as you can.In the course of your life, you can be both an assetto family money (by earning and investing well)and a liability (by spending lavishly or for a longtime). How much as each will you be? That de-pends, in part, on how long your life lasts.

In the 1,400 years from the fall of the Roman Em-pire to 19th Century America, the lifespan of anaverage person living in the most developed soci-ety increased just nine years—from 38 to 47. Inthe century since 1900, it has increased almost fourtimes as fast—to nearly 80. University researchersand other longevity experts predict that life expect-ancy could expand as far as 110 or even 125 yearsin the coming century.

This trend has had—and will continue to have—a

major impact on everything from the size and shape

of families to the best strategies for individual in-

vestment plans.

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Life expectancy charts used by insurance actuariesusually follow a complex pattern of calculating theyears a person has left, based on the age he or shehas reached or when he or she was born. For in-stance, a 40-year-old male can usually expect to liveuntil he’s 76; a 40-year-old female, until she’s 81.Some researchers say that 50 percent of baby girlsborn in 2000 will reach age 100.

Current projections are based on relatively straight-forward models with known variables. They don’ttake into account potential breakthroughs in thebiology of aging. More importantly, they have nobearing on how an individual lives—how manypacks of cigarettes a day you smoke, how manybanks you rob, how many quarts of bourbon youdrink, etc.

Nevertheless, governments and insurance compa-nies who bet on long-term trends want to knowhow long people can be expected to live. So, demog-raphers continue to develop more intricate com-puter models.

If you assume mortality rates will not decline, by2050 there will be 9.9 million Americans 85 andolder—the current low estimate of the Census Bu-reau. But, if you assume that the impressive 18 per-cent decline in the death rate seen in the 1970s and1980s will continue, there could be 27.3 millionpeople over 85 years old in the U.S. by 2050.That’s the Census Bureau’s high estimate—and apotential nightmare for Social Security and Medi-care. Nightmares for Social Security mean problemsfor most family finances.

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When Social Security was initiated in 1935, life ex-

pectancy at birth was about 61 years, and there

were 40 workers to support each retiree. Today,

according to federal figures, life expectancy is 76.9

years and there are three workers per retiree.

The system is financed by payroll taxes—6.2 per-cent of each worker’s paycheck goes to Social Secu-rity and another 1.45 percent to Medicare, for atotal of 7.65 percent. Employers also kick in 7.65percent per worker. So far, it has worked. But, withlife expectancy rising and Baby Boomers poised tostart retiring en masse around 2011, the system isheaded for trouble.

To forestall insolvency of the Social Security system(which includes the Old Age Survivors and Dis-ability Insurance fund and the Medicare health in-surance system), Congress has taken various steps.Most of them mean more work and fewer ben-efits for younger workers. For example: The federalgovernment is pressing up the age at which a per-son may retire with full benefits to 67 from 65.

In a society that finds a growing number of olderpeople using a shrinking supply of financial andhealth care assets, everyone has to make some deci-sions about where they will allocate their personalassets. The society as a whole also has to make thesedecisions.

One effect has already been felt: People are workinglonger. The median age of the work force in theUnited States increased 15 percent between 1980

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and 2000. And the average retirement age couldincrease several months per year over the nextfew decades as Baby Boomers gray, but stay in thework force. And this will remain the trend for along time; a full 80 percent of Baby Boomers ex-pect to work in retirement.

H O W M U C H W I L L Y O U N E E D ?

Most discussions about retirement planning focuson how much you will need to accumulate in orderto live in comfort. Make the maximum contribu-tion to your 401(k) or other tax-advantaged account.Invest wisely. Don’t borrow too heavily. These areall good points to remember...and they’ll help anyperson in any situation avoid mistakes.

For the purposes of this book, though, we are going

to suggest you plan for retirement in another way—

as if it’s a liability against (either real or potential)

family wealth.

Don’t turn away. This doesn’t mean you’re going tohave to live your last years as a hermit in a trailerwithout electricity or running water. It just meansyou need to think beyond your retirement to thering or two outside of your circle.

Of course, your retirement resources—like anymoney—are subject to some economic forces be-yond your control. Prime among these: Inflation,which can wipe out thousands of retirement dollarsevery year.

C H A P T E R 1

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A drop of even a few tenths of a percentage point in

the inflation rate can mean another year-plus of

solvency; conversely, a rise of a few tenths of a

point can rob years from your reserves.

This is a well-known reality for families with money:Inflation impacts people living on investmentsmore directly than people living on earned income(which reflects moves in the cost of living more im-mediately). Sure, you can invest your money moreaggressively—but aggressive investment meansrisk. Just ask all those people who were certain thateToys, Pets.com and JDS Uniphase were going tobuy them compounds in Kennebunkport or New-port Beach.

Invested money usually earns slow, steady returns.The steady part is great—and has the advantage ofcompounding growth; but the slow part can gethammered by a slip of the Federal Reserve’s hand.

One reliable average of investment returns (for ev-erything from savings accounts to hedge funds) inthe U.S. between 1940 and 2000 was 10.3 percenta year. That’s pretty good. It means that an averageperson could pull $30,900 a year out of $300,000in invested retirement money. That’s almost enoughfor a couple to live on from the mid-range sale priceof a house in a mid-range metropolitan area.

Inflation eats directly into the value of investment

return, though. How much inflation should an aver-

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age couple expect? One survey of economists pub-

lished in 2001 expected the low inflation of the 1990s

to continue through the 2000s—at about 2.7 per-

cent per year.

Net 2.7 percent out of the average 10.3 investmentreturn and you’re bringing home an inflation-ad-justed $22,800 out of $300,000 in investment prin-cipal. That’s a 26 percent chop off of gross invest-ment income. If the average couple is going to keepits principal for heirs, it’s going to have cut one outof every four dollars from its budget. Welcome tolife at the financial margins.

And things get worse if hard economic times meanhigher inflation. During the recession of the early1980s, the U.S. saw steady inflation of more than10 percent. What happens if inflation hits 12 per-cent? Then, on an inflation-adjusted basis, the av-erage person losing $5,100 on his investments—has to dig into principal to pay bills.1 That has badeffects for years to come, even when times get bet-ter.

This is part of the reason why people with a lot ofinvested money—even though they are rich andshould feel secure—act so conservatively aboutmoney. It’s a natural instinct in preserving princi-pal and the earning power of the principal.

1In truth, this is a bit of an exaggeration. The returns on mostconservative investments rise with inflation...though not always fastenough to make up the difference. All in all, inflation erodes thebuying power of people living on invested income.

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So, even though the number of North Americans with

at least $1 million in investable assets grew 2.4 per-

cent to 2.54 million in 2000, almost half of the Ameri-

cans asked think that $1 million is not enough to

retire comfortably.

More than half of people between the ages of 50and 53 surveyed by the Amercian Association forRetired Persons (AARP) expect an inheritance ofsome sort to help smooth their retirement. Thismeans that many Americans—already near retire-ment age—are positioning themselves as net con-sumers of family money. This is a bad sign fortheir children and grandchildren.

Which brings us back to the center circle. You needto think in terms of making your own retirementhappen without drawing more from the familysystem than you’ve contributed.

R E A C H I N G A C R O S S G E N E R A T I O N S

Family money is like a time warp. It doesn’t matterwhere you are in your own life’s course—you needto do all you can to contribute to the overall familyaccount. If you contribute effectively when you’rein your 30s, you’ll be able to withdraw more foryourself when you’re in your 70s without reducingthe balance left for your grandkids. If you help yourdad manage his money when he’s getting too oldto do it well for himself, you’re making money avail-able for your kids’ graduate school tuition.

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Reaching across generations can be a kind of im-mortality. Of course, some people twist that reachinto a bad thing. In February 2001, the SupremeCourt of New Jersey issued its decision in The JohnSeward Johnson 1961 Charitable Trust. The case wasone of the messiest family money disputes in thehistory of American law.

The case was merely one link in a long chain oflawsuits, all involving a dispute among the offspringof J. Seward Johnson, son of the founder of theJohnson & Johnson Corporation. In this episode,the beneficiaries of one of Johnson’s several trustschallenged the legal status of one of his grand-daughters. Fellow family members claimed that thegirl in question wasn’t really Johnson’s granddaugh-ter—and therefore wasn’t entitled to a share of a$350 million trust fund.

Johnson’s son, Seward Jr., divorced his first wife in1965. During the divorce proceeding, Seward Jr.acknowledged in writing that he was the father of achild named Jenia Anne Johnson—who was knownby her nickname “Cookie.” Specifically, Seward Jr.submitted a statement that read:

To Whom It May Concern: The Under-signed, John Seward Johnson, Jr.,...herebyunequivocally acknowledges paternity ofJennie Anne Josephine Johnson...born ofBarbara E. Johnson at Princeton, New Jer-sey, on January 11, 1961.

Later, Seward Jr. claimed that he had agreed to ac-knowledge the daughter quickly, without paternitytests, in order to expedite the divorce. That prob-

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ably seemed like the easiest way to make a bad situ-ation better. But Seward Jr. was part of one of thewealthiest families in America—so any decision hemade about family structure was going to impacthundreds of millions of dollars of family money.There wouldn’t be any easy out.

On December 20, 1961, Seward Sr. created an irre-vocable charitable trust (the 1961 trust), namingfour of his six children and 11 grandchildren as thetrust’s measuring lives. Cookie was named as one ofthose grandchildren.

In a trust, a measuring life refers to the lives of

individuals named by the founder whose deaths

terminate the trust.

With hundreds of millions in family money to man-age, Seward Sr. had decided to use a series of chari-table trusts as the means of moving the money tohis children and grandchildren. Under the tax lawsin place at the time, this was the best way to mini-mize the amount his family would have to pay thegovernment.

The 1961 trust was funded with 4,600 shares ofJohnson & Johnson common stock. Its terms di-rected the trustees to pay all net trust income to“educational, religious or charitable organizations”until January 10, 1997, or the deaths of SewardSr.’s four named children and 11 named grandchil-dren—whichever came first. After that, the trust-ees, in their “absolute and uncontroled discretion,”

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would distribute the trust’s proceeds to SewardSr.’s four children—Seward Jr., Mary Lea JohnsonRyan, Elaine Johnson Wold and Diana MelvilleJohnson Stokes—and “their spouses, and their is-sue, or any one or more of them.”

After Seward Jr. began divorce proceedings againstBarbara—but before the court entered the final di-vorce decree—Seward Sr. created another charitabletrust on December 31, 1963 (the 1963 trust). Thelanguage of the 1963 trust generally tracked thelanguage of the 1961 trust, except that the 1963trust expressly excluded Cookie.

The more time that passed from Seward Jr.’s di-vorce, the less committed he seemed to treatingCookie as his daughter. At one point, he describedher and her younger brother as “children of othermen.” But he never went as far as legally disavow-ing Cookie, either. He seemed content to let herstatus hang in murky uncertainty.

But this murkiness couldn’t continue forever. In themid-1990s, as the 1961 trust’s expiration date ap-proached, the trustees sought instruction from theNew Jersey court on several subjects, including:

• the interpretation of the term “issue”and who comprised that group; and

• whether the trustees’ understanding ofthe class of beneficiaries was correct.

Thirty-five years had passed. The “children” de-scribed in the 1961 trust were elderly—or had died.The “grandchildren” were adults, some in middleage, with children of their own. The value of the

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trust was then estimated at $350 million. SewardJr. couldn’t keep his equivocation about Cookie’sstatus in limbo with this much money at stake.

At an early conference on how the 1961 trust wouldbe handled, Seward Jr., his second wife and theirtwo children challenged Cookie’s inclusion as amember of the class of eligible beneficiaries. Cookie’scousins, Eric Ryan and Hillary Ryan (children ofSeward Jr.’s deceased sister Mary Lea) made a simi-lar challenge.

Despite the challenge, the trial court held thatCookie’s status as a child of Seward Jr. had beenconclusively and legally established in 1965. Thecourt further determined that she was an eligiblebeneficiary under the 1961 trust.

The Ryans and Seward Jr. appealed. The appealscourt ruled that Seward Jr. was barred from con-testing Cookie’s legitimacy. In effect, the court toldhim that he couldn’t renege on the legal acknowl-edgment he’d made in the 1960s.

But the question remained open about whether theRyans—the cousins, who had never acknowledgedCookie’s legitimacy—could question it now. TheNew Jersey Supreme Court agreed to make a rul-ing on this point.

T H E S T A T E P A R E N T A G E A C T

In 1983, the state legislature had enacted the NewJersey Parentage Act, which established the prin-ciple that “regardless of the marital status of theparents, all children and parents have equal rights

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with respect to each other.” It was also intended toprovide a procedure to establish parentage in dis-puted cases. Specifically, the statute states:

A man is presumed to be the biological fa-ther of a child if...[h]e and the child’s bio-logical mother are or have been married toeach other and the child is born during themarriage, or within 300 days after the mar-riage is terminated....

The state supreme court noted that, as indicated bythe legislative history, “[t]hese presumptions areintended to facilitate the flow of benefits fromthe father to the child.”

The presumption of legitimacy is one of the stron-

gest rebuttable presumptions known to the law.

Most courts require that it be honored unless over-

come by what the New Jersey court called “the stron-

gest sort of evidence.”

With that established, the court ruled:

We agree with the trial court that the Par-entage Act essentially forecloses a third-party attack on [Cookie]’s parentage. TheAct broadly accepts proof of paternity as“adjudicated under prior law,” as well as ina host of other settings.... Nor are we per-suaded that the doctrine of probable intentrequires a contrary conclusion or further pro-ceedings.

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Probable intent is a concept that courts apply to

trusts or contracts whose wording is unclear. But

the state supreme court ruled that this wasn’t so in

the Johnson case.

The Ryans argued, Cookie’s exclusion from the 1963trust indicated that Seward Sr. did not intend herto be a beneficiary of the 1961 trust.

But the state supreme court concluded that the in-ference of contradiction between the 1961 and1963 trusts formed an insufficient basis on whichto question Seward Sr.’s intent, which was unam-biguously stated in the 1961 trust.

Finally, the court had to consider the dispute in theframework of fundamental fairness (a big deal infamily money cases). On these matters, it wrote:

Although the social opprobrium once as-sociated with being a child born out ofwedlock has dissipated, the presumption infavor of legitimacy remains strong. Courtscontinue to rely on that presumption topromote our “oft-expressed policy of sup-porting the integrity of the family unit andprotecting the best interests of the child...[and the] child’s right to family identifica-tion.” Similarly, the doctrine furthers thepublic policy of favoring the establishmentof legal parenthood with all of its accompa-nying responsibilities.

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By design, the presumption of paternity in the New

Jersey Parentage Act was intended to prevent “ru-

mor, innuendo and whispers of illegitimacy from

creeping into the serious process of determining pa-

ternity.”

In essence, the Ryans’ claim required the court tobalance the re-examination of Cookie’s legitimacyagainst their right to question that legitimacy andthereby increase their economic gain.

With what sounds like some contempt, the courtwrote:

...the purported economic right to becomeeligible for an unspecified share of trustproceeds occupies a lower place in the hier-archy of rights as compared to a putativefather’s right to the parent-child relation-ship. ...[Cookie] cannot be Seward Jr.’sdaughter for only some purposes. By op-eration of law, the adjudication of SewardJr.’s paternity cements [Cookie’s] status asan eligible beneficiary under the 1961 trustabsent clear language to the contrary withinthe trust itself.

Cookie’s lawyers said that the ruling made a strongstatement about the integrity of family. “Once ahusband and a wife acknowledge the parentage of achild or it is determined in court, other people can-not intrude and raise questions about a paternity,”said attorney Robert Del Tufo.

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As we mentioned before, this case was only one ofmany involving the Johnson family. Seward Sr. hadmade some problems himself, in terms of familyintegrity, by marrying a Polish-born woman halfhis age—who’d worked as a cook and maid on his$30 million Princeton estate. Thirty-nine days be-fore his death, Seward Sr. amended his will, leav-ing most of his estate to his new wife.

His children, including Seward Jr., contested thiswill. That trial started the tabloid interest in thefamily’s affairs. The Polish wife considered SewardSr.’s children as greedy wastrels who squanderedmillions in inheritance. Stories of drug abuse, in-cest and suicide attempts filtered out from deposi-tions and testimony.

The heirs called family servants to testify—supportedby taped recordings of the Polish wife’s tirades. Inher heavily-accented English, she sounded like acartoonish caricature of a wicked stepmother (eventhough she was younger than most of SewardSr.’s children).

When all was said and done, the case was settledone day before it was considered by the jury.Seward’s new wife walked away with $350 million;the children split more than $40 million.

O L D - F A S H I O N E D N O T I O N S

The lawsuits and legal battling that took placewithin the family in the years after Seward Sr. setup his trusts make some people glad that they don’thave as much money—and as many problems—asthe Johnson & Johnson heirs.

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This may be part of the reason that some very richpeople—most notably, investor Warren Buffett andsoftware mogul Bill Gates—have said publicly thatthey intend to give most of their billions to char-ity. They want to avoid the generations of moneybattles that have beset families like the Johnsons.

But most people don’t have so much money to worry

about. And they do want to leave what they have to

children, grandchildren or other family members—

without creating small-scale versions of the

Johnsons’ problems.

The main lesson learned from the fight over CookieJohnson’s legitimacy is that legal status matters alot when it comes to money matters.

Although American society judges out-of-wedlockbirths less harshly than it did before the 1960s(there’s less “social opprobrium,” as the New JerseySupreme Court called it), the fact remains that out-of-wedlock or illegitimate births do make moneyissues more complex.

When out-of-wedlock births occurred primarily

among poor people, these complexities didn’t much

matter. But, as single-parenting becomes more com-

mon among middle-class and wealthier people, the

problems become a bigger issue.

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This is tough work. It’s easy for television writers tomake fun of social conventions and single mother-hood in a show like Murphy Brown. But real lifedeals with harder truths. Not all single mothers areas wealthy as that TV show’s lead character—and,in the real world, children born outside of marriagehave no immediate status as heirs of their fathers.This was part of the reason the New Jersey Parent-age Act was designed to support children trying toestablish paternity—not deny paternity, as CookieJohnson’s cousins were trying to do.

Not all fights over legitimacy involve hundreds ofmillions of dollars. More often, courts have tograpple with more mundane families—and moreordinary financial matters.

The January 2001 Ohio Supreme Court decisionEstate of Vaughan dealt with more mainstream—butno less agonizing—facts. The case actually started20 years earlier. In 1980, Deborah Ferrante filed apaternity suit against William R. Vaughan in juve-nile court. Ferrante wanted to establish thatVaughan was the father of her daughter, AngelVaughan.

At a hearing in October 1980, Vaughan entered aplea denying that he was Angel’s father. Severalmonths later, in early 1981, Angel’s parents reachedan agreement about the child. Vaughan entered aplea acknowledging paternity. Based on this, thejuvenile court determined Vaughan was Angel’s fa-ther and ordered Vaughan to pay Ferrante expensesfor pregnancy and childbirth as well as previousand current child care costs.

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Vaughan died in May 1981. As a result, the juve-nile court entered an order canceling its award ofchild care maintenance and support costs toFerrante.

In July 1981, Vaughan’s mother, JacquelineBradshaw, filed an application to administer her son’sestate. She identified Angel and herself as heirs toVaughan’s estate. The court appointed Bradshaw asadministrator and ordered that a fiduciary’s bondbe posted. Safeco Insurance Company of America,as surety for Bradshaw, provided bonds in theamount of $71,000.

Surety bonds play a big role in estate management—

especially when the estates are complicated. In short,

a surety bond is a kind of insurance policy against

mismanagement or malfeasance related to monies

that may be distributed among several people.

Courts require these bonds in certain situations.

In September 1981, Ferrante filed paperwork re-questing that the probate court appoint her asAngel’s guardian—for the purposes of negotiatingwith Vaughan’s estate. This was normal procedure.

Then, in March 1982, she didn’t want to be theguardian anymore so the probate court terminatedthe guardianship. A few days after that, Bradshaw—Vaughan’s mother—asked the probate court toamend the list of heirs, making her her son’s soleheir. Vaughan’s estate was quickly settled and theprobate court discharged Bradshaw and Safeco.

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Did Ferrante and Bradshaw make some kind of deal

to remove Angel from the estate? The court papers,

of course, didn’t say anything about that. But it

would seem to be a logical inference.

Almost 16 years later, in May 1998, AngelVaughan—having reached legal adulthood—fileda motion to reopen the estate of William Vaughan.She petitioned the probate court to vacate its judg-ment of March 1982, amending the list of heirs.She also asked the court to hold Bradshaw and Safecoliable for monies that should have been paid to her.

The probate court rejected Angel’s motion. So dida trial court. She appealed—and the Supreme Courtof Ohio agreed to consider the case. The supremecourt’s main issue: whether a juvenile court admis-sion of paternity is the equivalent of a probate courtlegitimation. In other words:

We are asked to decide whether WilliamVaughan’s juvenile court admission of pa-ternity conferred rights of inheritance upon[Angel] and thereby established her as thesole heir of Vaughan’s estate.

Angel claimed that Vaughan’s open-court admis-sion that he was her biological father resulted inthe establishment of the natural parent-child rela-tionship, which would vest her with rights of in-heritance by and through him.

The supreme court disagreed, and noted those cir-cumstances under which a child born out of wed-

2 6


lock could inherit from the natural father. Thosecircumstances included:

1) when the natural father designates thechild as his heir at law;

2) when the natural father adopts thechild;

3) when the natural father provides for thechild in his will;

4) when the natural parents of a childborn out of wedlock marry; and

5) when the natural father, with the con-sent of the mother, formally acknowl-edges in probate court that he is thefather of the child.

William Vaughan had done none of these things—his admission in juvenile court didn’t meet any ofthe law’s requirements.

The Ohio court held that Vaughan’s admission ofpaternity during a juvenile court proceeding didn’tconstitute a legal admission of parent-child rela-tionship “sufficient to vest [the] child with rightsof inheritance.” Angel was out of luck.

Clearly, the law can be pretty harsh when it comesto determining who’s family. That’s why it’s impor-tant—especially for people with blended or non-traditional families—to make a clear statement ofinheritance. And, as we saw in the Charles Bronsoncase, this doesn’t have to be a formal legal docu-ment. (We will consider the mechanics of wills inChapter 3.)

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D O W N , N O T S I D E W A Y S

Even people whose families have a traditional struc-ture are occasionally surprised with an inheritancedecision that goes against their plans. So, no onecan afford to be thoughtless about their estate plan-ning.

In most states, probate law assumes a much morelimited notion of what “family” means thanpeople who get their legal training from televisionshows might guess. The August 2000 OklahomaAppeals Courts decision in Estate of Dale J. Smithdealt one person a familial shock.

Dale Smith and Joe Smith were brothers. Jim C.Smith was Dale’s only child. Dale and Joe owned atotal of approximately two-thirds of the shares ofstock of Wood Oil Company, an Oklahoma corpo-ration. Together, they had controling interest in thecompany—separately, neither owned enough sharesto control.

The brothers had signed a shareholder’s agreement—

essentially a contract between them—that stated

certain terms under which they had purchased and

would keep or sell their shares. Joe claimed that

these terms included an option for him to buy Dale’s

Wood Oil shares in the event of Dale’s death.

When Dale died in 1999, his son Jim was namedpersonal representative (Oklahoma’s version of anadministrator) of the estate. So far, that was fine.

2 8


The trouble started when Jim told his uncle that hewasn’t going to sell his father’s shares in Wood Oil.Joe filed a lawsuit contesting Dale’s will. Jim askedthe court to dismiss his uncle’s contest on theground that Joe was not a “person interested” inthe estate, as required by law.

On the other hand, Joe’s theory was that, becausehis brother’s will granted Jim the power to sell hisstock, Joe’s rights under the shareholder’s agreementwere violated. This made Joe a “person interested.”

The probate court noted that, although “[a]ny per-son interested in a will may file objections...[to be]determined by the court,” not every person is a “per-son interested.” That was for the court to determine.

The court—which was limited in its scope to con-sidering the issues related directly to Dale’s estate—couldn’t find anything in the estate documents thatsuggested his brother had an option to buy his WoodOil shares. In fact, it didn’t find anything that gaveUncle Joe any legal standing in the estate. Okla-homa law granted status instantly to spouses andchildren—but didn’t give any special legal posi-tion to siblings of people who’ve died. It agreedwith Jim and denied Joe’s contest.

Joe appealed, arguing that the shareholder’s agree-ment he and Dale had signed should be includedin the estate. This argument failed to convince theappeals court. It concluded that Joe would have tosue Dale’s estate separately:

Whether Joe or [Dale’s son] is successful inthe independent action relating to the va-

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lidity of the stockholder’s agreement is notmaterial to this appeal. Dale’s stock in theoil company is a part of the property of theestate. That stock is subject to the restric-tions contained in the stockholders agree-ment, if it is valid. Otherwise, those restric-tions will not be enforceable. This is some-what similar to the rights of a creditor whoseclaims are disputed.

So, Dale’s will would stand. As far as the probatecourt was concerned, the Wood Oil shares wereproperty like any other property—and Jim was incharge of what would happen with them.

To support its ruling, the appeals court referred tothe 1933 Oklahoma case McVoy v. Lewis, in which asurviving sister, nieces and nephews contested a deadwoman’s will. The will granted all of the decedent’sproperty to her grandchildren, because she hadoutlived her own children. When the case reachedthe Supreme Court of Oklahoma, the court madethe following points:

1) the only persons who may contest theprobate of a will are persons having aninterest in the estate of the deceased;

2) in its legal sense...“issue” means descen-dants, lineal descendants, offspring; and

3) in [Oklahoma] statutes, grandchildren,being lineal descendants, inherit to theexclusion of a sister, nieces and neph-ews of the deceased.

This is why many lawyers wearily chant “inherit-ance flows down, not sideways” when extended fam-

30


ily members want to raise legal complaints. Unlessthey are specifically named in a will, trust or otherlegal document, siblings, cousins, in-laws and thelike are not considered “family.”

D I V O R C E A N D M O N E Y

There’s no doubt that the social changes of the sec-ond half of the 20th Century brought about im-portant changes in the way people live. Many socialcritics argue that one of the key changes has beenmore liberal attitudes toward marriage and divorce.The easing of legal barriers and social stigma allowspeople to get out of bad marriages more quickly.

On a social and psychological level, easier divorcemay be an improvement in the way people live.But on a financial level, divorce remains a majorproblem. It has been well established that divorcecreates financial hardship for everyone involved, butespecially for women and young children.

This hard reality reflects some little-realized legal

and financial facts—namely, that marriage exists

primarily in legal and financial contexts as a con-

duit for transferring wealth from spouse to spouse,

and from parent to child. Although divorce is well

established in the law, it still makes smooth

transfer...not so smooth.

The May 2001 Delaware Chancery Court decisionDoris Mitchell v. Betty DiAngelo offers a good exampleabout how deep this instability can go. And howlong it can last.

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Carl Jones and Betty DiAngelo were married in1951. They had no children together. In June1968, Betty sought a divorce in order to marry an-other man. Carl’s attorney arranged for her to go toAlabama, where she obtained a written divorce de-cree dated June 28 and signed by an Alabama judgenamed F.O. Whitten. She married her second hus-band in Georgia the next day.

Shortly before she left Delaware for Alabama, Bettysigned a written agreement with Carl that statedhis payment to her of $5,000 would be a completesettlement of all of her rights to their marital prop-erty. He got the home, and by August 1968, Carlwas identified as a “divorced man.”

Betty and her second husband lived together untilhis death in 1987. Betty then began to collect So-cial Security benefits and a veteran’s pension as thatman’s widow. She married for a third time in 1990—but that marriage ended in divorce a year later.

Carl never remarried and had no children. He diedwithout a will in early 2000.

When Betty learned of Carl’s death, she calculatedthat she would be eligible to receive higher SocialSecurity benefits as Carl’s surviving spouse thanshe was receiving as her second husband’s surviv-ing spouse. She applied for an adjustment with theSocial Security Administration.

As part of the adjustment, the Social Security Ad-ministration asked for a copy of the Alabama di-vorce decree. When Betty wrote to Alabama for acertified copy of the divorce, she discovered that

32


the state had no official record of her divorce fromCarl and that Judge F.O. Whitten had been im-prisoned for issuing fraudulent “quickie” divorces.

Suddenly, Betty had a whole new legal strategy topursue. She filed legal papers in Delaware, claim-ing right to 100 percent of Carl’s estate—as hiswidow. She argued that, because the divorce decreewas void, her subsequent marriages were also void.And that she was Carl’s wife when he died.

On the other side, Carl’s family members (led byhis sister, Doris Mitchell, who was the administra-trix of his estate) argued that Betty should be pre-vented from denying the validity of the Alabamadivorce and her later marriages—and, thus, frominheriting Carl’s money and property.

Furthermore, Mitchell argued, the Property Settle-ment Agreement Betty and Carl signed as she wasleaving served as a release of all of Betty’s claimsagainst Carl’s estate.

The Delaware court agreed with Mitchell. In itsruling, the court pointed to The Uniform Pro-bate Code, which provides that:

a surviving spouse does not include (1) anindividual who obtains or consents to a fi-nal decree or judgment of divorce from thedecedent or an annulment of their marriage,which decree or judgment is not recognizedas valid in this State...; (2) an individualwho, following an invalid decree or judg-ment of divorce or annulment obtained bythe decedent, participates in a marriage cer-

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emony with a third individual; or (3) anindividual who was a party to a valid pro-ceeding concluded by an order purportingto terminate all marital property rights.

Put simply, the court held that subsequent mar-riages compromise a person’s status and right tomake a claim on the estate of a previous spouse—even if there has been an invalid divorce. The courtsaid:

...ubiquitous change in public attitude to-ward divorce in the last half century, andthe vastly different set of laws now in effectin this and other states, is reflected in moremodern opinions in the area.

In making its decision, the court pointed out theunique and troubling aspect about Betty DiAngelo’sclaim: She had waited more than 30 years—anduntil Carl had died—before she asserted any claimto a greater share of their marital property.

The court wrote that there would be a fundamen-tal unfairness if Betty were allowed both to ignoreher divorce and remarriage and to avoid the effectof her agreement to renounce her statutory right toCarl’s estate. She had lived her life since 1968 asthough she were divorced from Carl and fully en-joyed the benefits of that divorced status. Now thatCarl was dead and her marital duties to him hadterminated extra-judicially, it was too late for her toassert her rights as his spouse.

In the court’s final words, “...between Betty andCarl, equity and good conscience dictates that theybe left where they put themselves...in 1968.”

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L I N E S B L U R I N M A N Y W A Y S

Joe Smith’s assumptions about having a role in hisbrother’s estate—or Betty DiAngelo in her firsthusband’s—show that the “ubiquitous change” inthe social meaning of family isn’t only about fallingapart. It’s also about non-traditional coming to-gether. In a time of less certainty, some people willassume family ties that don’t exist.

The February 2000 Delaware state court decisionSusan Wagner v. Gordon Hendry involved yet anothervariation of assumed familial ties.

Briefly stated, the parents of a young man decidedto help out and facilitate the purchase of a home fortheir son and soon-to-be daughter-in-law. Theymade several business arrangements under the as-sumption that Susan Wagner, their son’s fiancé,would be a part of the family. But when Susan calledthe engagement off and moved out, those businesstransaction became a source of legal trouble. Susanwanted her share of the down payment back, andhad to drag her case to court.

She eventually got some of the money back, but itwasn’t easy. The deal had simply been too compli-cated and too conditional to do anyone involvedgood. Susan Wagner and her potential in-laws hadagreed to a business deal that would have requireda lot from family members—and they weren’t fam-ily.

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C O N C L U S I O N

The purpose of this chapter has been to offer yousome tools for thinking clearly about what your fam-ily is...and who belongs in it. We’ve also tried toshow how strict and conservative a view most fi-nancial institutions, laws and courts take in defin-ing “family.”

Again, it’s important to stress that the law’s strictconstructions aren’t just part of some political agenda.They go deeper than that. More than most peoplewould like to admit, families exist to channel re-sources (cultural, intellectual—and financial)smoothly from one generation to another.

It serves little purpose to rant against hard rules.The strict constructions of “family” in moneymatters are facts of financial life that must be recog-nized and dealt with effectively.

The rest of this book will concentrate on strategiesand tactics for doing so.

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C H A P T E R 2

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CH

AP

TER

ATTITUDES AND

APTITUDES

2

You’ve considered your notions of family—and madesome basic decisions about who’s in that group. Thenext step in effective planning is to do some criticalthinking about what kind of person you are andwhat kind of people your family members are interms of money management.

And don’t just laugh this off by saying “broke” or“incompetent.” The purpose of this step is to makedecisions about managing family money that arerealistic, given your own tendencies and those ofthe people who’ll inherit your family’s resources.

With members of the World War II generation pass-

ing their assets to Baby Boomers...and the Baby

Boomers, in turn, passing assets to their children,

more money will pass from one generation to an-

other in the first half of the 21st Century than the rest

of American history combined.

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A T T I T U D E S A N D A P T I T U D E S

No matter how unprepared you may feel, you’regoing to pass some kind of financial legacy ontoyour loved ones. It might as well be well thought-out. Managing family money, like parenthood, is aresponsibility that often forces self-centered peopleto become less self-centered.

So, you need to ask yourself: What kind of moneyperson am I? To prevent this question from spinningout of focus, consider how your finances relate toeach of the following common issues:

• Timeliness. Do you adjust your planswith the birth of children and grand-children; sale of a business, home orother large asset; marriage or divorce,death of a family member; change inguardian or relocation? Any of these ev-eryday facts of life can render your fi-nancial plans out-of-date.

• Organization. Do you have a detailedinventory of what you own, what youowe and where accounts or assets arelocated? Wills and trusts often includethese inventories; but they can becomeobsolete as circumstances change. That’swhy smart planners keep separate as-set inventories...and update them atleast once a year.

Make sure everything is on the list—cash, liquid in-

vestments, business interests, loans or notes, real

estate, collectibles, personal papers, etc.

C H A P T E R 2

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• Clear (or clearly-defined) title. Do youknow precisely who owns the assets inyour estate? For example: How is thetitle to any real estate structured? Areyou the sole title holder? Are you a jointtenant with a spouse? These matterscontrol how the assets are transferred.

• Communication. Do your family mem-bers know what you want? Many prob-lems arise because beneficiaries ordistributees (the heirs getting themoney) don’t know what the grantors(people leaving the money) wanted.

The confusion may begin before your death, if you

become incapacitated. This is why living trusts are

useful; they state how you wish your affairs to be

handled if you can’t speak for yourself. Without

something like this in place, you may force family

members to make quick, unprepared decisions about

your medical care...and the family’s resources.

• Beneficiary designations. How youdefine who gets family money can be-come an issue itself. Part of this is me-chanical: Naming a revocable trust as abeneficiary will usually force accountsto be liquidated and subject to incometax after you die. Part of this is personal:Naming specific heirs often meanssomeone doesn’t like the result.

• Life insurance. Simply buying a policywith an X dollar benefit isn’t enough.

4 0


Setting up the right structure can al-most double its value. If you name yourspouse as beneficiary, proceeds will goto him or her tax free at your deathbecause of the marital deduction—butany money left will be taxed at yourspouse’s death. If you transfer owner-ship of the policy to an irrevocabletrust—while you’re still kicking—theproceeds will go to the trust when youdie...and it pays less tax (usually).

• Gifts. One of the smartest ways to trans-fer money is to give it to family mem-bers slowly and steadily. You can giveup to $10,000 per year to any personfree of gift tax. (If you’re married, eachspouse can give $10,000.) Some peopleare hesitant to do this because theythink it means losing control. It doesn’thave to; but it will require financial dis-cipline over a long time...so you hope.

We’ll consider all of these matters in more detail aswe proceed through this book. The point of thisexercise is to help you realize what kind of moneyperson you are. Have you made plans that dealwith the seven issues we just described? If youanswered “yes” to all seven, you’re a conscientiousplanner who’s already ahead of the game; if you onlyanswered “yes” to one or two, you don’t like think-ing about money—and you need to start.

There are two kinds of people: accumulators ofwealth and distributors of wealth. The two are sim-ply different sorts of people—different attitudes and

C H A P T E R 2

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inclinations. Accumulators are savers and planners bynature. Distributors spend more than they save.

Of course, there are exceptions to that solute stance.It seems more accurate to say that different people—at different stages in life—may be savers or spend-ers. It’s certainly easier to accumulate when you’resingle and unencumbered than when you’re put-ting a couple of kids through college.

And even incorrigible distributors of wealth wantto leave their worldy goods to the people they careabout most. After all, someone who’s spent morethan he or she has saved over the course of a life-time should have a lot of cool stuff.

You can be a spender and a planner. In fact, if you

are a spender, you need to make a concerted effort

to plan...precisely because it may not come natu-

rally to you. If you’ve never done anything about

any of the issues we described in the previous couple

of pages, reread those pages. There will be more

information about what to do about each topic in

the coming chapters.

A T O U C H O F A G G R E S S I V E N E S S

Instilling the right attitude about family money inyour family members requires a certain aggressive-ness about using resources and financial devices.

The January 2000 Louisiana Appeals Court deci-sion in William Brockman v. Salt Lake Farm Partner-

42


ship et al. shows how one family thought creativelyabout using trusts to a practical end. And, despitethe courtroom losses that it suffered, the family’sattitude toward using family money influenced oth-ers.

Salt Lake Farm Partnership was a hunting club,formed as a corporation in the late 1970s whenTravis Oliver purchased a 3,200-acre tract of land.Oliver assembled 10 other men, all avid hunters, toacquire the land and develop it for hunting. Eachof the original members, including RalphBrockman, put up $20,000; the club financed thebalance of the $1.8 million purchase price.

Sometime prior to 1982, Ralph Brockman trans-ferred his share to a trust on behalf of his twosons and named his brother, William Brockman,trustee.

In 1982, the Salt Lake corporation restructured asa partnership. In addition to hunting dues, eachpartner was liable to make an annual capital contri-bution or capital call of up to $20,000; but, uponunanimous vote of the partners, a capital call of morethan $20,000 could be required. On the club’sbooks, these contributions would be kept in apartner’s capital account. The Articles of Partner-ship stated that, if a partner failed to meet a capitalcall, “the Partnership shall liquidate that Partner’sinterest.” Upon liquidation, the partner would getback 70 percent of his capital account, with thebalance forfeited to the partnership.

During the 1980s, Oliver purchased 80 acres ofland to the north of the Salt Lake tract. Although

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Oliver didn’t grant a lease or right-of-way to theclub, he allowed members free use of his adjacenttract for ingress and egress. This became the mainthoroughfare to the club’s property.

Incidents in other business dealings betweenBrockman and Oliver were straining their relation-ship by the late 1980s. By 1991, some partnershad withdrawn from Salt Lake, reducing the num-ber of partners to seven. This was also when theclub’s bank loan was due to expire—so, the part-ners would have to refinance.

In order to refinance, a $60,000 capital call wasnecessary. Final vote on the matter was set for ameeting in September 1991.

Prior to the vote, Ralph Brockman called and sentmemos to partners, expressing his dissatisfaction withthe direction Salt Lake was taking. He wanted aformal, permanent right of way across the Oliverproperty as a precondition to voting for the refi-nancing. Oliver assured him this would be arranged.

Neither Ralph nor William Brockman was able toattend the September 1991 meeting; after receiv-ing official notice of the meeting, Ralph gave a writ-ten proxy to another friend and Salt Lake member.The friend cast the Brockman Trust’s vote in favorof the capital call, which passed unanimously.

William Brockman received formal notice of thecapital call on October 3, 1991; Ralph, who’d beentraveling, received it a few days later. But Ralphwasn’t content with how things had gone while he’dbeen away. He felt that the lease Oliver offered the

4 4


club for the access road didn’t meet his demand fora permanent right-of-way. Ralph offered to pay only$30,000 from the trust on the capital call.

In November, Salt Lake offered Ralph $78,000 forthe trust’s capital account. He declined the offer.Salt Lake terminated the Brockman Trust’s intereston December 11, 1991.

William Brockman filed a lawsuit against Salt Lake,Oliver and several other members in January 1992.The trust sought 70 percent of its capital accountand other expenses. Alternatively, on the theory thatthe termination was invalid, the trust asked for ajudgment dissolving the Salt Lake partnership.

The case went to trial, and through the testimonyof the Brockmans, the Brockman Trust made thefollowing arguments:

• Consent to the $60,000 capital call wasinvalid because a proxy had beengranted by Ralph Brockman, who wasnot the trustee.

• Consent was also invalid because thetrust’s vote was specifically condi-tioned on acquiring a permanent right-of-way across the Oliver Tract.

• After the September 1991 meeting, SaltLake did not promptly mail meetingminutes to the Brockman Trust, thuskeeping it in the dark and denying itthe ability to act more quickly to pro-tect its interest.

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• Salt Lake undervalued the BrockmanTrust’s capital account.

Because Ralph had consistently voted the partner-ship shares that were owned by the trust, the trialcourt had a hard time accepting these rather slypoints. It issued directed verdicts rejecting all theBrockmans’ claims. They appealed.

The appeals court wasn’t much more sympathetic.It ruled that reasonable jurors would have inevita-bly concluded that William delegated legal votingauthority to Ralph, and that Ralph therefore hadthe apparent authority either to cast this vote him-self or grant a proxy to a trusted friend and partner.

The appeals court did rule in favor of the BrockmanTrusts on one count. It wrote:

Even though the trust failed to prove fidu-ciary breaches, intentional misdeeds and theright to be reinstated into Salt Lake, itshowed that upon termination it was owed70 percent of its capital account. The trustintroduced sufficient evidence to cast doubton [Salt Lake]’s final calculation.

So, the trust could make the case for a larger reim-bursement from Salt Lake. Despite RalphBrockman’s untenable claims, he had been smartand aggressive about putting his partnership sharesin the trusts for his sons.

T H E E F F E C T S O F C O M P O U N D I N G

Although there may not be any profound moraldistinction between spenders and savers, savers have

4 6


one key tactical advantage over spenders. Theytend to be on the winning side of compounding.

Compounding is the most important financial toolyou can use. In short, it is the progressive effectthat earning interest (or, on the other hand, payinginterest) has over a long period of time. It’s likeputting two rabbits in a room and coming back tofind that they’ve multiplied to 20. The longer you’reout of the room, the more rabbits you get.

Money works the same way. If you put it in theright place and give it time, it will multiply.

For the saver, incremental growth is the key to accu-

mulating wealth. Usually, the effect of compound

earnings over 20 or 30 years of steady investment

will mean as much—if not more—than any individual

investment decision.

For the spender, the flip-side advice is: Avoid debt.Compounding can work against you as steadily as itcan for you. The paths to many personal bankrupt-cies are paved with finance charges. And financingfinance charges. If you’re moving balances fromcredit card to credit card...or to equity lines or otherloans...stop financing new purchases. Take thecredit cards out of your wallet. If you don’t trustyourself even then, cancel all but one or two ac-counts or pay cash.

If you’re able to put away some true savings (afteryou’ve paid off your consumer debt) at the end of

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4 7

each month, congratulations—you can skip the nextfew pages.

If you don’t have enough money to pay your billsat the end of each month, or if you want to savemore than you are now, there are only two waysto fix your problem: make more or spend less.Earning more is tough and usually relies on exter-nal factors (the job market or investment market).Spending less is the best way to improve your fi-nancial health. First, ask yourself: Where does allof your money go?

Answering that question takes a bit of work, butit’s a key step to building family wealth.

K E E P D E T A I L E D R E C O R D S

There are long books dedicated to the practice ofmaking household budgets. We suggest a mechani-cally simple process for checking your finances.

To start, buy a small receipt book. A notebookwill work...a day-planner is great. Also, buy onepacket of blue pens and one packet of red ones.Keep one red pen and one blue pen with your re-ceipt book at all times.

Second, for one month, collect receipts for everydollar you spend. From whatever tomorrow is tothat same numbered day next month, ask for a re-ceipt or make one for yourself every time you handanyone cash, a check or a credit card.

Third, tally your expenses. Put the receipts in thereceipt book at least once a day. Using the red pen,

4 8


list the expenses—amount, date and party paid—in the book at least every other day…in a clear,chronological order.

Include everything—from the 50 cents you gaveyour daughter for an ‘NSync sticker to the $2,500check you wrote for this month’s mortgage pay-ment. Include deductions taken from yourpaycheck...and note the fees added to things likemortgage payments.

Fourth, make a note in blue of every deposit youmake into your bank account (if you have multipleaccounts, focus this effort on whichever one youuse primarily). Count every kind of deposit in thislist—salary, bonus, dividends, transfers from otheraccounts, loans from college friends, money fromyour aunt. Try to keep the deposits in chronologicalorder with the expenses...but don’t sweat it if theorder gets a little mixed up. The main point is toinclude everything.

Keep these records for the full month. Resign your-self to being an anal-retentive bean counter. At theend of one month, it’s time for analysis.

The main question: How do the blue total and redtotal compare? Don’t be surprised if the red total islarger. This is usually explained by credit cards,lines of credit and interest expenses. If you net outpayments (usually by check) to consumer financecompanies, you should end up with numbers thatcome close to matching.

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A caveat: If credit card charges account for more

than 20 percent of your total expenses, you’re prob-

ably using the things too much...and should be

cutting back.

Once you’ve balanced the account, you can beginto characterize the ways you spend your money.Go back through your list of red expenses and giveeach expense one of the following numeric codes:

1—Shelter. This includes rent on yourstudio, mortgages on your homes. In-surance. Furniture. Repairs and main-tenance. Utilities. No taxes—they goin their own category.

2—Transportation. This includes carpayments, car insurance, gasoline,repairs and maintenance. Bus or trainfares, the chauffeur’s salary. The ’66 Tri-umph you’re spending weekends restor-ing probably fits somewhere else.

3—Food. This includes groceries andkitchen-related expenses like waterservice, etc. This should not include thecosts of eating out, though some peoplecount prepared food they bring home.It should definitely not count discretion-ary items like gourmet coffee on theway to work each morning.

4—Health. This includes health insur-ance premiums, if you pay them your-self or they are deducted from your pay-

50


check (the paycheck stub should breakout the details). It also includescopayments or deductibles that youpay out of pocket, money you spendon drugs—prescription or not, and ex-penses for seeing chiropractors, thera-pists or anyone else who tends to yourwell-being.

5—Education. This includes the costsof your education or your children’s.Student loan payments, tuition, schoolsupplies (including uniforms, after-school activities or day care expenses).

6—Taxes. This includes everything youpay directly to the federal, state or lo-cal governments. Include income taxeswithheld from your paycheck (and item-ize that, breaking out federal, state andother, if you like). Also include prop-erty taxes that are impounded (that is,included) in any mortgage payments.Leave out sales tax for this exercise.

7—Retirement planning and savings.This includes contributions to retire-ment plans—tax-advantaged or not;and money that you deposit each monthinto a savings account. Again, you mayhave some of these expenses deducteddirectly from your paycheck—so lookat that stub.

8—Recreation. This will be the firstof several broad categories. It shouldinclude things like health or countryclub memberships, athletic equip-

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ment, hobby supplies, collections, etc.Most people who use this system in-clude travel and vacation expenses inthis category. The ’66 Triumph and itsattendant expenses probably goes here.

9—Entertainment. This includes eat-ing in restaurants; drinks with friends;concerts, plays, sporting events ormovies; videos you rent, books, maga-zines or newspapers you buy. It alsoincludes gourmet coffee, lunches,online computer services or member-ships, etc.

10—Clothes. Everything that youwear—whether functional or outra-geous—goes here: work clothes,weekend clothes, funky thrift-shopcoats, Armani tuxedoes, Nikes. Mostjewelry. Dry cleaning and tailoring.

11—Communication. This includesyour home phone bill and—impor-tantly—any cell phone bills. Also, youprobably should include things likehome DSL lines and/or Internet servicefees, answering services, if you usethem, pagers, phone hardware, etc.

12—Religious and charitable dona-tions. This may include cash contri-butions and pro-rated commitments(for example: one-twelfth of an annualgift that you’ve promised). The pro-rated commitment may be a little toughto calculate; keep it to actual pledgesthat you’ve made. Usually churches or

52


charities will send you some kind of pa-perwork describing the commitment.

13—Interest and finance charges.This includes interest on consumerdebt—credit cards and the like. Itshould also include bank fees chargedto your account and finance charges forthings like cash advances and special-ized transactions. It includes late feesfor tardy payments. You don’t need toinclude interest on things like mort-gages or margin loans...though somepeople do.

You may feel that particular expenses deserve theirown categories, or that these 13 categories don’t dojustice to your complicated life. But the purpose ofthis exercise is to make basic conclusions aboutwhere your money goes.

Most people spend roughly:

• 35 to 40 percent of their net incomeon shelter

• 10 to 15 percent on transportation

• 10 to 15 percent on food

• 10 to 15 percent on medicine andhealth

• 5 to 10 percent on savings

• 5 to 10 percent on recreation

• 5 to 10 percent on entertainment

• 5 to 10 percent on clothes

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• 5 to 10 percent on education anddaycare

• less than 5 percent on communication

• less than 5 percent on charitable do-nations

• less than 5 percent on finance charges

Use this list as an indication of trouble areas. If oneitem is way out of range, it may be a problem. Payparticular attention to the items near the bottomof the list. The expense categories that surprise morepeople are communications, entertainment and in-terest/finance charges. If any of these are more than10 percent of your monthly spending, you prob-ably need to cut back.

This exercise isn’t intended for people with urgentmoney problems. Make gradual, lasting adjust-ments rather than radical change.

C U R I N G B A D S P E N D I N G H A B I T S

Most of us have at least a few bad spending hab-its—whether we are inclined to be spenders or sav-ers. In many cases, a lack of experience with dailycosts of living leads to a certain level of volatility,which makes steady savings difficult.

What follows is a review of some of the worst, butmost common, spending habits that screw uppeople’s financial lives. Check your own habitsagainst these patterns. Pay close attention to thesolutions discussed and take control.

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Buying on credit is probably the worst habit youcan have. If you have it, you shouldn’t feel alone.American consumers have more short-term, unse-cured debt than any other group on the face—or inthe history—of the planet.

People who avoid using credit are sometimes seen

as cranks or eccentrics—people who aren’t willing to

play by the conventional financial rules. But there’s

a lot to be said for avoiding revolving consumer debt.

Borrowing money to buy things that lose value overtime means you lose twice—once in the interestcosts of borrowing the money and twice in the lostvalue (depreciation is the accountant’s term) of thething you’ve bought.

Consumer lending is designed to lull the con-sumer—namely, you—into a false sense of financialsecurity. That’s why Circuit City, Bloomingdales andNordstrom are happy to issue store credit cards.But credit cards are the worst form of borrowing.Once they’ve encouraged you to spend beyond yourcurrent means, they charge you anywhere from 15to more than 20 percent interest.

Break this habit by not buying anything on creditexcept your education, your car or your house.Everything else should be paid in cash or paid offwhen you get the credit card bill.

Keeping up with the Joneses is another bad habit.Thanks to a natural competitive instinct and bil-

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lions of dollars spent every year by advertising ge-niuses, we have been brainwashed into judgingourselves by whether we have the same materialgoods as our friends.

This is the familiar rat race of consumption—more

money to support a fancier lifestyle which then re-

quires even more money. And that word lifestyle

doesn’t just mean buying fancy cars and beach

houses. It applies to just about anything: the amount

of time you spend on the Internet; the number of

times you see your favorite band in concert; the

food you eat, booze you drink or clothes you wear.

Keep your mind on the long-term goal: Buildingand maintaining wealth that will last for genera-tions after your gone.

Buying without goals is the bad spending habitthat even careful people can suffer. For many people,making a good salary or inheriting some moneymeans feeling that they have to spend it to showthey’ve got it. This is the flip side of the debt prob-lem—and a variation of the status issue.

Rethink your personal and financial goals. In otherwords: Start saving more. In an economy thatlaughs at old notions of career stability, no one isdoing well if the main source of income is a salary.

Most people are fairly average financially—that is,they don’t make that much more or that much lessmoney than other people their age. It’s just that

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some people are better at using their money toreach their goals.

What should your goal be? Go back to your monthlydetail and look at how much money you put intosavings. Is it 15 percent of your income? It shouldbe. If it’s not...there’s your goal.

H E I R S A N X I O U S T O I N H E R I T

The November 2000 Wyoming Supreme Court de-cision in Estate of Constance Louise Fosler deals withsome of the psychological and emotional issues thatcan shape family money disputes. It serves as a cau-tionary tale for what can happen if you generate alot of money but instill the wrong attitudes aboutwealth in your family members.

Constance Fosler died in December 1998, leavingan estate in excess of $19 million—and no will.Her only surviving relatives were first cousins andtheir descendants. The question was how to fairlydistribute the assets among the heirs.

The court construed state law to require distribu-tion to the nearest living relatives (the first cousins)as the root generation per capita and to their de-scendants per stirpes.

In this context, per capita means all those who would

receive an equal share of the family money; per

stirpes refers to the children or dependents of each

of the per capita people. The per stirpes beneficia-

ries get a subpart of a per capita share.

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Consider the chart below as an illustration of percapita and per stirpes shares:

Any solution would rub some part of the familywrong. And this one, although plenty wise, did.Daniel Fosler, a first cousin, ran the numbers andrealized that he could get more of Constance’s moneyby pushing for a different distribution.

Daniel filed a lawsuit, proposing a distribution planthat would give him and his immediate family abigger share than his cousins.

Once the case got some publicity, people startedcrawling out of the woodwork. In all, 26 relativescame forward to be recognized as the objects ofConstances’s far-ranging view—and funds.

Per capitadistribution

Per stirpesdistribution

Per capita distribution treats all living relativesequally; per stirpes tries to follow a family tree.

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When the court didn’t adopt the distributingmethod that would have given Daniel the mostmoney, he appealed.

Although Daniel took the most visible position ofConstance’s heirs, he wasn’t alone in taking aggres-sive measures to collect the most that he could. Allof the heirs were aligning and positioning them-selves with some and against others. It was a kindof Darwinian competitive ritual.

Daniel’s appeal finally ended up in the hands of theWyoming State Supreme Court, which had to ap-ply some dusty law to the group of conniving heirs.

The court had to scrutinize the laws referring topeople who die intestate, and it had to determinethe practical meaning of those laws’ language.

The court noted that neither the word cousin norcousins appeared in the statutory language. So,Constance’s cousins could only take by representa-tion as descendants of the uncles and aunts.

The court ultimately agreed with Daniel’s interpre-tation because “grandfather, grandmother, uncles,aunts” were specifically named in the state law. Thischanged hundreds of thousands of dollars in inher-itance among Constance’s relatives. And it meantDaniel had prevailed in the Darwinian battle.

The Wyoming Supreme Court admitted that its de-cision might seem harsh to some observers:

...we recognize that many state legislatureshave adopted intestacy provisions which

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identify the root generation as the nearestgeneration with living members. However,our 131-year-old statute and case law donot support such an interpretation. ...Al-though some may perceive this result asbeing unfair, others may well conclude thatthe statute accurately reflects what the ma-jority of people would intend. However, wecannot revise the statutes through interpre-tation to satisfy our individual views of con-temporary family ties and equitable distri-bution.

Keep this statement in mind when you think aboutbuilding family wealth. In many ways, saving andmaintaining the money is the easier part—raisingfamily members who understand and agree withwhat you want to do is harder.

If you count on the courts...or God...or fate to dis-tribute money, there’s a good chance your heirs willend up battling each other for every additionaldollar. And the courts may begrudgingly refer toancient laws that reward the pushiest partisans.

R E T I R E M E N T . . . A N D F A M I L Y

This book isn’t about retirement planning. But, ifyou are trying to build or maintain family wealth,you need to think about your own old age. Thegood news here is that the same perspective thatyou need for maintaining family money—makingconservative money decisions, keeping your eye onlong-term goals and having at least a workingknowledge of legal/financial devices like wills,trusts and investment accounts—will also help youmake sure you have enough to take care of yourself.

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The main devices that most Americans use for re-tirement planning (other than Social Security, whichwe’ll talk more about later), are the tax-advantagedsavings plans known by the following names:401(k), IRA, Roth IRA and Keough. These plansare the best and easiest way for people to save moneyfor their old age.

The plans are designed to encourage the slow, steadyasset growth that takes advantage of compoundingvalue. There are limits to the amount of moneyyou can put in these plans—through the 1980sand 1990s, it was $2,000 per year in most cases.Several reform plans proposed in the early 2000sraise the limits to approximately $5,000 per year.

In some cases, your employer may match part orall of your contribution to these retirement plans.(This is usually offered as a benefit to attract andkeep good workers.)

Even if you don’t work at a traditional job—you’reself-employed, you’re staying home to raise kids oryou can afford to follow your bliss on your ownterms—you should still put money into one ofthese plans. Most banks and stock brokerages havethe paperwork for setting up individual retirementaccounts.

A big caveat: These tax-advantaged plans are not

very good for building family wealth. Each plan

varies slightly—but they all share the trait of taxing

the transfer of assets to anyone other than a spouse.

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So, from a family money perspective, the best wayto think of 401(k)s and the like is: The money youput in will be available on very good terms for youwhen you’re older. At that point, it will be moneythat you don’t need to take from family accounts.And it will give you a benchmark for making yourown retirement budget.

I S Y O U R 4 0 1 ( K ) E N O U G H ?

As we noted before, most people try to save be-tween 5 and 10 percent of their take-home pay forretirement (and other things—but retirement isusually the main concern). In many cases, saving10 percent of your net income will put you pastthe maximum tax-advantaged contribution to a401(k) or similar plan.

Many people put this money into a basic bank sav-ings account and then, periodically, move thatmoney in larger chunks to another kind of invest-ment (certificates of deposit, government treasurybills or bonds, investment accounts, etc.).

A common rule of retirement planning is that you’llneed 70 percent of your annual pre-retirementincome each year to live comfortably when you reachretirement. But most people can get by with lessthan 70 percent—especially if they’ve paid off theirhome mortgages before stepping back from therat race.

The problem with making general statements aboutretirement is that people head into it with all sortsof different assumptions about what they want.

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Some, having worked hard for many years in jobsthey didn’t like or for companies they didn’t re-spect, feel entitled to a very high standard of liv-ing. They want to drive nice cars, live in plush sur-roundings and travel as they please.

Others, having lived their lives keenly calibrated tothe society around them, see little more than con-tinuing to live in lockstep with the people theyknow. They want to live around their friends...orat least people like them. They want to belong toclubs. They want to follow traditional patterns ofresidence, activity and travel.

Others want to be around their families. Theywant to help raise grandchildren, -nieces or -neph-ews. They want to offer support and advice whenneeded. They look forward to becoming the matri-archs or patriarchs of large clans.

These are just three scenarios. There are hundredsof variations. All of them can be wonderful; all ofthem can be taken to extremes. And all of them cancost a lot.

The specifics of how you live your retirement usu-ally matter less than the attitude that you bringinto it. Try to avoid the rat race while you work,piling a lifetime of expectation and deferred gratifi-cation into your later years. You may find that, whenyou get there, you end up living another rat race—to do all the things you didn’t do when you wereyounger.

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As with all things in life, building family wealthinvolves a long series of choices. In this case, youmay need to make the decision that a decent condoin Miami or Phoenix allows you to play a lot ofquality golf—and keep your money earning. Letsomeone else give in to the need to consume con-spicuously in Boca Raton or Scottsdale. You havelonger-term goals.

In retirement, and in all of your life, the best way tobuild and maintain family wealth is to live beyondmoney. Earn it. Invest it. Respect it. But don’t fearit...or worship it. Or hate it.

C H A N G I N G F A C E O F R E T I R E M E N T

Another important thing to remember is that re-tirement—at least the version of it that dominatescommercial breaks during the evening news—is arelatively recent creation. Historically, people’sroles in family or other community changed as theygot older; but they didn’t bolt for Leisure Worldand 20 years of golf cart races. The elders remainedinvolved in the life of the village or clan.

We, as a culture, may be heading back that direc-tion. Through the 2000s and 2010s, American re-tirees will continue to retire to a higher quality oflife than those who’ve retired before them. But, start-ing in the mid-2010s, financial pressures on theSocial Security system in the U.S. will probably startreducing the benefits available to able-bodied el-ders. This will come as a shock to the more thanhalf of all Americans who’ve never even sat downto run the numbers about how much money they’llneed to live.

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Since you’re reading this book, you’re already aheadof that half. But, it never hurts to reiterate: Plan foryour retirement in tandem with your plans for man-aging family money. The better you do the one,the more you’ll have left of the other.

Specifically:

• Set savings goals;

• Don’t agonize over specific investments;

• Contribute the maximum to a tax-advantaged retirement plan;

• Realize that your expenses will change;and

• Accept working in retirement.1

In the end, retirement is a critical test of your atti-tudes about money because it’s usually your largestopportunity to plan carefully and act selflessly.You can teach your family members a lot—by les-son and by example—from the way you handlemoney and your own old age.

A T T I T U D E S A R E S U B J E C T I V E

The challenge to raising family members who shareyour attitudes about money is that attitudes aresubjective things. What your family considers ahealthy disdain for materialism, you may see as ir-responsibility. Of course, if you’re in charge of themoney, you can enforce your opinions...financially.But lording over family members is risky; you canmake enemies of the people closest to you.

1According to one AARP survey, more than 80 percent of BabyBoomers said they planned to work either full or part-time afterthey retire.

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Consider the August 2000 Texas appeals court de-cision in J. Howard Marshall III v. Don Cordes andCharles Koch. It’s hard to find a more colorful ex-ample of conflicting attitudes about money. EvenAnna Nicole Smith had a starring role in this drama.

In 1995, J. Howard Marshall III (Howard 3) filedsuit against the estate of his father, J. HowardMarshall II (Howard 2), who had died a few monthsearlier and left virtually all of his considerable wealthto another son, E. Pierce Marshall.

In December 1998, Howard 3 amended his law-suit to include Charles Koch and Donald Cordes asdefendants, alleging they used undue influence tocause Howard 2 to restructure his estate plan tosuit their purposes.

Charles Koch was the CEO of Koch Industries, Inc.;Donald Cordes was a corporate vice president andthe chief legal officer. Why were two executives froma large petrochemical company based in Kansas in-volved in an inheritance case taking place in Texas?The answer went back almost 20 years.

Howard 2 had amassed a fortune, based primarilyon his large investment in Koch Industries. In1980, a dispute arose among the Koch stockhold-ers. Two sides emerged, one led by Charles Kochand the other led by his brother, William Koch.

Howard 2 supported Charles Koch. Howard 3owned a relatively small stake in the company—approximately four percent of the voting stock—but it was the swing vote in the dispute.

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Howard 2 asked his son to vote his shares in sup-port of Charles Koch. But the son was inclined togo with the others for business reasons.

Angered by his son’s dissent, Howard 2 playedhardball immediately—threatening to disinheritHoward 3. In December 1980, the father and sonmet to discuss the matter. Howard 2 offered to buyHoward 3’s shares, which he did under interestingterms. Among them was the stipulation thatHoward 3 would not be left out of any estate plan-ning on the father’s part. His mother would alsoget an annual income of $100,000.

Howard 3 could demand the additional terms be-cause the $8 million sale price was far below fairmarket value (the others had offered him $16 mil-lion). The son was willing to accept the low pricebecause he wanted to resolve a number of familyissues with his father; the father seemed willing toput some bad times in the past and reach an ami-cable solution with his son.

By 1982, things started taking an ugly turn. Aseries of events led to an allegation that DonaldCordes, an attorney and executive at Koch In-dustries, and other execs at Koch had persuadedHoward 2 to rewrite his estate plan and renege onthe promises made in the stock sale. In Howard 3’slawsuit, it was discovered that Howard 3 had beenkept in the dark about a lot of things, and that hisbrother—Pierce—had been informed of everythingalong the way. Enough evidence surfaced to showthat Cordes and Charles Koch had conspired forthe benefit of themselves, Pierce and other KochIndustries execs.

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Although a trial court used the legal definition of“conspiracy” to dismiss Howard 3’s claims, the ap-peals court took a much more sympathetic view.That court concluded:

Howard [3]’s sale of his Koch Industriesstock to [his father] was a definitive con-tractual agreement between a father and ason who trusted him. Howard completelyperformed his side of the contract by deliv-ering the agreed upon shares. However, af-ter this contract the [father] breached hisside of the deal. In other words, the prom-ises and representations made to Howard[3] by his father were false and made withno intention of fulfilling the promises.

So Howard 3 won that round and was reinstated asan heir of his father’s estate. Had he been a goodson to his father? No one other than the twoHowards could answer that question. And the courtsdidn’t even try.

But the Marshall family was due for more trouble.Aside from having problems with one of his sons,Howard 2 did something else that often causesproblems when it comes to family money. Late inlife, he married a much younger woman.

In 1994, Howard 2 wed Anna Nicole Smith, a vo-luptuous model and former Playboy magazine Play-mate of the Year. He was 89 years old; she was 26.He lived less than a year after the marriage.

A side effect of Howard 3’s challenge to his father’s1982 will was that it gave Smith—who’d lost sev-

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eral court attempts to make a claim on Howard 2’sestate—a chance to get more of her husband’smoney. After all, she was his wife when he died.

This made Howard 3 and the former Playboy modelunlikely allies in legal battles against Pierce.

How much money was at stake? Some estimatesvalued Howard 2’s estate at $1.2 billion. Pierceclaimed it was only $60 million—but many of hispositions in the legal battle had been dubious.

In December 2000, a federal bankruptcy courtawarded Smith $475 million as her share of Howard2’s estate. But that ruling conflicted with othersthat had gone against her. Pierce appealed, citingthese conflicts. His lawyers looked forward to a longencampment...and millions of dollars in legal fees.

According to people who knew him, Howard 2 wasserious when he promised to Howard 3 that he’dtreat his children equally in his will. But the messthat followed—undue influence of corporate wraths,left-handed disinheritance, a last-minute mar-riage—suggests that he was a person who wasn’table to sort out his own values...let alone instillthem in his family.

D O G O O D G U Y S F I N I S H L A S T ?

Few families have as much money or eccentricity asthe Marshalls of Texas. But more than the money orthe weird facts, what stands out about the Marshall’scase is the thought of Howard 3—apparently a de-cent guy trying to make peace with his father—on

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the outside, having to ally with the Playboy modelto make his claim on his father’s estate.

That doesn’t seem right. And it may make youwonder whether decent guys trying to do the rightthing even end up on the winning side of moneydisputes. Do the aggressive jerks always win?

Not always. Although there may be dark momentsof greed or resentment in any human heart, a focuson building and maintaining family wealth...andsome skepticism about wanting money for its ownsake...position people to do well. The July 2000Minnesota Appeals Court decision in Estate ofLawrence C. Dahlheimer dealt with one such case.

Lawrence and Delvina Dahlheimer were first mar-ried to each other in 1936. They owned and oper-ated a farm in Dayton, Minnesota and had 11 chil-dren, including a son named Adrian.

Adrian lived on the farm since his birth in 1938,with the exception of four years when he served inthe Air Force. After 1961, he worked on the farmwith his father.

In 1983, Adrian bought a portion of his parents’land by contract for deed. The purchase price was$80,000, structured as $5,000 down and the bal-ance payable in monthly installments of $650 at 9percent interest until the contract was paid in full.Although Adrian did not make regular monthlypayments on the contract, his parents—the sellers—accepted his unpaid labor on the farm and occa-sional cash payments as sufficient to keep the notecurrent.

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In 1995, Lawrence and Delvina Dahlheimer begandivorce proceedings. Adrian had to relinquish hiscontract for deed claim so the land could be di-vided simply between his parents.

In July 1996, Adrian executed quitclaim deedsand reconveyed the land to his parents.

Lawrence and Delvina remarried in 1997—butLawrence died later that year. Adrian was left withnothing to show for nearly 30 years of unpaid laborand occasional cash payments to his parents. Hefiled a claim against his father’s estate for $334,907.50,seeking compensation for services rendered on hisfather’s farm from 1967 to 1997.

The probate court found that there was no writtencontract between Adrian and his father to com-pensate for his labor or financial contributions tothe farm. Thus, it dismissed his claim.

Unwritten agreements like the one between Adrianand his father fall into the category of what Minne-sota law calls “quasi-contracts.” The appeals courtnoted that, under quasi-contract principles, theright to recover is based in equity. The idea is toprevent unjust enrichment at the expense of some-one like Adrian.

Samuel Goldwyn’s famous quote about verbal con-

tracts not being worth the paper they’re written on

aside, many family squabbles get down to these

quasi-contracts. They are handshake arrangements,

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often loosely-defined, that stay in place for years—

in ways that non-family arrangements never would.

The lawyer for the father’s estate argued that, evenif Adrian hadn’t waive his right to bring a claim,his action was barred by the so-called “presump-tion of gratuity.”

Courts often presume that services rendered by anadult child are gratuitous so long as the child re-mains in the parental home. But the appeals courtpointed out that:

...the presumption may be overcome byfacts and circumstances from which an im-plied promise to compensate may be in-ferred. Here, [Adrian] provided extensiveand regular labor and financial contribu-tions to his parents’ farm.

In fact, during her divorce hearings, Adrian’smother had testified that he had “kept the farmgoing since 1983. ...[Adrian] has more than paidfor the deed in payment of kind.” The appeals courtagreed that Adrian’s labor and other contributionsto the farm fulfilled his contract for deed obliga-tion for 13 years. At $650 a month, this meant hecould claim at least $101,400 against his father’sestate.

It sent the case back to the lower court to deter-mine how to resolve Adrian’s legitimate claim.

The irony of the Dahlheimer case is that Adrianhad what many people would consider a healthy

7 2


attitude about family money. He selflessly did whatwas required to help his parents keep their farmand make money from it. When his parents werehaving marital problems, he did what they askedto help expedite an amicable separation.

Was Adrian Dahlheimer too casual about money?Wouldn’t he have been better served by being asaggressive as Daniel Fosler or Pierce Marshall?

No. Those others either lost their legal battles orwon—at best—measured victories. AdrianDahlheimer’s claims were ultimately vindicated instronger terms.

The best attitude about money to convey to yourfamily members combines a smaller part of the cre-ativity and aggressiveness that Louisianan RalphBrockman showed in using trusts to invest in a hunt-ing club with a larger part of the goodwill andselflessness that Howard Marshall III or AdrianDahlheimer tried to show in tough circumstances.

That’s a tough combination to accomplish. But, ifyou can do it, your family should be positioned todo well, financially.

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CH

AP

TER

THE VEHICLES FOR

TRANSFERRING

FAMILY MONEY

3

Avoiding family conflict is the main reason peoplecreate wills and trusts. But these financial deviceshave little meaning in and of themselves. That’s whywe spent so much time in the first two chaptersdiscussing more personal matters that affect fami-lies and their dynamics.

Now, you’re ready to dig into the details and me-chanics of how best to structure your estate.

There are two ways to move money effectively tofamily members:

• inter vivos transfers, or

• testamentary transfers.

Inter vivos transfers are made while the estate owneris still alive; testamentary transfers are made afterthe estate owner is dead. These transfers can be madein various ways—as wills, gifts, trusts or policy own-ership under rights of survivorship...all of whichwe’ll discuss in turn. First, let’s consider the mostcommon mechanism: wills.

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T H E V E H I C L E S F O R T R A N S F E R R I N G F A M I L Y M O N E Y

E L E M E N T S O F A W I L L

People often lose sight of the fact that the actualword—will—means exactly what it says: a way toextend your will, your intent and decisions, aboutfinancial matters into the future of your family fortheir benefit.

A will is a decision-making device, forcing you to

see that it becomes a precise legal tool that no one

can argue with, dispute or change easily.

Still, many people avoid making wills. They feardeath...or don’t want to “waste” time thinkingabout things that happen after they’re gone.

If, however, you fail to make your decisions knownand die without a will, legally you will have diedintestate. That means probate—the state’s bureau-cratic process of handling property—takes over.

A will not only gives you decision-making controlover who gets what but it also gives you controlover how and when they receive it. It conservesand distributes your assets and money according toyour wishes, names guardians for your minor chil-dren, etc., and generally minimizes the chances thatthings get screwed up.

There are two basic ways to write a will: either withan attorney or by yourself. And, if you write thewill yourself, there are several ways to proceed: youcan use a will kit or software that includes stan-

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dard forms...or, you can scrawl your thoughts on ascrap of toilet paper (in legal terms, this is called a“holographic will”).

Courts sometimes recognize poorly scrawled wills,

while tossing out carefully crafted lawyer’s work.

But, the scrap of paper approach is easier for angry

heirs to challenge, so it’s not a good idea if you’re

leaving people anything more than a few bucks.

Some of the items in a will include:

• your full name and principal residence,stated clearly;

• the date;

• a declaration that the document is awill;

• the names of your executor and sub-stitute executor;

• the names of guardians and succes-sor guardians for children or disabledpeople in your care;

• a list of your assets;

• which funds should be used...or assetssold...to pay estate taxes, and how theyshould be managed;

• bequests (general, specific and residu-ary);

• where you want to have your funeral,

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burial, cremation, etc.—or whether youdon’t want these ceremonies at all;

• a list of established trusts, includingnames of trustees and successor trust-ees; and

• your signature, made in the presenceof at least two witnesses with theirnames attached to the document.

T H E B A C K G R O U N D W O R K

The mechanics of a will aren’t complicated. Butwriting a will require an inventory of the thingsthat you own...and some basic decisions aboutwho should get what. This background work makesmany people shy away from the effort. If youthought compiling the guest list for your weddingwas tough, try choosing the family member or friendthat both you and your spouse agree will be able tofinish raising your two-year-old twins.

Start by using a basic personal inventory check-list. Not all of this information appears in a will,but it’s important to keep a list of your assets andliabilities so that your spouse, family, trustee or ex-ecutor can manage your estate properly.

The assets and liabilities listed in any will or trustthat you sign should include the following itemsand approximate values:

• Checking Account(s) __________

• Savings Account(s) __________

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• Certificate(s) of Deposit __________

• Safety Deposit Boxes __________

• Retirement Accounts __________

• Brokerage Accounts __________

• Insurance Policies __________

• Real Estate __________

• Other Investments __________

• Cars __________

• Household items,jewelry and collectibles __________

Total assets __________

• Mortgage and HomeEquity Loans __________

• Credit Cards __________

• Auto Loans/Leases __________

• Tax obligations __________

• Other personal debt __________

Total liabilities __________

As you review these possessions and obligations,there are a number of more general questions youshould consider.

Does your will reflect everyone you wish to cover?Has it been updated to reflect births and deaths,changes in tax laws and changes in your state ofresidence?

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Does your will address any charitable bequests youwant to make?

Do you take into account items that will pass out-side of your will, such as insurance policies and re-tirement plans?

Do you take care of bequests involving personalproperty that may have significant sentimental oremotional value?

Should you establish trusts or other means to lookafter your children’s financial assets, in additionto a guardian?

Will your beneficiaries have enough money to liveon while your will is in probate?

These questions aren’t as simple to answer as thebasic mechanical issues of drafting a will. And therearen’t any quick answers to them. Through therest of this chapter (and the rest of this book), wewill examine the various issues and how they canbe handled.

I F Y O U D I E W I T H O U T A W I L L

Some people, even those with considerable assets,remain cynical about what will happen with theirmoney after they die.

If you die intestate (without a will), the court willchoose the person responsible for wrapping up youraffairs. This person is called an Administrator, andmight not be the person you would have wanted.Often, a neutral lawyer is appointed, and must be

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paid with estate funds. A neutral person may notbe in any hurry to get things resolved.

A key point to remember: Probate is designed to

prevent fraud or abuse. It’s not designed for effi-

ciency or protection of wealth.

A quick way to consider probate is to look at whathappens under different family circumstances.Here are the ground rules if the person who dieswithout a will is:

• Married with children. The law in moststates awards only one-third to one-halfof the dead person’s property to the sur-viving spouse and the remainder tothe children, regardless of age.

• Married with no children. Most statesgive only one-third to one-half of theestate to the survivor. The remaindergenerally goes to the dead person’sparent(s), if they’re alive. If both par-ents are dead, many states split the re-mainder among the dead person’sbrothers and sisters.

• Single with children. State laws uni-formly provide that the entire estategoes to the children.

• Single with no children. Most statelaws favor the dead person’s parent(s)in the distribution of property. If both

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parents are deceased, many states di-vide the property among the brothersand sisters.

There are some good reasons for these statutorydistributions. If there is a will, the survivingspouse can usually renounce it and instead opt totake the share of the estate provided by state law.This is a legal device historically intended for theprotection of the survivor.

If a husband holds the title to the property himself

and writes a will directing it to his children by a

previous marriage, the second wife can file a peti-

tion in probate court to take her share of the estate.

In most cases, though, probate proceedings andstatutory distributions interfere with and dimin-ish the transfer of family wealth.

R E C I P R O C A L W I L L S

Most married couples (and, for that matter, unmar-ried ones) are smart enough to set up reciprocalwills. The concept is simple: Each partner writes aseparate will that is a mirror image of the other’s.Depending on where you live, the wills may be partof a single legal document, may reference each otheror may restrict changes made to one but not theother. Among other things, this device provides thesimplest form of parity and assurance that basic fi-nancial plans can be achieved.

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For married couples, reciprocal wills also sim-plify some tax issues. If the combined estates of bothspouses total under $675,000, the wills may be allthe tax planning they need. (If your combined es-tate totals more, however, federal estate taxes be-come a factor. More on this later.)

Updating wills is a challenge that requires twice asmuch effort. What happens if a beneficiary diesbefore the makers of the wills? The best solution:name contingent beneficiaries to bequests or specifythat if a beneficiary dies, his bequest is includedand distributed with the residue of the estate.

Most simple wills prepared for parents have a clauseto deal with a common disaster situation. Eachwill says some variation of: “All of my property tomy spouse, if he/she survives me by at least 30 days.Otherwise, all to the children.”

(There’s nothing special about using 30 days, butthe period should always be less than six months. Ifit is longer, the tax-free status of the property trans-fer to the surviving spouse could be lost.)

If either or both the wife and husband have chil-dren from a previous marriage, the reciprocal willsare usually not true mirror images. Each will has aparallel section that articulates the differences. Thisusually works—legally—but you need to have anestate lawyer review it before you sign it.

Differences—even minor ones—can make a big dif-ference when one spouse dies first (or is presumedto die first, in the case of a common disaster). Whathappens, for example, if a husband and wife with

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reciprocal wills die together in a car wreck? Theexecutor of the husband’s will sees that the wife didnot survive for 30 days after her husband’s death.She inherits nothing. The husband’s estate is di-vided among his children. They pay inheritancetax, but the logic of the transfer is clear.

Now let’s look at another scenario. Assume the com-mon disaster clause says something like: “If we dietogether, and the order of death cannot be deter-mined, my wife is presumed to have survived me.”This might sound ludicrous...but in some tax situ-ations it’s a good idea. Property must be left to thesurviving spouse, in order to take the unlimitedmarital deduction for calculating federal estatetaxes. If the spouses’ estates are different sizes buttotal over $675,000, this can mean a big tax break.

Now, go back to the aftermath of the car wreck.The husband’s executor distributes property as ifthe wife were still alive. Never mind that she livedonly a minute longer; she gets everything. Thehusband’s money is lumped in with the wife’s prop-erty. Her will doesn’t mention the husband’s chil-dren from a previous marriage (as his didn’t hers).All of her assets, including her husband’s, go to herkids, according to her will. His kids from the pre-vious marriage get nothing.

Most states have adopted the Uniform Simultaneous

Death Act to avoid these problems. The law dictates

the order of death when parents die together. It is

used only when the spouses’ wills say nothing about

who survived whom—or if there are no wills at all.

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C O M M U N I T Y P R O P E R T Y

The term community property often comes up indiscussions about estate planning (and divorce). Itis a form of property ownership derived from Span-ish law—solely between husband and wife—recog-nized in Arizona, California, Idaho, Louisiana, Ne-vada, New Mexico, Texas, Washington and Wis-consin. (The other states are common law states,using a different set of laws regarding their maritalproperty ownership system.)

Specific community property laws differ greatlyamong these states, but the defining feature is this:Irrespective of the names on title documents, own-ership of (almost) all property—including incomefrom wages and self-employment—acquired dur-ing marriage by either spouse is automatically split,so that each spouse owns a separate, undivided one-half interest.

In terms of community property, an undivided in-

terest is one in which each spouse has half owner-

ship of the whole pie, rather than full ownership of

only half of the pie.

Property acquired by a spouse separately andbrought into the marriage remains separate. Prop-erty acquired by gift or inheritance, or in exchangefor separate property or money, also remains sepa-rate. The income, if any, the separate property pro-duces is treated differently. In California, for example,separate property income remains separate property.

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In Texas, however, income produced by the sepa-rate property of one spouse becomes communityproperty.

Each spouse is free to dispose of his or her half ofcommunity property in a will. It does not auto-matically pass to the survivor, as it would if ownedjointly, with right of survivorship. Of course, thedeceased spouse’s federal taxable estate contains hisor her half of the couple’s community property.

In common law states, the 50/50 outcome that fre-quently occurs in divorce settlements is not auto-matic. The goal of the court in these states is sim-ply to be fair.

O F S O U N D M I N D

Under the law of most states, the person making awill must be of sound mind. He must understand,for example, that he has three children and fourgrandchildren, who would naturally be those towhom a person would leave his estate. (But thatdoes not mean he must do so.) Additionally, he mustbe aware that, by signing the will, he is making afinal disposition of his property.

The will maker is not required to be smart or wise or

reasonable or fair. He must only know what he is

doing and, if he does, the law will respect whatever

disposition he cares to make, subject to lawful claims

that must be paid first, and the rights, if any, of the

surviving spouse.

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Most wills recite that the maker is of sound mind.The law tries hard to reject claims that the makerwas mentally-impaired or under undue influenceor duress. If a will is thrown out, the estate ishandled as if there wasn’t one to begin with.

C O D I C I L S

A codicil is an amendment to an earlier legal docu-ment. Written additions or changes are usually notmade on an original document. Instead, a separatepage is prepared, referring specifically to the origi-nal and executed with the same formalities requiredof a will or other document.

Codicils are usually best used to address legal tech-nicalities or things like typographical errors in theoriginal document. Any substantive changes—likenew beneficiaries added or others removed—shouldmean drafting a whole new document.

At this point, one basic piece of common sense bearsrepeating: Read your will thoroughly before sign-ing it. For one thing, this will help establish thatyou are, in fact, of sound mind. For another, it shouldhelp avoid the need for things like codicils. It’s nosecret that most law offices use form documents,such as wills they’ve previously drafted for others,as models for subsequent clients. It would be ineffi-cient to reinvent the wheel every day; you are pay-ing the attorney for guidance in formulating andimplementing a plan, not for typing the plan. How-ever, editing mistakes can occur (these are some-times the typographical errors that need to be fixedby a codicil). If something is not right, or if youhave any concerns, don’t be afraid to speak up.

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H O L O G R A P H I C V S . W I T N E S S E D

Contrary to popular belief, many states do not per-mit handwritten, “holographic,” wills. For one tobe legal, at least three competent witnesses musttestify that they believe the will was written en-tirely in the handwriting of the person whose willit purports to be and that the signature was writtenin the handwriting of that person.

At least one witness must testify that the will wasfound after the person’s death among his valuablepapers, in a safe-deposit box or other “safe place,”or that the person had left it with someone for safe-keeping.

An attested will, on the other hand, is written andsigned by the person making the will, or someoneelse in his presence, and attested by at least twocompetent witnesses. State law says the witnessesmust sign the will in the presence of the personmaking the will but need not sign in the presenceof each other. It isn’t necessary for the will to bewritten in the presence of the witnesses. But theperson making it must signify to the witnessesthat this is his will and sign it in their presence oracknowledge to them that the signature is his if hehas already signed it.

When the person dies, the witnesses must appearbefore a court representative to testify that the wit-nessing signatures on the will are theirs.

Most state laws do not require either holographicor attested wills to be notarized.

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A self-proved will is hardest to question or con-test. This kind of will must be written substantiallyin the words specified by state law, signed by theperson making the will in the presence of a notarypublic and two witnesses under oath, signed bythe witnesses, and signed and sealed by the notary.

The most famous fight over a holographic willinvolved the so-called “Mormon Will” of reclusivebillionaire Howard Hughes. Hughes died in 1976,leaving an estate estimated between two and threebillion dollars—and no apparent will. When a ho-lographic will emerged on a desk in the office build-ing of the Mormon Church, gossip and conjec-ture ran rampant.

Among the provisions of this alleged will was onethat gave one-sixteenth share of the estate—or $156million—to Melvin Dummar of Gabbs, Nevada.

Years before, Dummar had owned a small gas sta-

tion in southern Utah. During that time, he claimed,

he’d picked up a ragged old hitchhiker who said he

was Howard Hughes. Dummar had given the old

man a ride into Las Vegas, dropped him off at the

Sands Hotel and left him some spare change.

To make a long story (which was made into a funnymovie called Melvin and Howard) short, a Nevadacourt found Dummar a kook and ruled the will aforgery. In the meantime, Hughes’s estate had toendure months of trial and spend millions of dol-lars defending itself from a bizarre fate.

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A more recent dispute over a holographic will isthe Estate of Pearl McCormick. The case began whenMark Lukas and his wife bought a home across thestreet from an elderly lady named Mearl Stiller. TheLukases and Stiller became friends and, in 1988,Mark agreed to become Stiller’s legal guardian. Shewas getting forgetful and needed someone shetrusted to help manage her affairs.

Stiller’s main estate document was an inter vivostrust naming her sister, Pearl McCormick, benefi-ciary. Stiller died in January 1989, and McCormickbecame the owner of the trust’s assets, valued atapproximately $300,000. McCormick failed to ex-ecute a will of her own, though; her attorney,Stephen Hodsdon, never drafted one because hequestioned McCormick’s testamentary capacity.

Frustrated by her lawyer’s delays, McCormick gotLukas to help her draft a holographic will in Octo-ber of 1989. The will provided that $40,000 begiven to an English relative of McCormick’s deceasedhusband, with the remainder going to the Lukases.

McCormick died in January 1997, following a pe-riod when she was indisputably not of sound mind.By June, her distant cousin, Lorraine Bowdoin, un-expectedly emerged to take control. The court ap-pointed her as personal representative of the estate.

Lukas filed McCormick’s holographic will in Octo-ber, and a month later, he filed an inventory andaccounting of his conservatorship and a petition toprobate the holographic will. Bowdoin quicklyfiled objections.

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In January 2000, a probate court ordered Lukas topay Bowdoin $40,420 in attorneys’ fees and$10,263 in personal representative fees resultingfrom the will contest and litigation. Lukas appealed.

The court later disallowed the holographic will, adecision no one appealed. So, the dispute focusedon whether Lukas had to pay the fees to Bowdoin.

On appeal, Bowdoin argued that, because Lukashad acted in bad faith toward the estate, she shouldbe allowed to recover attorney and personal repre-sentative fees from him personally. Lukas arguedthat he should not be surcharged as a fiduciary be-cause he was not a fiduciary when he offered theholographic will for probate.

This was a tough claim. Lukas had the dual role ofconservator and beneficiary of the estate. Lukaswas not precluded from filing the holographic willbecause he was conservator; but, as beneficiary ofthat will, Lukas had a natural interest that mightnot be the same as the estate’s. The appeals courtconcluded that Lukas filed the will in his capacityas beneficiary, and that such filing did not vio-late any fiduciary obligations he owed as conserva-tor. He didn’t have to pay Bowdoin.

But Lukas had also hoped to recover his attorneys’fees from the estate. The probate court had deniedhis motion on this matter. And the appeals courtagreed, writing:

Lukas was aware that when the holographicwill was drafted McCormick’s testamentarycapacity was highly questionable. Never-

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theless, he allowed McCormick to draft thewill.... Because Lukas was aware that thevalidity of the will was speculative, the [pro-bate] court did not abuse its discretion indenying Lukas’s request for fees.

He’d pushed too hard about the holographic will.Implied in the court’s decision: If McCormick hadbeen of sound mind, she could have drafted an at-tested will. Even if Lukas had helped her do so.The handwritten will suggested too much help.

W H A T A W I L L D O E S N ’ T C O N T R O L

Property that passes under the terms of your will iscalled probate property, referring to the probateprocess that executes the terms of your will. Thereare a number of assets that pass by the operation oflaw or contract, and are not controled by the termsof your will. The most common of these are below.

Proceeds from your life insurance policy go directlyto the beneficiary named on the policy, withoutpassing through your will. The person who receivesthe proceeds does not have to pay taxes on them.But, if you own and control the life insurance policy(having the ability to borrow on the policy or changethe beneficiary is considered control), the proceedsof the policy are part of your estate and may besubject to estate tax.

Keep in mind that because of the unlimited mar-riage deduction (which we will discuss in moredetail below), payments to your spouse incur noliabilities. However, for payments to your kids orothers, you will want to:

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• have someone other than you buy andown the policy on your life; or

• irrevocably transfer the policy at leastthree years before you die.

Also, after that transfer, you can’t change the ben-eficiary or borrow money from your policy.

Proceeds from retirement plans, such as SEPs, IRAs,401(k) plans, pension and profit-sharing plans, etc.also pass directly to named beneficiaries. How-ever, like insurance proceeds, these assets are sub-ject to estate tax, and federal income tax—althoughyou get a deduction for estate taxes paid. There’salso an additional 15 percent tax if you have a largeamount of money (at press time, the amount was$750,000) in your plan.

Items owned by you and someone else, such ashouses, bank accounts and brokerage accounts, canbe held in joint tenancy with right of survivor-ship or JTWROS accounts. This means that if oneof you dies, the other person has legal rights to theassets. If your spouse is the surviving person, usu-ally half of the value of the asset is taxed in yourestate. If it’s someone else, such as your child, theIRS will look to who actually paid for the assets todecide who will pay.

Owning something in a JTWROS with your children is

not typically a successful way to avoid taxes.

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A living trust—also called a revocable trust—is atrust that allows you to control your assets duringyour lifetime but pass them directly to your ben-eficiaries.

T R U S T S

A trust is a legal contract by which one party—thetrustee—is given legal ownership of some prop-erty to be managed or invested for the benefit ofsomeone else. Trusts are private contracts or agree-ments, but are recognized by the laws and courts asindependent legal entities—like people or corpora-tions.

The property in the trust is known as the trust prin-cipal or corpus. The person for whom it’s beingmanaged or invested is the beneficiary (there canbe more than one beneficiary to a trust). Finally,the person making the trust is called the grantor(or settlor or trustor in different locations).

Generally, one person can play up to two of the

three key roles in a trust. The grantor can also be the

trustee; the grantor can also be the beneficiary. In

most cases, though, one person can’t be all three.

Like any contract, a trust can be structured too rig-idly and with unreasonable conditions—or it maybe written too loosely. Both extremes can encour-age unwise decisions among the people they’reintended to benefit.

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Trusts can dramatically reduce the estate tax that

your family has to pay.

Most married people leave their property to theirspouses when they die. But, for larger estates, itmay be better to leave property in a credit sheltertrust for the surviving (also called second) spouse’sbenefit. This trust shelters the first spouse’s assets—and credit—up to $625,000. The income from itstill goes to the second spouse for life; even the prin-cipal can be tapped for purposes of health, educa-tion and support. But the assets aren’t subject toestate tax when the second spouse dies. Withoutthis type of trust, the tax hammer would fall on thechildren with the death of the second spouse.

Single people have fewer options, but can also re-duce estate taxes by setting up charitable trusts(in which a charity owns the principal but the ben-eficiaries collect interest as long as they live) or mak-ing annual gifts.

Like an executor, a trustee has a legal responsibil-ity—fiduciary duty—to manage the property andsee that it is used in a manner established by thegrantor in the trust contract.

In many cases, a trust can remain empty (unfunded)for quite a while after its creation. In some states,however, nominal funding (e.g., $100 in a bankaccount) is required. This is a good idea anyway. Itshows that the trust is more than a piece of paper.

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Although an empty trust can exist, in order to func-tion, a trust must have assets formally transferredto the trustee, with this title used in the documentsof ownership. Financial institutions will require au-thorization, in the form of the trust document, be-fore they will accept instructions from a trustee.

Trusts can be living (established during the grantor’slifetime) or testamentary (established in a will).Separately, trusts can either be revocable or irre-vocable. Living trusts are usually revocable, whichmeans the grantor can change structure or terms. Ifa trust is irrevocable, the grantor can never changeor terminate it—or withdraw assets, even in anemergency. An irrevocable trust is an independententity under the law.

It is important to note that testamentary trusts re-quire that the will creating them be probated.Moreover, these trusts might then be accountableand have to report to the probate court, understate law—unlike living trusts. These are signifi-cant drawbacks, without offsetting advantages.

Testamentary trusts remain more common than liv-ing trusts because most people are hesitant abouttransferring major assets while they’re still alive.Even though a trust created by a will has to gothrough probate, there’s no re-titling of assets intothe trustee’s name until the grantor has actually died.This hesitation is understandable...but it runsagainst the best efforts of building family money.

Lifetime property transfers into living trusts inevi-tably involve frank discussions about death...andlots of paper work. And many people are uncom-

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fortable talking about death, let alone executing acontract about it. But relying on testamentary truststo transfer assets only delays the work until some-body else (usually a lawyer or accountant from out-side the family) has to do it.

The main problem with trusts is that they are some-times badly drawn. If they leave important peopleor facts out—or if they include language that con-tradicts itself—trouble will follow. The existenceand structure of trusts also may complicate familyrelationships. The June 2001 New York AppealsCourt decision In Re: Trust Created by James F. Wibledealt with one such mess.

Shortly before his death, James Wible created a liv-ing trust funded by his home, household furnish-ings, boat and the proceeds of a note and mortgageon an investment property. Following his death,the trust was to pay 40 percent of the monthly netproceeds of the investment property note to his chil-dren, including Sharon Bailey.

The trustee—a friend of Wible’s named StephenPalka—was also required to pay Wible’s wife, Ilean,the net income from, or provide her with exclusivepossession and use of, the remainder of the trustcorpus. This included the right to live in the Wiblehome for the rest of her life. Upon her death, thetrust was to be terminated and all proceeds dis-tributed to the children.

After the note on the investment property was re-paid in full, Palka distributed 40 percent of theproceeds to the children and 60 percent to Ilean.This was a mistake—since Ilean was only supposed

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to have access to the income from her husband’s es-tate. But the section of Wible’s trust dealing withthe investment property seemed to suggest a splitof the proceeds. In any event, it was confusingenough that the mistake was understandable.

Palka soon realized that he’d make a mistake andreported it to the probate court. The court orderedthat Ilean return the 60 percent payment and thatPalka sell the Wible home and give Ilean an amountequal to the actuarial value of her life estate. Ileanreturned the overpayment. But the error had openedfloodgates of animosity between Ilean and herhusband’s children.

Sharon Bailey—who acted as a spokesperson for thechildren—agreed to the sale of her father’s homeand the distribution of the resulting proceeds. So,Palka sold the house and filed a final accounting ofthe estate. Both Ilean and Bailey filed objections.Ilean wanted more than she was being offered as aliquidated payment; Bailey argued that Ilean wasalready being paid too much.

Palka again went to court, asking for a judgmentresolving the dispute. Following a hearing at whichIlean’s expert testified about the actuarial value ofher life estate in the Wible home, the court issued adecree which settled the final account, awardedfees to Palka, distributed the remaining corpus ofthe trust and terminated it.

Sharon Bailey appealed, again arguing that this reso-lution gave too much money to Ilean. Also, sheargued that she’d been treated unfairly—in that thetrial court had allowed Ilean’s expert to testify but

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not Bailey’s. And she claimed that Palka had takenexcessive fees.

The appeals court upheld the lower court’s ruling.After 40 percent of the proceeds from the note andmortgage had been distributed to Bailey and hersiblings, the remaining purpose of the trust was toprovide Ilean “with a residence and/or income forher lifetime.” Sale of the Wible home and distribu-tion of its proceeds, to which Bailey consented, sub-stantially depleted the trust corpus and eliminatedthe means of providing Ilean with a lifetime resi-dence or its income equivalent. There wasn’t any-thing left for Wible’s adult children.

Bailey may not have liked the fact that Ilean—her

stepmother—was getting so much money from the

trust. But the court ruled that the early liquidation

and termination of the trust was the best way to

make the fairest resolution. This is a common ruling.

The appeals court also disagreed with Bailey’s otherclaims. In all, because James Wible’s trust was con-fusingly written, Palka had a hard time managingit effectively. And the people most hurt by this, inthe end, were Wible’s children.

L I V I N G T R U S T M E C H A N I C S

Generally, a living trust is used as an alternativeto a will; it gets its name because you set it upwhen you’re alive, transfer all or most of your assetsinto it, then administer it yourself as trustee.

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Living trusts cost more at the front end to set upthan wills, but wills cost more at the back end whenyou die because they go through probate. At yourdeath, assets in the living trust are distributed ac-cording to your provisions, without supervisionof a court. A properly designed living trust makesthe hand-off of assets clean and private.

Living trusts do not cut estate taxes. During yourlifetime, you have to pay taxes on investment prof-its made by the trust and, after you die, your estatestill owes estate taxes. So, the same kind of tax plan-ning you do with a will should be done with a liv-ing trust.

Keep things up to date if you use a living trust. If

you forget to transfer new property into the trust,

your estate may have to be probated anyway.

Remember, the simple living trust is revocable.The grantor transfers ownership of assets to the trust;but the trust document reserves for the grantor com-plete control over everything, including the rightto terminate the trust, during the grantor’s life.

If there is only one grantor, the simple living trustbecomes irrevocable at his or her death. If thegrantor has been serving as his or her own trustee,it is imperative to have an alternate named tohandle post-death affairs and property distribution.

Instead of the court order which gives the executorof a will his authority, the trustee uses a copy of the

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grantor’s death certificate and a certified copy ofthe trust document as authorization to act.

The will that accompanies a living trust is some-times called a pour-over will, because it pours overinto the trust any assets—often things like cars,active bank accounts, etc.—that have not beenformally transferred to it or have been acquired af-ter the living trust was created.

In the common case of a married couple with chil-dren, upon the death of the first spouse, the trustcan be set up to remain revocable. Usually, the sur-vivor stays in control as sole trustee. But—again—it is critical to have an alternate trustee already inplace when the second spouse dies. Otherwise, a courtwill appoint a trustee of its choosing.

When the survivor dies, there are two broad op-tions for the disposition of trust assets: a divisioninto separate trust shares for each child; or con-tinuation as a single fund for the benefit of all thechildren until specified ages, at which time total orpartial distribution occurs. The single pot approachis usually best, since it allows more flexibility indealing with emergencies or special needs.

In the broad financial context, there are three mainadvantages to using a living trust:

• Avoiding probate. This can save you sig-nificant time and money on probatefees and attorneys’ fees.

• Privacy. Probate is a public process;wishes in living trusts are kept private.

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• Flexible management. You can turn overthe management of your trust duringyour lifetime to your successor trustee.In most cases, you can scrap the wholetrust and start a new one. Just makesure that the grantor retains the rightto terminate the trust, regardless ofwho’s managing it.

If you live in a community property state, or ownmany of your assets in joint tenancy with right ofsurvivorship, it may be difficult to split your assetsinto two separate living trusts. In this case, you maychoose to form a joint living trust. This can ac-complish the same goals as a living trust, but with-out the difficulties of splitting up your joint assetswhile you are both alive.

T E S T E M E N T A R Y T R U S T S

Having made the argument for the privacy andsmooth operation of living trusts, we now turn tothe mechanics of traditional trusts created by wills.

In most families, an adult child or heir is best suitedfor the role of trustee or successor/alternate. It’s im-portant to think of this succession from an earlyage; the best trustee is one who knows what youthink about family money and how it should bemanaged. If you have no reliable family members,institutional trustees are available. Generally, theseare banks or trust companies. And professional ser-vice providers—attorneys and accountants—of-ten serve as trustees. But they are often a relativelyexpensive option...and they sometimes attract asmuch trouble as they avoid.

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L I F E I N S U R A N C E T R U S T S

This is a widely used, but unfortunate name for anirrevocable trust used to buy insurance as an in-vestment. The trust can also be authorized to holda range of investments, and not just life insurance.

Remember that proceeds from policies you own willbe included in your estate, even though they arepaid to a third party. If an irrevocable trust owns thepolicy, however, death proceeds can be received bythe family income tax free (as usual), yet not beincluded in your taxable estate.

A trust is not necessary to get this result. For ex-ample, if a child owns, pays for and is beneficiary ofa policy on the life of a parent, he or she can receivethe policy proceeds with no tax consequences toanyone. (So, one of the smartest money things achild can do is fund estate taxes and other costs bytaking out a policy on his or her parent’s life.)

Trusts that hold insurance provide for the use and

management of the policy proceeds according to

your wishes. The beneficiaries might not be old

enough to manage a sizeable lump sum of money.

Too often, an irrevocable life insurance trust is pre-pared by an attorney as part of a family estate plan,but little guidance is offered on avoiding taxes.

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An existing policy can move out of your estate iftransferred to an irrevocable trust and if you, as theformer owner, retain no incidents of ownership.

But you have to plan ahead to take tax advantageof this transfer. Policies transferred to a life insur-ance trust within three years of death will be in-cluded—and taxed—in the estate, anyway.

An unfunded irrevocable life insurance trust isan estate and income tax planning tool for use insolving a variety of problems. It can be used to:

• protect and preserve assets;

• manage assets professionally;

• avoid probate;

• provide a source of estate liquidity;

• create tax exempt wealth; and

• save taxes in general.

It accomplishes the last two points by:

• lowering or freezing the value of an es-tate by the grantor divesting himselfof ownership of the property; and

• passing estate taxes by keeping theprincipal out of the estates of grantorand the grantor’s spouse.

T R U S T S F O R M I N O R S

Gifts to trusts in which beneficiaries are minorsusually qualify (at least in part) for the annual gift

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tax exclusion. The rules are plainly written in thefederal statute books—not in a cloud of court opin-ions. These trusts are irrevocable, yet permit somecontrol over the timing of wealth transfer to thenext generation.

In a trust for minors, annual income may be accu-mulated and not paid out, but the trust must pro-vide that, if necessary, both income and the entireprincipal can be used for the minor’s benefit.

When the beneficiary turns 21, things change. Heor she may be allowed—by law—to receive all as-sets available to him or her in an outright distri-bution. In any event, the annual income of the trustcan’t be accumulated after the beneficiary turns 21.And there are ways to work around the rules aboutmaking funds available. For one thing, the minorcan name a beneficiary of the income from the trustbut not the principal in it. That can go to some-body else. However, splitting the benefits like thiscreates some problems.

If the minor beneficiary has no right to the trustprincipal, he or she only has an income interest—theright to receive annual income payments from trustinvestments. Therefore, the amount of each gift thatqualifies as a gift (for tax purposes) is the presentvalue of the series of income payments that the giftwill produce over the years. Different assumptionsabout investment returns can change this numberdramatically. This usually comes into question ifthe beneficiary with an income interest makes somesort of claim against the trust.

Both life insurance trusts and trusts for minorscan be receptacles for tax-advantaged gifts, includ-

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ing gifts used by the trustee to pay life insurancepremiums. If the insured person (or spouse) is thegrantor, trust income should not be used to paypremiums—because the grantor will incur incometax liability on the income so used. Worse still, thegrantor might be considered the owner of thepolicy for estate tax purposes.

If you’re using these trusts, consider using trust

principal or yearly gifts to pay insurance premi-

ums. It keeps ownership clear.

Again, it bears repeating that imprecise or confus-ing language in trusts can create major problemsfor the people making them...and the beneficiarieswho are supposed to receive money from the things.

The June 2001 Tennessee Appeals Court decisionin Guardianship of Courtney Warner Hodges shows howa hash of oral trusts and handwritten notes botchedwhat should have been a relatively simply inherit-ance of some real estate.

Oral trusts—or lengthy instructions left with trust-ees—are called parol trusts in most legal circles.Most often, when a close-knit family doesn’t feelthe need to draw up a written document, theywrongly rely on intentions and assumptions.

Ida Hodges was the grandmother of Warner HodgesIII. Warner married Jo Whiteley Massey in 1978;and, in 1982, they had a daughter named CourtneyWarner Hodges. Ida felt very close to Courtney and

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intended to leave her great-granddaughter enoughmoney to pay for college and get started in life.

Ida owned two fairly valuable pieces of real estate,and when she died, her will deeded to Courtney anundivided one-eighth interest in the net sale pro-ceeds of one of the pieces of real estate. It also gaveher a one-fourth interest in a life estate in the otherproperty.

After Courtney’s parents divorced in 1990, hermother, Jo, filed a petition for appointment of aguardian for Courtney. The petition also stated thatthe income interest to Courtney was outright andnot encumbered by trust. In other words, that therental income should go directly to Courtney’sguardian.

Warner, Courtney’s father, didn’t like the sound ofthis. He argued that oral instructions from Ida hadmade it clear that all income and proceeds from thereal estate should flow through trusts establishedfor Courtney.

In October 1999, a Tennessee trial court ruled thatCourtney needed a guardian for purposes of rep-resenting her interests in Ida’s estate. However, thecourt refused to impose oral trusts upon the prop-erty. It ruled:

The Court is impressed with the testimonyabout the close-knit Hodges family and thedesire of all parties...to see that the chil-dren received a good education. However,it cannot be found that this is sufficient toimpose an oral trust on the funds. Such a

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finding would require speculation as to theterms and conditions thereof and the testi-mony is not sufficiently clear and convinc-ing under the law to find such a trust.

This was a major victory for Jo; she was one stepaway from controling the assets Ida had left forCourtney. But Warner hadn’t given up. He appealedthe decision.

The appeals court had to decide whether either orboth of the properties received through deed anddevise were encumbered by oral express trusts.Tennessee law permits an express trust in real estateto rest upon a parol (another legalism for “verbal”)agreement. And, Warner claimed that Ida had en-gaged in discussions with him, his brother and hisfather about Courtney’s inheritance. His brother andfather agreed—and testified—that Ida had toldthem she didn’t think it was necessary to make aformal trust document—since the family membersall got along.

Jo and her lawyers, however, argued that Ida’s in-tentions had been expressed in general terms, notspecific enough to impose oral trusts upon the prop-erty. Jo also pointed to the language in her divorcepapers, which stated:

If the children’s Poplar Pike property sells,income attributable to Courtney’s share shallbe invested and the tuition payable by theHusband shall be diminished by theamount of income generated by Courtney’sshare each year.

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She argued that the document referred to the“children’s property” instead of the “children’s sharein trust.”

The appeals court concluded that all of this talliedup to enough doubt that it couldn’t create a trustfrom recollections of conversations. It concluded:

Because both the trust and its terms mustbe established by clear, cogent and convinc-ing evidence in order to establish oral trustsupon the property, we find that the trialcourt did not err in failing to find that theproperty was encumbered by oral trusts.

Courtney’s cashflow from the rental property wouldgo directly to her—via her guardian.

C H A R I T A B L E R E M A I N D E R T R U S T S

Charitable remainder trusts (CRTs) work best forpeople who have a lot of money tied up in capitalinvestments that have appreciated over the years,such as stock, bonds, a home or a business. Whenyou sell that asset, you are liable for a lot of taxes.But if the asset is not providing you with a lot ofdividends, interest or other income, you may needto sell the asset and buy some other investment thatprovides you with income.

Once you have placed assets in a CRT, the trust cansell the assets without paying taxes and put the pro-ceeds into investments that provide a good sourceof current income. You (and your spouse) are en-titled to that income for as long as you live, andwhen you die, what’s left goes to the charities younamed when you started the CRT.

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In a variation, called a Charitable RemainderUnitrust (CRUT), the grantor receives a fixed per-centage of the trust’s value each year, rather thanan unchanging dollar amount. Many people preferCRUTs because they can provide inflation protec-tion. As the trust grows in value each year, so doesthe amount of the grantor’s annual draw.

With either a CRT or CRUT, the remainder thatwill eventually go to charity has a value today, es-tablished with a financial calculation, using an as-sumed future interest rate.

The IRS publishes the interest rate each month tobe used in this calculation of the value—in today’sdollars—of the charity’s right to receive the remain-der of trust assets at the specified future date. Thatis the amount the grantor is giving away. It is, there-fore, the value of the current income tax deduc-tion. (The IRS rate was 6.2 percent in July 2001.)

A big additional benefit is that the donated prop-erty, and all future price appreciation, is removedfrom the grantor’s taxable estate.

When interest rates go up, the present value of the

remainder (and therefore the tax deduction) goes

down, and vice versa. The present value of the re-

mainder also decreases as the length of the trust

term increases, and vice versa.

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O T H E R V A R I A T I O N S

The grantor retained annuity trust (GRAT) is anirrevocable trust, good for shifting some of the valueof an asset out of an estate. The grantor places assetsin a trust for the ultimate benefit of heirs—theyhave a remainder interest—but retains the right toan annual pay out for a period of years.

By accepting some gift tax liability at the time theGRAT is set up, the grantor has reduced his estatetax liability later; and the heirs end up with more.If the grantor dies during the term of the trust, allproperty is included in the estate, and there are notax consequences—just as if nothing had been done.

The key to GRATs (and CRTs) is the relative valuegiven the two interests involved: the gift of theremainder interest in the trust principal and thevalue of what the grantor has retained—the presentright to collect a certain cash payout from thetrust each year for X years. (And that X has to beestablished at the beginning.)

The greater the annual payout and the number ofyears of payments, the greater the value the grantorhas retained for himself, and the smaller the valuethe IRS gives to what is left over—which is thetaxable gift. (In the CRT, of course, what is left overgoes to charity, so there is no taxable gift. This valuewill therefore be the amount of the donation andcurrent income tax deduction.)

A Qualified Personal Residence Trust (QPRT) isan irrevocable trust, similar in concept to a GRAT.It is a good method of shifting the value of the

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family home out of an estate, for the purpose oflowering the ultimate estate tax.

The house is placed into trust for the future benefitof heirs. The value today of this remainder interestis a taxable gift. As with a GRAT, the grantor ac-cepts some federal gift tax liability now to save moreon federal estate tax later. What is retained here bythe grantor is not income, but the right to live inthe house for a set term of years. If the grantoroutlives that term, the value of the house—plusany property appreciation since it was transferredto the trust—passes to the heirs with no additionalfederal estate tax. As with a GRAT, if the grantordoes not survive the term of the trust, a QPRT hasno tax effect.

The QPRT has two major drawbacks: First, heirswill receive the house by lifetime gift, not inherit-ance, so there’s no step-up in tax basis. For a homepurchased decades ago at a fraction of current value,this means that income tax (at the 20 percent capi-tal gains rate) must be paid on the increase in value—if the property is ever sold. Second, a tax reform—applicable to QPRTs created after May 1996—elimi-nated a loophole permitting the grantor the rightto buy back the residence for his continued occu-pancy at the end of the trust term.

A Generation-Skipping Trust is an irrevocable ar-rangement that provides income only, not access totrust principal, to the grantor’s spouse and/or chil-dren. It terminates when all have reached a speci-fied age or died—with trust principal then dis-tributed to grandchildren.

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Under a loophole in prior law, by skipping over thechildren in the final distribution of principal, agrantor could save gift and estate tax. Now, suchtransfers are taxed at the maximum federal gift andestate tax rate of 55 percent. But there is a cumu-lative exemption of $1,030,000 (adjusted annu-ally for inflation) per donor that can be used to avoidtax on generation-skipping transfers (by trust orgift) during the donor’s lifetime or at death.

Any gift to a natural person that qualifies for the$10,000 annual exclusion from federal gift and es-tate tax automatically qualifies for an exemptionfrom the generation skipping tax. This, again,means that a generation-skipping trust can makesense—if you start gifting money early enough.

Medicaid trusts were designed to hold assets thatwere given away to impoverish the trust grantor,so that he or she would qualify for Medicaid ben-efits. The purpose was to preserve life savings shouldnursing home care become necessary. These truststook many forms, which were all made obsolete bychanges to the federal tax code that took effect in1993.

Today, an asset transfer to any irrevocable trustwithin a “look back” period of five years of ap-plying for a Medicaid nursing home bed is presumedby law to have been made in order to qualify forMedicaid.

M I N I M I Z E P R O B A T E

As we’ve mentioned already, probate is the legalprocess that oversees the working of your will.

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It is the way to see that your will is valid, and thenoversee the repayment of your debts and the distri-bution of your assets. Probate is usually a long andtedious process. And, just like anything that is long,tedious and requires attorneys, probate can be veryexpensive.

Expect to pay between 6 and 10 percent of your

estate’s value in probate costs, attorneys’ fees and

executor’s fees. If your estate is worth a modest

$200,000, probate can cost your family $20,000.

Probate is initiated in the county of the dead person’slegal residence. Usually, the first step is taken bythe executor or other interested person who’s inpossession of the will. This person files (with or with-out the help of a lawyer) a Petition for Probate ofWill and Appointment of Executor—or a similarstandard form.

If there is no will, somebody must come forwardand ask the court to be appointed as administrator,instead of an executor. Most often, this is the sur-viving spouse or an adult child, although it mightalso be another interested party.

The probate estate simply refers to any propertysubject to the authority of the probate court. Assetsdisposed of outside the probate process are part ofthe non-probate estate.

There is a common misconception that a will canbe drafted in a manner to avoid the probate process

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completely. This is not possible. Specific assetscan avoid probate...but some form of the processmust take place for every estate. There are usuallystreamlined—and in some places highly expe-dited—procedures set up by the local court systemto handle the settlement of small estates, or evenlarger ones, if uncomplicated.

The probate procedure involves three basic steps:

• Collection, inventory and appraisal ofall assets that are subject to probate;

• Payment of taxes and creditors; and

• Formal transfer of estate property.

The surviving spouse and/or children are generallyallowed some inheritance under state law, whetheror not there is a will. Generally, that comes off thetop first. After that, the order of payment of claimsagainst the estate is usually:

1) Costs/expenses of administration;

2) Funeral expenses;

3) Debts and taxes; and

4) All other claims.

What remains of the estate after these payments aremade is available for distribution to heirs and ben-eficiaries.

Throughout this process, the executor—in somestates, called a personal representative—plays acentral role. He or she is responsible for seeing thatthe estate makes it through probate.

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Sometimes the executor is also a beneficiary. In these

cases, he cannot give himself preferential treatment.

The best way to assure family peace is to make a will

that states clearly how assets should be handled.

One of the executor’s most important duties afterappointment is to take an inventory of estate as-sets. An executor must also act to preserve and pro-tect the assets, according to the Prudent PersonRule. Obeying this rule is part of a fiduciary dutyimposed by law on executors (and trustees) to actcautiously, as though dealing with their own af-fairs.

That said, the burden of getting things right restswith the person who’s died. An executor will onlybe liable for problems if he or she acts criminallyor is grossly negligent. This is rare. The executoris also not liable for a poor return on estate invest-ments (this is not so rare), as long as those chosenare prudent.

An executor is entitled to reasonable compensa-tion, often limited to a certain percentage (e.g., 5percent) of the property in the probate estate. Extracompensation, related to handling some specialmatter, may be allowed by the court.

The key point in choosing an executor is fairness.

The executor of even a modest estate can be the

lightning rod for all kinds of family disputes.

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C O N C L U S I O N

Wills and trusts are among the essential tools inmost people’s lives, especially if you have a consid-erable estate and lots of (potential) heirs. In thischapter we gave you a general overview of typicalvehicles for transferring money. The goal is to avoidcostly mistakes, like extensive probate proceedingsand bitter family squabbles. Sometimes, however,those incidentals are hard to avoid.

In this next chapter, we’ll continue to discuss thevehicles of family money by talking about types ofinvestments.

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C H A P T E R 4

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CH

AP

TER

TYPES OF

INVESTMENTS

4

We’ve considered family, attitudes and the mechan-ics of wills and trusts. In this chapter, we’ll considerhow the types of assets that most families own canbest be transferred from one generation to another.

F A M I L Y - O W N E D B U S I N E S S E S

In a commercial society, a business that stays in afamily’s control for several generations is the lit-eral embodiment of a legacy. And family businessescan be efficient. In one much-quoted study, CornellUniversity economist R.J. Monsen found that fam-ily firms have a better-managed capital structure,more efficient allocation of resources and a bet-ter return on investment.

Management gurus have taken to calling this con-servative, long-term approach to running a busi-ness stewardship. They talk about professionalmanagers creating a sense of stewardship towardtheir companies and their employees.

Legacy and stewardship are different ways of describ-ing the same thing. They describe a sense of the

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T Y P E S O F I N V E S T M E N T S

business as a means of perpetuating values andbeliefs, as well as organization and cash flow. In thiscontext, succession becomes less a matter of brightpeople battling in a corporate arena and more a mat-ter of setting parameters and letting everyone who’sinterested learn them.

Thanks to the downsizing of the late 1990s and early

2000s, a large number of experienced employees

have been given ample severance packages—some

of which are used to start a family business.

Many entrepreneurs share the dream of building astrong, profitable business that they eventually canpass along to their children. However, it’s impor-tant to remember the statistic that only 30 percentof all family businesses—less than one in three—actually are passed on to the second generation. Andonly 10 percent pass to the third generation.

These are shockingly low percentages, but there area number of reasons for them—most of which haveno bearing on the type of relationship that thebusiness owners have (or have had) with their chil-dren. Some businesses simply fail, leaving nothingto pass along to the next generation. Or the ownermay sell or liquidate the business before it can bepassed along. New technology may make the busi-ness obsolete between one generation and the next.Some family members may prefer careers of anothersort and have no desire to run the business, whileothers may not have the ability to run a business.

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Still, a profitable business is a valuable thing. Ifyou own one—and make sloppy plans for what willhappen when you’re gone—trouble will follow. TheMay 2001 New York Appeals Court decision in Es-tate of Francis Penepent v. Richard Penepent shows justhow difficult the transfer of a family business canbe. And these guys had a plan in place!

In 1937, Anthony Penepent and his four sons, Ri-chard, Francis, Angelo and Philip, started a busi-ness. In 1952, they incorporated the business—andeach took a 20 percent interest. They also enteredinto a shareholder agreement, which providedthat upon the death of any shareholder PenepentCorporation would pay the dead person’s estate (ei-ther through a life insurance policy or directly) aset price for all of his stock.

The agreement further provided:

the stock so purchased shall be deliveredand surrendered by the representative of the[dead person] to the Corporation, whichshall thereupon retire such stock.

This is known as a “mandatory buy-out” or “stockretirement” agreement.

The agreement also described a method by whichthe corporation could increase the purchase price:

The parties hereto agree that the value ofthe stock may be changed from time totime.... A revaluation must be signed byall Stockholders and the Corporation....

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Originally, the set price was $10 a share, then $15a share and finally, in 1984, the set price was in-creased to $200 a share.

In 1979, the four brothers bought out their father’sinterest, each becoming a 25 percent shareholder.In the late 1980s, however, a rift had formed amongthe brothers over how to transfer the business totheir children: Richard and Angelo were on oneside; Francis and Philip on the other.

In May 1990, Philip petitioned for the dissolutionof the corporation under New York Business Cor-poration Law. In June, Francis also sought dissolu-tion of the corporation.

New York Business Corporation Law allows a holder

of 20 percent or more of a closely held corporation’s

stock to file a petition for dissolution of the corpo-

ration on the grounds that those in control have

either committed “illegal, fraudulent or oppressive

actions toward the complaining shareholders” or

have “looted, wasted or diverted for non-corporate

purposes” the corporation’s assets.

Invoking another section of state business law, Ri-chard and Angelo agreed to purchase Philip’sshares at “fair value.”

While awaiting a court decision about what fairvalue would be, Angelo died. A state court permit-ted Angelo’s estate to revoke his agreement to pur-chase Philip’s shares; Richard thus stood to acquire

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all of Philip’s shares. Penepent Corporation paidAngelo’s estate the specified price for his own sharesand retired them.

In December 1991, after his decision to sell butprior to the fair value determination, Francis died.

The court now had to determine whether the man-datory buy-out provision in the shareholder agree-ment trumped a “fair price” purchase that had beenagreed upon before the provision became opera-tive—that is, before Francis’s death.

Richard argued that Francis was still a shareholderwhen he died and, pursuant to the shareholderagreement, the corporation had a right to acquireFrancis’s shares at the set price and retire them.According to Richard, Francis remained subject tothe mandatory buy-out provision until the courtfixed fair value and the stock purchase transactionwas actually completed.

Francis’s estate argued that at the time of his deathFrancis was a shareholder in name only. Richardhad already made an irrevocable agreement topurchase the shares at a fair value; thus, he was le-gally bound to purchase Francis’s shares at fair value.

The court agreed. Once a party makes an election,that party is obligated to purchase (and petitioneris obligated to sell) the petitioner’s shares at theirfair value. A mandatory buy-out agreement will notoperate to frustrate a fair value purchase.

The divestiture event under the shareholder agree-ment—namely, Francis’s death—did not occur un-

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til a year and a half after Richard made a valid deci-sion to purchase Francis’s shares at fair value. Thecourt held that, upon Richard’s agreement, Francishad a vested right to recover fair value for his cor-porate stock and that right survived his death.

F A M I L Y B U S I N E S S F I N A N C E S

In a family business, you are not only watched bycolleagues, you are watched by family members.Overcoming this pressure is one of the most diffi-cult aspects of being in a family business.

Aside from taking care of the daily activities of thebusiness, the management group makes sure suc-cession issues are planned properly—well in advanceand in a logical way.

Creating a tax structure to sustain future genera-

tions is important. You’re not rewarded for build-

ing a business for the next and passing genera-

tions. In fact, it is just the opposite. You are taxed

at a high level. The group that inherits the business

could end up working for more than 20 years to pay

off the tax liability of the business.

There are a number of ways in which a businesscan be organized. Each one has certain advantagesand disadvantages for the owners. If it is not, thebusiness or its owners may be paying more taxesthan necessary. They may not be using tax advan-tages that the law provides. And they may be lay-ing the groundwork for future problems regarding

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control of the business, legal accountability and howto generate cash effectively.

However you start your business, one of the firstmajor decisions you must make is how to structureit. There are six basic possibilities:

• sole proprietorship;

• general partnership;

• limited partnership;

• closed (Subchapter S) corporation;

• open corporation; and

• limited liability company.

For many people, a significant advantage of operat-ing a family business is the opportunity to obtainstart up or growth capital from members of thefamily. Parents, grandparents, brothers and sisters,aunts and uncles, cousins and in-laws frequentlyhave the means—and the willingness—to providefunding for your business.

Family financing comes with its own costs—whichcan be emotional, as well as financial. Still, it’sthe source of capital that most start-ups use. Andit’s the reason there are so many family-owned busi-nesses. There are situations in which relatives havemortgaged their homes to provide start-up capitalfor a promising entrepreneur. There are others inwhich siblings have advanced the entrepreneur hisprojected share of the family inheritance so he couldstart a business. And there are others in which achild has borrowed against parents’ insurance to raisesome needed business capital.

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The form that financial support from family mem-bers takes will depend, in part, on the ownershipstructure the entrepreneur selects for the company.If it’s a sole proprietorship and the loan is small, asimple promissory note from the borrower maysuffice. If the company is larger—and the borrow-ing is larger—the lenders may want some equity inthe venture. Some families may want a partner-ship structure in order to invest. There’s no bestway to proceed; every situation depends on theneeds of the business and the wants of the family.

T R I C K Y V A L U A T I O N S

One of the challenges of running a family businessis that the things are hard to value. This was abitter lesson learned by Selcuk Sahin, who sued herex-husband in 1999 for fraud after he sold his com-puter software firm for more than a billion dollars.

Mrs. Sahin claimed in Virginia court documents thatKenan E. Sahin committed a multimillion-dollarfraud by pricing his firm at just $4.9 million whenhe agreed to pay her 30 percent of the firm’s valuefollowing their 1996 divorce. She accepted a $1.5million cash payment.

Mrs. Sahin argued her former husband hid the truevalue of his company from her—allowing him tosell the firm in January 1999 to Lucent Technolo-gies Inc. for $1.47 billion in Lucent stock.

By taking the cash, Mrs. Sahin passed on the option

of being paid in company stock, which would have

been worth about $441 million in Lucent shares.

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Although Mrs. Sahin claimed she helped get thefirm off the ground during her marriage, Mr.Sahin—who’d started the software company in 1982while teaching at MIT—disputed the fraud claimand the sob story. He pointed out that his ex-wifehad access to scores of documents estimating thecompany’s value, as well as the opinion of her ownexpert. His arguments convinced the court, whichtossed out Mrs. Sahin’s fraud claim.

Still, Mrs. Sahin wasn’t destitute. In addition to the$1.5 million in cash, she got $100,000 a year inalimony from Mr. Sahin.

But the lesson remains: If you get divorced, con-sider taking the stock in a family business insteadof cash. Even if this means keeping in contact withsomeone you’d rather not see, the payoff can be wellworth the inconvenience. As Selcuk Sahin knowsonly too well...now.

R E A L E S T A T E

When you hear the term “American dream,” thefirst thing that comes to mind is probably homeownership. However, the dream can quickly turninto a nightmare if you don’t take the time to edu-cate yourself on the details of financing and law.

People buy homes for a variety of reasons. Somelook at it purely from a tax savings and invest-ment perspective. Others hate the thought ofthrowing away rent money. And still others simplywant a place to call their own and raise a family.Whatever your reason for buying real estate, it willprobably be one of your main vehicles for growingfamily wealth.

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Generally, as a homeowner, you are entitled to amortgage interest deduction on your taxes. Boththe interest and property taxes are deductible. Inthe first few years of any mortgage, the bulk of whatyou pay is interest.

Assume that on a payment of $1,300 per month,

you could deduct $1,160 in interest. That would

mean you could reduce your taxable income by

$13,920 over a period of a year. Your tax bracket

would determine how much per month that is to

you. If you are in the 28 percent tax bracket, then it’s

worth $324 per month.

There are various caveats to this calculation. Be-cause the government allows for a standard deduc-tion, some homeowners may not qualify for a mort-gage interest deduction. With respect to local taxes,not all states allow for a mortgage deduction.

What about the upside of a real estate investment?Of course, no one can know for sure what the fu-ture holds. At various points in time, a real estatemarket can see both appreciation and deflation; and,since most people borrow heavily even when theybuy investment properties, the leverage increasesthe boom or bust. Generally speaking, though, mostpeople have done pretty well in real estate since theend of World War II.

Because of the tax breaks and borrowing, real estateinvestments are sometimes not liquid. Getting atthe value—even if its large—can be difficult. The

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January 2001 California Appeals Court decision inAlicia Remsen et al. v. Carol E. Lavacot et al. showshow tough this can be.

Alicia and Greg Remsen were brother and sisterand beneficiaries of a trust set up by their great-grandparents. Those great-grandparents, Willardand Ruth Cain, owned 3.7 acres of beachfront prop-erty in chic Laguna Beach, California—some ex-tremely choice real estate. The Cains believed theproperty was worth over $10 million.

In 1983, the Cains created a revocable inter vivostrust funded by the Laguna Beach property.Through the trust, they left $1 million to theirdaughter; $300,000 to a personal friend; $200,000to a cousin; $100,000 to each of their seven great-grandchildren; and the remainder to the principalbeneficiaries, their four grandchildren.

Distribution of the trust assets was not to be madeuntil after all debts, taxes and administration ex-penses related to the Laguna Beach property hadbeen paid.

Willard and Ruth passed away in August 1987 andJanuary 1988, respectively. After their deaths, CarolLavacot—their granddaughter—and her husband,who served as trustees, gave the beneficiaries cop-ies of the trust and said the money would be avail-able when the property was sold and all taxes paid.

Selling the property wasn’t easy, and by November1990 Alicia Remsen filed a petition demanding thatCarol and her husband distribute her $100,000 in-heritance. It was approaching three years since

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Ruth’s death...and Alicia wasn’t the only familymember getting exasperated with the delays. Theprobate court agreed to investigate the situation.

Carol and her husband explained to the court theirtroubles. All offers to purchase had been contin-gent on the estate securing a city-approved tractmap, which in and of itself would have been a feat.

Like many ritzy coastal towns, Laguna Beach hadquite a few land use regulations. The value of theCains’ land was based on developing it into severalresidential tracts—exactly the kind of project theland-use regulations and various state agencies aredesigned to delay and restrict.

The court believed Carol’s explanation and deniedAlicia’s petition. Six years later, Alicia received aletter informing her that a deal was in place forher great-grandparents’ land. The letter went on tooutline the specifics:

The sale price is $5,200,000. At the closeof escrow, there will be $3,200,000 paidwith the remainder financed by us at a rateof 8 percent. Unfortunately, the IRS willtake its cut which amounts to almost$2,000,000 and the State of California theircut, the amount not determined as yet.There are also administration costs thatmust be paid which also are, as yet, unde-termined. As you can see, it will take sometime to figure this all out. [When escrowcloses, our] plan is to get everyone togetherfor a meeting... and hopefully, distribute apercentage of your inheritance at that time.

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It certainly didn’t sound like Carol was going to beable to fund the trust fully.

Alicia received another letter in January 1997 stat-ing that escrow had closed on the property—butthat the trust had received very little cash from thesale due to taxes and closing costs. The trusteessaid they had applied for “an overpayment reim-bursement from the IRS” and expected to be ableto make a distribution in a few months.

Alicia wrote back, requesting documentation of thetrust’s assets and liabilities and a complete account-ing. In April 1997, Carol replied that she didn’twant to deplete trust resources by having thedocuments photocopied...but she invited Alicia toview the documents at the accountant’s office.

Carol added that she planned to give Alicia her in-heritance, minus expenses incurred to fight the1990 lawsuit, “as soon as the money was available.”

In November 1997, Alicia and her brother Gregfiled a another lawsuit to direct Carol to give them$100,000 each plus interest from July 1, 1989,and attorneys’ fees. They also asked that Alicia’s dis-tribution not be reduced by costs incurred by thetrust in defending against her 1990 lawsuit. Eventhough Carol sent them a check for $85,000 and aletter stating the remainder would come later, thiswasn’t enough in Alicia and Greg’s eyes to settlethe issue.

In June 1998, Carol asked the court for a ruling onwhether Alicia’s 1990 petition and her more recentlegal demands qualified as “contests.” The trial court

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agreed to consider all of the issues together, as asingle process. After considering the various argu-ments, the court granted Alicia and Greg’s peti-tion, stating:

Court finds $100,000 cash bequests to be“general pecuniary devise[s]” entitled to earninterest after [one] year, if not yet distrib-uted; payment of earned interest dependson estate ability. Court finds no authorityfor trustee to deduct atty. fees for cost ofpast trust litigation.

After this ruling, Carol filed motions to reconsiderand a petition for instructions. She argued that, ifinterest was due on the cash bequests, no moneywould be left for the remainder primary beneficia-ries (the Cains’ grandchildren).

In January 1999, the court took back its originaldecision on the interest issue and agreed with Carolthat the trust didn’t have to pay interest on un-distributed cash bequests.

As expected, Alicia and Greg appealed. But in theend, they didn’t win the interest…because therewas no provision in California law for the paymentof interest on a cash gift from a revocable livingtrust established before July 1989.

This was a small victory for Carol, who had had ahard time selling her family’s real estate.

R E A L E S T A T E T R A N S F E R T I P S

Some simple precautions can make transferringreal estate easier—or at least cleaner—to transfer.

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Pay close attention to how ownership is describedon the title or deed to any real estate property. Com-mon descriptions of real estate owners include:

• a single person;

• joint tenants (for married or, in somecases, unmarried couples);

• a divorced person;

• a married person as an individual; and

• an investment partnership.

Depending on the state, there may be other de-scriptions. But any description should include thenumber of owners (specifically, one or more) andtheir marital status. The reason that the descrip-tion of ownership is important is simple: When itcomes time to divide or transfer the property, youhave be clear on where the transfer starts.

Marital status is always an issue with real estate.Community property laws, designed to make own-ership easier to determine, can make this more com-plex. For example: Hank purchased a home 10 yearsago with a $50,000 down payment; for the nextnine years, he paid $10,000 a year for the mort-gage and repairs/maintenance. Then he got mar-ried. In the 10th, the $10,000 mortgage and re-pairs/maintenance payments were paid from com-munity funds.

If Hank and his wife get a divorce, she has a soleand separate one-thirtieth interest in the home cal-culated as follows: total payments of $150,000($50,000 down payment and the 10 years of mort-gage and repairs/ maintenance payments at $10,000

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per year) with $10,000 being payments from com-munity funds. His wife’s half share of the commu-nity funds is $5,000—and $5,000 is one-thirtiethof $150,000.

If Hank dies with a will, he can do just about any-thing with his interest in the house. If Hank dieswithout a will, his wife will get the entire interestin the home—unless Hank has legitimate children,either with his wife or from a prior marriage. Inthat event, his wife will have to split Hank’s inter-est in the home with the children. (Her one-thirti-eth interest remains her sole and separate property.)

This brings us to the next point: You need to becareful about how children—often adult children—are included on real estate deeds.

During the summer of 2001 an inheritance lawaimed at preventing older people from committinga serious real estate blunder took effect in Ari-zona. The blunder, a fairly common one, involvedlisting adult children as current co-owners on thedeed of a parent’s home in order to transfer the prop-erty—probate free—when the parent passed away.The problem was that such titling, especially whendone as joint tenants with right of survivorship,could lead to problems while the parents are stillalive. These problems include:

• If the child got into financial problems,the parent’s property could be includedin a judgment or tax lien.

• The parent’s house could be draggedinto divorce proceedings if the child’s

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marriage fell part. A spouse could claimthe house was community property.

• If the parent changed his or her mindabout joint tenancy, an adult child hadto agree in writing to relinquish hisor her stake in the property.

• A child’s co-ownership could disqualifya parent from tax advantages and dis-counts available to people 65 and older.

• Gift taxes could apply.

And parents...or grandparents...who added minorchildren as co-owners could face another hurdle ifthey wanted to sell their house. They’d likely haveto go to court and have a conservator appointedto oversee the transfer of the minor’s interest.

The Arizona law solved these problems by extend-ing a so-called “beneficiary deed designation” toreal estate assets. (The mechanism had been usedfor years in Arizona on investment and bank ac-counts.) It provided for a probate-free “payable ondeath” transfer, expressly stating that the deed isn’teffective until the owner dies.

Real estate is one of the most common assets that

families have to manage from relatives’ estates. But

the tax impact of inheriting real estate can be diffi-

cult. Very often, heirs decide to sell, pay the result-

ing taxes and divvy up whatever is left.

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S T O C K S , B O N D S & O I L R I G H T S

Every investment requires a decision-maker to con-sider a virtually endless series of factors, includingpersonal ones (that the gnomes at the FED con-temptuously call “non-economic” factors). No twopeople ever reach the same conclusion about whatto do with money. That’s why Warren Buffett buysconvertible preferred stock in Coca-Cola while yourUncle Everett buys Azerbaijani treasury notes.

Every investment you will ever consider is eitherequity, debt or cash, although some investmentshave aspects of each.

In an equity investment, you are an owner or partowner of a business or property. Stocks, partner-ships and real estate are the most common examplesof equity investments. If the business prospers orthe property increases in value, your investment in-creases in value. However, your investment can de-crease in value. Theoretically, your potential loss isyour entire investment, and your potential profit isunlimited.

In a debt investment, you are loaning your moneyto a person or company. In exchange for that loan,the borrower agrees to pay you back with interest.Examples of debt investments are corporate bondsand municipal bonds. Debt investments are alsocalled fixed income investments. That’s because theborrower pays you a pre-arranged amount of inter-est. Unless the borrower goes bankrupt, you willreceive exactly what you expected—your moneyback with interest.

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In all but the most extreme cases, the longer you

invest, the more money you make. That’s because

your savings will earn money, and then that money

earns you even more money. This is the magic of

compound growth.

As with real estate, the form of ownership of aninvestment can be important. Each of the two ormore joint owners of an asset has an equal, undi-vided interest in the whole account or asset. Mostmarried couples own their homes and checkingaccounts in this way. By operation of law, a deadperson’s share automatically shifts to any survivingjoint owners or tenants at the moment of death. Thetransfer of ownership is complete at that point.

In most situations, no federal tax is saved by us-ing joint accounts. For tax purposes, 50 percent ofproperty held jointly with a spouse is included in adead person’s estate. If the surviving joint owner isnot the spouse, 100 percent of the jointly held prop-erty is included in the dead person’s taxable estate,unless the surviving joint tenant can prove his orher contribution to the account or property.

An alternative to joint ownership is tenancy in com-mon. In this arrangement, each tenant takes a sepa-rate, equal interest and can sell or bequeath it in-dependently of other owners. Tenancy in commonis frequently an appropriate form of ownership insituations such as when siblings inherit real estatefrom their parents. But tenancy in common can beapplied to non-real estate assets.

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Tenancy in common can be dicey. If there’s discord

between the tenants, any one can sell his or her

shares to an outsider.

Another common investment issue: How should afamily handle retirement money in company pen-sion plans for IRAs when a breadwinner dies? Inmost situations, the owner has to select a benefi-ciary when enrolling in the plan or opening theaccount. If the owner dies, the retirement accountacts like a living trust or life insurance—bypass-ing probate and going straight to the beneficiary.At one time, these funds enjoyed special tax treat-ment; but now they are usually included in a deadperson’s estate for tax purposes.

A 1997 IRS rule change permits revocable trusts—not just individuals—to be IRA and retirement planbeneficiaries, without a sacrifice of continued taxdeferral. If you already have a good trust programfor your heirs, this is probably something you shouldconsider. One point to keep in mind: The receivingtrust has to become irrevocable upon the grantor’s(that is, the IRA owner’s) death.

The May 2001 Wyoming Supreme Court decisionin Oedekoven Family Trust v. Douglas C. Greenough etal. dealt with unusual—but highly lucrative—fam-ily investments.

When Frank and Doris Greenough discovered oilon their ranch property, they decided to give theresulting royalty interests to their children. Be-tween November 1967 and January 1969, the

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Greenoughs executed a series of Assignments ofRoyalty. Each assignment specified that it “is in-tended as a gift” for a named child. Each furtherstated that the Greenoughs:

do hereby SELL, ASSIGN, SET OVER,TRANSFER and CONVEY...all right, titleand interest in, of and to __ Percent (%) ofall the oil, gas and other hydrocarbon sub-stances produced and saved from the fol-lowing described lands....

Each assignment stated that it was for either 0.5 or1 percent of the oil, gas and other hydrocarbonsproduced from one of 11 tracts of land on theGreenough ranch. The 77 separate documents gaveeach child a shared 7 percent interest in the oilproduced from some of the 11 tracts and a 3.5 per-cent interest in the others.

In 1974, the Greenoughs sold their ranch to theTR Ranch Limited Liability Company, reservingthe mineral rights. In 1995 and 1996, TR Ranchsold portions of the ranch to Edwin and ElizabethRogers and Gabrielle Manigault Boley who, in turn,sold a portion of the land to the Oedekoven Trust.All of the transactions involved lands burdened bythe Greenough assignments.

In early 1998, the Boley No. 31-36 Well was drilledon land subject to the Greenough children’s assign-ments. The well operator obtained a Drilling TitleOpinion and a Division Order Title Opinion, butneither could determine whether the assignmentsto the Greenough children were perpetual royaltyinterests or were limited to any oil and gas leasesin effect at the time of the assignments.

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The Oedekoven Trust, which had drilled the well,was advised to hold royalties in suspense pendingresolution of the assignment questions. This wasthe first time in 30 years that the Greenoughs’ roy-alty payments had been interrupted. They soughta court order enforcing their interest in oil produc-tion on their family’s former land.

The Greenoughs claimed that they had perpetualnonparticipating royalty interests. The OedekovenTrust countered that, because the assignments usedthe term “overriding royalty” and the Greenoughshad leased some land to others for oil drilling at thetime, the assignments were either limited or voidfrom the start.

The trial court sided with the Greenoughs; it foundthat the assignments were intended to transfer per-petual royalty interests in the described lands whichwere not limited to the duration of any particu-lar lease—but were applicable to existing and sub-sequent leases of the underlying mineral interests.The Oedekoven Trust appealed.

After some procedural moves, the Wyoming stateSupreme Court agreed to hear the case. It notedthat, when the Greenough family made the dis-puted assignments, it owned approximately64,000 acres of land...and all mineral rights. Theassignments were made immediately after the dis-covery of oil and gas on the land—and had the statedpurpose of providing the grantors’ children withcash flow.

According to the high court, the fact the Greenoughshad already leased some parcels to third parties at

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the time of the assignments didn’t prevent an inter-pretation of the assignments as conveying perpetualnonparticipating royalties. The court wrote:

It is clear from the “heirs, successors andassigns” language...that the Greenoughswere creating perpetual nonparticipatingroyalties as opposed to a life estate or a termof years.

This all supported the Greenoughs’ claims. The onlyquestion that remained: Did use of the term “over-riding royalty” in one clause contradict the balanceof the assignment...and render the assignment void?

The court said the “overriding royalty” did not pre-clude the creation of nonparticipating royalty in-terests in perpetuity. So, the Greenoughs could keepcollecting their checks.

I N T R A - F A M I L Y L O A N S

Federal tax regulations can make lending money toyour relatives complicated. Although most peoplereduce the interest rate charged on loans to familymembers, the IRS establishes limits. When you lendmore than $10,000, the IRS sets a minimum in-terest rate that it expects you to charge.

This minimum is known as the applicable federalrate (AFR) and varies monthly. (You can look therate up on the IRS’s Web site at www.irs.gov.) Even ifyou charge less than the AFR, you must pay in-come taxes on the interest you would have re-ceived if you had charged the AFR.

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Regardless of the rate you charge, it is importantthat you have a formal written promissory notesigned. If the borrowers default, you will have diffi-culty deducting the loss on your income taxes with-out a note. You may also want to prepare a simplemortgage if you want to be sure that you have se-curity in the event of default.

Aside from the tax issues, loaning money to familymembers can be tricky on the personal level, too.The June 2001 Nebraska state Supreme Court de-cision in Estate of Thomas J. Reading dealt with thefallout of one such situation.

After he died, Thomas Reading left a sizable estatethat was meant to be distributed among quite afew extended family members. In the course of sort-ing through the details, the state probate court or-dered Reading’s executor to transfer five promis-sory notes from the estate to a revocable trust thatwas in existence at the time of Reading’s death.

Reading’s wife Katherine and daughter Paula—who’d borrowed the money and made the promis-sory notes—appealed. They argued that the noteswere not assets of the estate because the noteswere so old that they should have been canceled.

If they prevailed, the mother and daughter would

effectively create a new mechanism for transferring

money: loan it to your child and then instruct your

estate to forgive the loans after your death.

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In October 1995, Connie Distransky—Reading’sother surviving child—filed a petition for deter-mination of heirs and appointment of a personalrepresentative. She wasn’t excited about her sister’sloan forgiveness plan.

According to Connie’s lawsuit, a will her fatherdrafted in October 1984 should have been offeredfor probate. In October 1995, the court declaredthe 1984 will to be valid and admitted it to pro-bate. Norwest Bank of Nebraska was appointed aspersonal representative of the estate.

So, Norwest had to figure out what to do with thepromissory notes Paula had given her father in ex-change for loans.

At one point, Katherine and her daughters agreedto resolve their disputes by forming a new trust tohandle the family’s money. Under the terms of thenew trust, Katherine and her daughters were to re-ceive all trust income and as much of the princi-pal as necessary to provide for their support, in thesole discretion of the trustee—which was Norwest.

In January 1998, Norwest asked the court for in-structions about a proposed distribution, which in-cluded transfer of the promissory notes to the trustat their face value, with no further interest accrual.be applied to Paula’s share of the trust.

This approach made sense, from a lay person’s per-spective. In short, it would debit the money Paulahad borrowed—plus interest—from her inheritance.But Paula and her mother didn’t agree to this pro-posal. They kept arguing that Paula’s promissory

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notes were not assets of the estate and should havebeen canceled.

The trial court ruled for Norwest and ordered Paula’spromissory notes to be applied against her rightsin the trust. Paula and her mother appealed, insist-ing that any attempt to enforce Paula’s liability onthe promissory notes was barred by the statute oflimitations under Nebraska law.

But the state’s probate law allowed for debitingunpaid loans against inheritance. Specifically, thecourt noted:

Unless a different intention is indicated bythe will, the amount of a noncontingentindebtedness of a successor to the estate ifdue, or its present value if not due, shall beoffset against the successor’s interest; butthe successor has the benefit of any defensewhich would be available to him in a directproceeding for recovery of the debt.

Paula and Connie were each to receive one-half ofReading’s personal effects and household furnish-ings, with all other assets to be distributed to thetrust. Paula’s loans would be repaid from her share.The appeals court agreed with the trial court’s or-der authorizing the transfer of the notes to the trust.

This case suggests unbalanced favor on the mother’s

part, who was determined to erase $50,000 in loans

to another daughter.

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L I F E I N S U R A N C E

Life insurance is a critical asset for most estates. It’sa guaranteed, quick source of funds to pay the vari-ous costs that come up. Even if you plan well, sub-stantial federal estate tax may be due. This canpresent a serious problem when the estate has bignon-liquid assets, like real estate or a business.

Insurance can prevent a distressed sale of assets toraise cash for taxes under time pressure. Family busi-ness owners often underestimate what their compa-nies are worth (at least for estate tax purposes).

As we’ve seen, another way to protect a family-owned business is to execute a shareholders’ agree-ment whereby the surviving owners have the rightto purchase the dead partner’s shares. There are dif-ferent details to these deals, but a common point isthat funds must be available to honor the agree-ment; there are life insurance policies designed spe-cifically to generate them.

A major advantage of life insurance is the incometax-free transfer of proceeds to the beneficiary. Thisis widely known to the public. What the publicdoesn’t always appreciate is that the insurance pro-ceeds can be included in a dead person’s estate, ifthat dead person owned the policy—and eventhough someone else got the money!

For example: Mom owns a life policy on Dad,with the children as beneficiaries. She is careful topay premiums with her own separate funds, so thatDad won’t somehow be deemed by the IRS to have

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strings attached, and the proceeds, therefore, willnot be included in his taxable estate.

At Dad’s death, the insurance money goes directlyto the children, exactly as planned. No estate tax isdue. But Mom has made a taxable gift to the kids,for federal purposes, because she gave them the policyproceeds! And if the kids put up part of that moneyto help Mom with the gift tax—if any is actuallydue and payable—then they will be deemed to havemade a taxable gift to Mom.

Life insurance proceeds pass to a spouse income andestate tax free (as can all other assets). If the insuredperson owns the policy upon death, the death ben-efit is included in the taxable estate (just like allother assets). If children or a trust own the policy,then neither the policy, cash value nor death ben-efit is included in the taxable estate.

The proceeds are likewise included if the policyowner names his “estate” as beneficiary. That ben-eficiary designation is also a bad idea because it ex-poses the policy proceeds to creditors of the estate,which would not otherwise happen.

Wills and trusts created within wills are always un-

der jurisdiction of the local probate court. If you

leave life insurance proceeds to a trust for your chil-

dren, the probate court will probably become in-

volved with the proceeds.

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Unlike term life insurance—which has no value af-ter a set period of time (its term)—there are someforms of life insurance that build a cash equity valueover time. These include:

• whole life;

• universal life;

• blended whole/universal life;

• interest sensitive whole life;

• variable life;

• variable universal life; and

• variable blended whole/universal life.

In most cases, premiums start higher than term in-surance—but they stay level...and the policy accu-mulates a redeemable cash value as time goes on.This kind of insurance makes sense if you:

• are accumulating cash for the future;

• need coverage for more than 15 years;

• are in a high tax bracket; or

• are over 35 when you buy your firstpolicy.

The most common of these kinds of insurance iswhole life. Whole life insurance is a permanentform of insurance protection that combines a deathbenefit with cash value accumulations. In a wholelife policy, the face amount is constant—and thisamount will be paid if the insured person dies atany time while the policy is in effect.

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Whole life insurance is usually used as a form oflevel protection during income-producing years.At retirement, many people then use the accumu-lated cash value to supplement retirement income.This gradually reduces the death benefit.

Whole life plays an important role in financial plan-ning for many families. In addition to the deathbenefit or eventual return of cash value, the policyhas some other significant features. During a finan-cial emergency, policy loans may be available. Somewhole life policies also pay dividends.

The policy owner has options as to how dividendswill be received. They can be taken in cash or ap-plied toward premium payments. They can also beheld by the insurance company and earn interest—then be transferred later. Finally, they may also beused to buy additional amounts of whole life insur-ance or one year term insurance additions.

After a whole life policy has a cash value, certainvalues are guaranteed upon the lapse or surrenderof the policy. Any of these options (which are knownas nonforfeiture options) may be elected by theowner if a premium is in default.

The net surrender value is the cash value, plus thepresent value of dividend accumulations and addi-tions, minus any outstanding policy loans. Out-standing loans that are subtracted from the surren-der value will include any interest or other amountscharged against the policy.

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Whole life is preferred to other kinds of life insurance

by most people because it combines protection and

savings—two major factors in the financial plans of

most families.

A N N U I T I E S

Annuities combine elements of insurance andfixed-income investment—and offer some tax ad-vantages. Essentially, you agree to pay a certainamount of money to an insurance company, eitherin a lump sum or several payments. After a periodof time, the company agrees to make a series of pay-ments to you. The earnings on the annuity are nottaxed until you actually receive your distributions...and you arrange to receive these when you’re older.

With a fixed annuity, you have no choice of invest-ments but you are guaranteed a certain return onyour investment. Also, the fixed rate is usually onlyfixed for the initial period of the annuity and maybe reset thereafter. In a variable annuity, you typi-cally have certain limited investment choices.

C O N C L U S I O N

Face it: It’s hard to take control of family moneyissues when there’s more than one person involved.It only takes one dead relative and one distant—but very alive and combative—one to pose a prob-lem. As we’ve seen in this chapter, investing in thefamily is critical to your family’s continued healthand longevity. And there are lots of ways to do it.

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But, as always, there are things in life that seem tothwart one’s ability to protect the family and gener-ate wealth. Taxes probably first come to mind,which we’ll get to in Chapter 7. For now, we’ll diveinto the arena of legal and administrative fees.

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CH

AP

TER

LEGAL AND

ADMINISTRATIVE

FEES

5

We’ve discussed elsewhere in this book how legaland administrative fees can eat into the value offamily resources. This is particularly true whenan estate goes through the probate process—but itcan be true in other situations, too.

Anyone involved in managing family money—ei-ther as the grantor putting together an estate planor as the beneficiary receiving the proceeds—mustpay close attention to the lawyers, accountants andtrustees charged with assisting in the transfer.

We’re not going to rant, as some writers on thissubject do, about these professionals being “sharks”or “crooks.” But, when it comes to managing fam-ily money, there are some troubling statistics:

• Trust and estate lawyers sustain mal-practice claims twice as frequently asdo criminal defense lawyers, accordingto a survey published by the AmericanBar Association in April 2001.

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L E G A L A N D A D M I N I S T R A T I V E F E E S

• State funds that compensate victims ofcrooked lawyers paid 37 percent of theiroutlays in claims involving estate at-torneys, says an ABA study covering1993 through 1995.

• According to Dominic Campisi, a SanFrancisco litigator who heads a com-mittee on estate malpractice for theAmerican Bar Association, “there arelots of attorneys that steal from estates.”

But it doesn’t take outright theft to make trouble.Most professionals will do as much work as you’llallow...to generate the highest fees you’ll pay with-out a fight. This is, simply, human nature. And it’ssomething families need to watch carefully.

In this chapter, we’ll expand on some topics we’veconsidered before...and add some new topics...thathave to do with the mechanics and strategies ofmanaging the people that your family hires to man-age its money.

A V O I D I N G L A W Y E R S C O M P L E T E L Y

It’s no secret that some people have such a low opin-ion of attorneys that they don’t want to use them atall. What drives many people’s fears of lawyers astrustees? The all-too-frequent tales of abuse. Forexample: In July 2001, a Washington D.C. courtruled that a local lawyer had violated her ethicalduty when she sold a house owned by a schizo-phrenic client to her own parents at a below-mar-ket price, allowing them to make a big profit whenthey renovated and resold the property.

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The court recommended that Deborah Boddie re-pay $53,000 to Benjamin Land, the mentally-im-paired man it had appointed her to represent. Themoney would make up for the below-market sale,some fees Boddie charged Land for her services andthe cost of the investigation into her actions.

Boddie had resigned as Land’s conservator andtrustee a few weeks earlier. She had also repaid Landsome money she billed him inappropriately. At onepoint, she had claimed—wrongly—to have worked23 hours in a single day on his case.

Land’s childhood home was the most valuable itemhe had inherited when his mother died in 1991.Boddie never hired a real estate broker to marketthe property and did not alert the court, as the lawrequired, that she was selling the property to herown family. Even more incriminating: She allowedher stepfather, a contractor, to begin renovating thehouse months before he actually bought it.

Boddie sold the four-bedroom house in northeastWashington to her mother and stepfather for$36,000 in May 2000. Boddie had claimed thatthe $36,000 price was the fair market value of thehouse and that there was nothing wrong with sell-ing the property to her family at a fair price. Butthe court investigation found that the property wasworth at least $50,000 to $66,000 when Boddiesold it to her parents. In July 2000, they sold theproperty for $137,000.

The court concluded that Boddie had negligently“breached her duty;” but it found no proof thatshe acted with malice toward Land. It wrote:

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Although there is no evidence that the salewas construed for Ms. Boddie’s personalbenefit, the familial relationship causes aconflict in the actions of Ms. Boddie thatborderlines on misconduct.

The main tool for do-it-yourself family money man-agement is the so-called “will kit.” Numerous pub-lishers and software companies offer these products,which all include the same basic parts. The kits usu-ally include:

• a blank will form that includes thestandard language (“boilerplate lan-guage” in legal terms) required to makea will effective;

• an inventory form for listing assets;

• a form for witnesses to sign; and

• blank forms for personal messages orspecial gifts or instructions.

Some kits also include the basic paperwork re-quired to set up several kinds of trusts; however,trusts are usually best set up by a professional.

Even though these will kits can save you hundredsor even thousands of dollars in legal fees, if you’redealing with a lot of money, you may be puttingmore money at risk than whatever fees you’ve saved.

Therefore, you should only use will kits or softwareto prepare your will if it’s relatively simple. If any ofthe following describe you, you should use the booksand software for education, but you should hire agood attorney to prepare the documents and giveyou advice:

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• your assets are over $500,000;

• you intend to set up a living trust, acharitable trust or any other kind oftrust;

• you own your own business;

• you own assets jointly with yourspouse, or someone else, that have ap-preciated in value by over $50,000, andyou have not yet paid taxes on that ap-preciation;

• you expect any contests or other issueswith family members; or

• you live in a state that has significantestate or death taxes.

Even if your family is perfect and won’t have any

fights, the IRS is waiting over your shoulder, like

some hideous bird of prey, for you to make a mis-

take that will cost you thousands in additional taxes.

P L A N N I N G S C A M S

One area of rampant abuse in estate planning fees isthe aggressive selling of cookie-cutter living truststo senior citizens who may not need them. A recentstudy form the American Association of RetiredPeople (AARP) found that 18 percent of people overthe age of 50 and with incomes of $25,000 or lesshad a living trust. That’s a 125 percent growth inthe number of people in that category who had liv-ing trusts in 1991. The AARP is concerned about

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this because sales materials often twist general com-mentary from the AARP into what seems to be anendorsement of specific living trust packages.

The problem with generic trusts is that they usually

don’t conform to specific state laws.

If you’re thinking of using an estate planning orwill kit, you need to understand what the kit is.For one thing, it’s not the same as legal advice. Ifyou make a technical mistake because you used akit, you (or your heirs) will have a hard time hold-ing the publisher liable for the resulting problems.Also, some “estate planning kits” are actually mar-keting tools designed to sell you services of ques-tionable value.

Be wary of cheap or free estate planning or will kits.For example: In early 2001, Pennsylvania AttorneyGeneral Mike Fisher announced that a Texas-basedcompany would pay $5,000 in civil penalties andinvestigation costs to resolve accusations that it hadprovided legal advice and estate planning servicesto Pennsylvania consumers for a fee—without a li-cense to practice law.

According to Fisher, Nationwide Estate Planningused direct mail solicitations to advertise and pro-mote the sale of its estate planning services to Penn-sylvania consumers between 1999 and 2001.

A “New Information Update” encouraged consum-ers to request a free guide offering money saving

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tips and information that “gives you hard facts andstraight answers on living trusts to protect your es-tate and privacy, plus information on how to avoidprobate and estate taxes.” People who requested thefree guide were contacted by Nationwide to set upan in-home appointment to discuss the purchase ofestate planning services that focused on setting upprefabricated revocable living trusts.

Fisher claimed that Nationwide falsely led peopleto believe that licensed attorneys provided the ad-vice on estate planning and living trusts. In reality,he said, Nationwide’s employees were not licensedlawyers. Fisher went on to say:

Estate planning is a specialized field that inmany cases requires expert legal advice andlegal services to ensure that consumers areaware of their options, responsibilities andrights under the law. In this instance, weallege that consumers believed they werepaying for legal advice and services from alicensed lawyer, which was not the case.

Although Nationwide admitted no wrongdoing, itagreed to comply with Pennsylvania’s ConsumerProtection Law. As part of the settlement, it can-celed any contracts with consumers who requestedrefunds, and it paid fines to the court.

Be careful: Lots of companies will try to sell you

“services” that are nothing more than one-size-fits-

all tools—no matter what your actual needs may be.

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T O O M U C H L E G A L A D V I C E

Because lawyers play such a critical role in estateplanning and the drawing of wills and trusts, manypeople come to rely on them heavily for familymoney advice of all sorts. This is not always a goodidea.

The June 2000 Illinois Appeals Court decision inLeslee Peterson v. Stanley Wallach dealt with a case ofone family’s excessive reliance on the advice of onelawyer. Anger, recrimination, charges of malprac-tice and other ugliness followed.

Leslee Peterson was the daughter of Ardele andSidney Peterson and the sole beneficiary of Ardele’sestate. Leslee received the bulk of her mother’s es-tate pursuant to an inter vivos trust.

Leslee filed a complaint in November 1998, alleg-ing that Stanley Wallach had committed malprac-tice by negligently rendering estate planning ad-vice to her mother. Specifically, Leslee alleged that,in 1989, Ardele had hired Wallach to handle theadministration of Sidney’s estate. Ardele also askedWallach to recommend estate planning proceduresthat would minimize death taxes on her estatewhen she passed away.

According to Leslee, Wallach recommended thatArdele make substantial taxable cash gifts to Leslee;on this advice, Ardele made gifts to Leslee totalingapproximately $580,000 in 1990 and 1991. Thisshould have raised some red flags for either Ardeleor Leslee; large cash gifts are almost never a goodfamily money management tactic.

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Upon Ardele’s death in November 1996, the giftswere “added back” into her estate for purposes ofdetermining death taxes. As a result, the death taxesdue on Ardele’s estate were increased by approxi-mately $238,000.

Wallach’s response to Leslee’s charges was a techni-cal one: That, by 1998, the statute of limitationshad passed for malpractice claims based on advicegiven in 1989. In Illinois, claims of legal malprac-tice have to be made within two years of “the timethe person bringing the action knew or reasonablyshould have known of the injury.” The court had todetermine when the two years started ticking: WhenWallach allegedly gave Ardele the bum advice...orwhen Leslee figured out what had happened?

A specific part of Illinois law helped in answeringthis question. It read:

When the injury caused by the act or omis-sion does not occur until the death of theperson for whom the professional serviceswere rendered, the action may be com-menced within 2 years after the date ofthe person’s death....

By that standard, Leslee had sued Wallach in time.But the trial court first hearing the case ruled forWallach, making a complicated ruling that essen-tially said the extension only applied to estates go-ing through probate disputes. Leslee appealed.

The Illinois appeals court noted that the primaryissue in determining whether the extension wasapplicable was whether the injury caused by the

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act or omission occurred upon the death of theperson for whom services were rendered, not themanner in which assets were distributed. So:

where any injury caused by an act or omis-sion does not occur until the death of theperson for whom services were rendered,[the extension] is applicable regardless ofwhether the assets are subject to distribu-tion through probate proceedings, an intervivos trust or some other mechanism.

To support this decision, the court went back tothe legislative history of the extension. It quoteda state representative who’d sponsored the bill say-ing that there were:

some exceptions, of course, as in the casewhere you don’t learn about the malprac-tice in the case of say a will or testamentarytrust because the error could not be discov-ered until after the client has died.

Wallach argued that this supported his theory thatthe extension applied only to estates involving willsand testamentary trusts—not living trusts. Thecourt didn’t buy this argument. In fact, the courtdidn’t buy many of his arguments. The appeals courtconcluded that:

The clear and unambiguous language of[Illinois law] states that where the injurycaused by the act or omission does not oc-cur until the death of the person for whomprofessional services were rendered, thecomplainant has two years from the date ofthat person’s death in which to commence

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an action. There is no language limiting[that] section to assets subject to distribu-tion through probate proceedings or ex-cluding assets that are transferred via aninter vivos trust.

Ardele Peterson had relied too heavily on StanleyWallach for advice on managing her family money.He’d failed her...to the tune of a quarter-milliondollars in taxes. And then he fought hard to avoidbeing held responsible for the mistake. The dili-gence of Ardele’s daughter finally prevailed.

But things would have been much better if Ardelehad shopped around a bit for estate planning ad-vice in the first place.

U S I N G L A W Y E R S E F F E C T I V E L Y

Because the standard terms and conditions of trustsare different from those of wills, you should use alawyer to prepare any trust. Property (real estateand personal) that you want transferred must behandled by a lawyer. This includes deeds preparedfor real estate, financial accounts modified to showjoint owners, insurance policies amended for ei-ther owner or beneficiary, etc.

This makes the up-front cost of setting up trustshigher than a simple will. You need to weigh thiscost against the cost—and terms—of allowing yourfamily money to grind through probate.

Most states automatically provide a fee schedulefor your executors; in some states these are as highas 10 percent of your assets. Most executors will

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agree to waive the fee, or take a fixed fee. Your nextbiggest cost is usually your estate attorney.

If not having to pay a probate attorney’s percent-based fee is the only reason you want a living trust,you (or your executor) can find somebody willingto handle probate on an hourly fee basis. Don’tgripe about lawyers; just shop around. Wills, trustsand estate work make up one of the most complexareas of the law, so attorneys who work in the fieldoften charge more than others. But, even with ahigh hourly rate, the final cost may be less than afixed percentage—if the estate is simple to settle.

One of the real services that an attorney can provide

to you and your family is knowledge of and experi-

ence with the local probate courts.

Like any legal process, probate can be easier or harderdepending on the judges and other players involved.A good attorney will know the politics of the lo-cal system...and navigate for family money accord-ingly. In many situations, this is what you’re pay-ing for...not the filing of paperwork. Make sure yourlawyer is spending most of his or her time concen-trating on the activities that save your family thegreatest amount of time and money.

T R U S T E E S F E E S

The best trustee for overseeing the transfer of moneyfrom one generation to the next is a family memberwho knows the details of how money management

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should work...and who will treat each beneficiaryequitably and appropriately.

People who’ve survived battles over family moneymay cynically say that such a person doesn’t exist.That self-interest and human frailty will inevitablymean that one group or individuals will be treateddifferently than others.

When family members won’t work, institutionaltrustees (banks, trust companies or professionals)can serve the purpose effectively.

The fees these institutions charge to serve as trusteeare usually a percentage of the amount of the estate(often 1 percent per year...or less). But these feescan increase, depending on the amount of effortinvolved in the trusteeship. A complex estate thatinvolves multiple trusts and intricate wills may re-quire anywhere from a few thousand dollars a yearto tens of thousands—just to keep up with all ofthe paperwork.

Some estates require active, day-to-day manage-ment. These accounts usually involve a family-owned business or personal services to heirs whocan’t manage their own affairs. Because this level ofservice calls for several hundred thousand dollarsa year in trustee fees alone, it’s not something anyreasonable person should want.

The schedule of fees and services offers the first clue

about whether an institution caters to trusts like

yours. A lot of fixed fees for specific services will

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drive the annual amount up quickly...and probably

means the firm wants to focus on very large estates.

An institutional trustee typically charges about 2percent of an estate’s value each year. A trust ac-count of at least $250,000 is required for these feesto make sense for everyone involved (though someinstitutions are happy to manage smaller accounts).

If you hire an institution to serve as trustee, it’s agood idea to name someone close to the family asco-trustee. This person can be a family member dis-tant enough to be impartial or a family friend whosejudgment is sound. The purpose of this arrange-ment is to support the institutional trustee withpersonal input and advice.

E X E C U T O R A N D B E N E F I C I A R Y

From the beneficiary’s standpoint, inheritancemoney is free from federal income tax. The fee paidto an executor, however, is ordinary, taxable in-come to him. When an executor is also a benefi-ciary, these facts weigh in favor of the beneficiary/executor not taking his fee, and obtaining a slightlylarger (income tax-free) inheritance. So if the onlybeneficiaries are you and your spouse, for example,then it makes sense to skip the fee.

If there are other beneficiaries, then not taking anexecutor’s fee means this money is left in the estateto be shared with the others.

Depending on how many other beneficiaries thereare, and on the distributions provided by the will,

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the executor might end up with more money afterall, by taking an appropriate executor’s fee and pay-ing income tax.

Two other factors should be considered in the deci-sion to take or not take an executor’s fee:

1) Executor’s fees are a deductible expensewhen it applies to estates over $675,000.But the tax rates are so high that theexecutor might be duty-bound (to theother beneficiaries, if any) to reduce fed-eral estate tax by taking his fee, in largerestates where the tax is applicable; and

2) Some states have an estate or inherit-ance tax of their own.

Executors who are also beneficiaries must performtheir fiduciary duties honestly and in good faith.The main problem posed by an executor who isalso a beneficiary is the perception of conflict...andresulting legal fees...that follow any misstep. Howbad can these legal fees get? The March 2000 Ten-nessee appeals court decision in Estate of Lillie MaePorter looked at the details of one such problem.

In this case, the court considered whether the formerexecutor of an estate had forged documents andbreached his fiduciary duty to act in good faithand—as a result—ran up legal fees defending him-self, which he tried to pass on to the estate.

The attorneys were Mary Katherine Longworth andPeggy Monger; their problematic client was Tho-mas Harvey, the former executor of the Estate ofLillie Mae Porter.

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Harvey didn’t start out as the executor. In Septem-ber 1990, Lillie Mae Porter executed her last willand testament. When probated, it was accompa-nied by an affidavit of attestation prepared con-temporaneously with the will. Under the provisionsof the 1990 will, Harvey was to receive certain realproperty and the remainder of the estate was to bedivided as follows: 20 percent to Harvey; 20 per-cent to Ted L. Porter; 25 percent to Shirley PorterWheeler; 25 percent to John Kerley; and 2.5 per-cent each to Lillie’s four step-grandchildren.

In September 1993, Lillie allegedly executed acodicil to the will, thereby amending it. The 1993codicil did not change the disposition of the realproperty to Harvey but did name him executor.And, it modified the division of the remainder ofthe estate. Harvey’s share increased from 20 to 50percent. The share of Shirley Porter Wheeler de-creased from 25 to 20 percent; and John Kerley’sshare was eliminated. The codicil did not changethe bequests to Ted L. Porter and the step-grand-children. The codicil was also accompanied by anaffidavit of attestation.

When Lillie died in November 1993, Harvey of-fered the will and the codicil for probate. For morethan 12 months, the various heirs debated the mer-its of the will and codicil. They couldn’t reach anysettlement; so, in the spring of 1995, the probatecourt sent the dispute to circuit court. The contes-tants (basically, everyone named in the will exceptHarvey) raised three issues:

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1) whether the will was invalid due toundue influence and whether Lillie’ssignature was forged to the codicil;

2) whether a prior will executed in 1975and codicils executed in 1980 and 1984were lost or spoliated testamentarydocuments; and

3) whether the wills and codicils executedin the 1970s by Lillie and her late hus-band were mutual and contractual, ren-dering Lillie’s 1990 will and 1993 codi-cil invalid.

In addition to suing the estate, the contestants suedHarvey personally, alleging—among other things—that he’d caused Lillie to change the designationon certain certificates of deposit shortly before herdeath, thereby diminishing the assets of the estate.

Once the matter headed to trial, Harvey startedchurning through lawyers. Longworth and Mon-ger were the third set of lawyers he’d used in a fewmonths. In the course of representing Harvey, theattorneys prepared documents, deposed numerousindividuals and retained the services of a forensicdocument examiner. Then, in December 1997,Harvey terminated the services of the attorneys andproceeded without counsel.

The jury eventually found that the 1990 will wasvalid, but held that the 1993 codicil was invalid.The court then entered a judgment declaring the1993 codicil invalid—“null and void ab initio”—and declaring the 1990 will valid. Accordingly,Harvey was removed as executor of the estate.

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The dispute didn’t end here. When Harvey’s earlierattorneys went after the estate for fees and expensesowed to them, the family filed objections. The ques-tion that had to be decided was whether executorHarvey had acted in good faith when he attemptedto probate the 1990 will and codicil. The appealscourt found itself unable to make this determina-tion with any certainty. So, it sent the case back toprobate court to figure out whether Harvey hadacted in bad faith. If he did, the appeals court said,the probate court would “have to apportion, insome equitable fashion, services performed by theattorneys....” (At press, this case was still undecided.)

H O W F E E S W O R K

What exactly constitutes excessive legal or ad-ministrative fees? The term is more limited thanangry clients think.

The March 2001 District of Columbia Court ofAppeals decision in Estate of Hazel M. King, et al.took a broad view of what’s a fair fee. The case wasone in which the key players had multiple roles—in this case, as trustees and personal representatives,relating to the same assets. It was also the secondtime the court had considered the “contentious ad-ministration of the estate of Hazel M. King.”

King had died, with a will in place, in July 1991 atthe age of 91. The Estate of Hazel M. King was thedistributee of the remaining principal and the ac-cumulated and undistributed income of an intervivos revocable trust that had been created byKing, which by its terms terminated at her death.The estate consisted of approximately $1.5 million

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in assets comprised of cash, stocks and bonds. RiggsNational Bank and Sanford Goldstein were trust-ees; Riggs and Goldstein were also named co-per-sonal representatives of the estate, along with LillianMalins.

All the specific legacies were paid. The trust pro-vided that:

upon termination of this trust, the remain-ing principal and the accumulated and un-distributed income, if any, shall be paid overto the Personal Representatives of theGrantor’s estate and said trust assets shallbe distributed in accordance with theGrantor’s will, dated August 27, 1982.

This made yet another situation in which the trust-ees were also personal representatives and—mostlikely—beneficiaries. King’s trust also provided that:

The [t]rustees shall be entitled to receivethe compensation that is customary fortrustees in the District of Columbia; pro-vided, however, that the compensation ofany institutional [t]rustee shall be in accor-dance with such institution’s standard trustfee schedule as in effect from time to time.

From a few weeks after King died in 1991 untilearly 1998, King’s heirs, the trustees and the per-sonal representatives battled over every scrap ofdetail related to the estate. The trustees failed tomake several required reports on the estate’s assets.And no one could agree on what constituted a “stan-dard trust fee.”

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On these counts, the probate court:

1) approved unpaid trustee commissionspayable to Riggs but denied furthertrustee commissions requested byGoldstein;

2) approved in full the compensationsought by the law firms representingRiggs and Goldstein; and

3) approved half of the compensationsought by Riggs as personal represen-tative, but

4) denied entirely the compensationsought by co-personal representativesGoldstein and Malins.

The probate court ruled that the personal represen-tatives were responsible for the failure to disclosethe final account of the estate to the beneficiariesand sanctioned Riggs by reducing its requestedcompensation by half. Because Goldstein had beenoverpaid from the estate in his role as trustee, thetrial court refused to approve further compensationfor him (though he was not required to reimbursethe estate).

Several parties appealed these decisions; the appealscourt combined the separate appeals into a singlecase that would consider both the administrativeand legal fees being charged to King’s estate.

The appeals court heard expert testimony from boththe trustees and the beneficiaries regarding generalpractices in the payment of trustee commissionsin the District of Columbia. That figure, according

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to the court, was a 1 percent trust termination feeof $14,820.69 taken by both Riggs and Goldstein(a total of $29,641.38), as well as a $1,251.95 ter-mination fee for principal reductions taken by Riggsand $2,502.93 in other commissions taken byGoldstein. Thus, the contested trustee compensa-tion on appeal was $33,396.26.

The appeals court considered Riggs’s fees first. Itnoted that institutional trustees are often paid com-missions based on their standard schedules of fees,but that institutional trustees in the District of Co-lumbia typically do not charge a percentage termi-nation fee where they serve as trustee for a trustthat pours over into an estate for which they alsoserve as personal representative—even if a publishedfee schedule literally permits a termination fee.

But the probate court had noted (correctly, accord-ing to the trial court):

[T]he payment of termination commissionswas contractual, in the sense that the Trustinstrument provided that institutional com-missions would be based upon the fee sched-ule of Riggs...which in turn does providefor termination fees....

Riggs was within its contractual rights, pursuantto the trust instrument and the fee schedule in placeat the termination of the trust, to receive the termi-nation fees.

However, noting the “natural conflict of inter-est” that arises when the same entity occupies theroles of both trustee and personal representative,

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and citing Riggs’s failure—as personal representa-tive—to provide a final account of the King trustto the heirs until compelled to do so by court order,the appeals court awarded Riggs one-half of its re-quested personal representative compensation basedon the “totality of the circumstances.”

Non-institutional trustees customarily bill their time

at an hourly rate; otherwise, non-institutional co-

trustees are typically paid 50 percent of what the

institutional co-trustee is paid.

Rather than presenting an hourly statement of ser-vices, Goldstein, a certified public accountant,charged the trust the same commissions chargedby Riggs at its institutional rate. The probate courtfound that Goldstein’s request for commissions was“entirely arbitrary” and approved Goldstein’s trusteecommissions at 50 percent of the commissionscharged by Riggs.

The appeals court stressed that the standard for de-termining fair administrative fees was based onwhat was reasonable. It quoted D.C. law:

A request for compensation for work per-formed with respect to the administrationof an estate [by each personal representa-tive or any attorney employed by them]must be accompanied by documentationshowing a reasonable relationship betweenthe requested fees and the nature of the ser-

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vices performed, the reasonableness of thetime spent, the number of hours expended,the applicant’s usual hourly compensation,and the results achieved.

Because Goldstein had overcharged the trust byalmost $15,000 while King had been alive, the pro-bate court had denied Goldstein any further com-pensation. Rather than have Goldstein reimbursethe estate for the prior overpayment, however, thecourt offset the amount Goldstein had been over-paid as a trustee against the amount he was request-ing in personal representative compensation.

The appeals court found that the overpayment re-ceived by Goldstein as trustee “should be deductedfrom his claimed compensation as a Personal Rep-resentative.”

But the court went further—concluding that, “inconjunction with a further reduction for all of thesame reasons that this court will reduce the fees ofRiggs,” Goldstein was entitled to no more than$10,000 of his requested $20,000 personal repre-sentative compensation. This meant that Goldsteinowed the estate between $4,000 and $5,000.

These decisions resolved the administrative fees; so,the court moved on to consider the legal fees. King’sheirs asked that the legal fees they had incurredbringing litigation against Riggs and Goldstein beassessed as a sanction against Riggs and Goldstein.Riggs and Goldstein, on the other hand, filed forpayment from the estate, pursuant to D.C. law, ofthe fees expended by the attorneys representingthem as personal representatives.

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The appeals court noted, ruefully:

Although both requests were for work per-formed in connection with the [same] liti-gation and raise similar issues, they are con-sidered under different standards. The lega-tees’ fee request is an exception to the“American Rule,” under which litigants,win or lose, bear their own fees.

The appeals court noted that it had previously rec-ognized a narrow exception to this rule in cases“where a party...withholds action to which the op-posing party is patently entitled...because of a fi-duciary relationship, and does so in bad faith, vexa-tiously, wantonly or for oppressive reasons....”

Did this bad faith exception apply to Riggs andGoldstein?

In short: No. The court ruled that, in their capacityas trustees, Riggs and Goldstein didn’t owe a fidu-ciary obligation to the heirs. And the court did “notregard the defense of the civil action to have beenmaintained in ‘bad faith’” because there was “noth-ing vexatious about defending an allegation or de-mand that was deemed to be meritless.”

On the other hand, Riggs and Goldstein’s requestfor legal fees was governed by D.C. law, which pro-vided that a personal representative who prosecutesor defends a proceeding “in good faith and withjust cause” is entitled to “necessary expenses anddisbursements relating to such proceeding.”

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This was like a logic problem from a college phi-losophy class. A determination that Riggs andGoldstein’s litigation posture was not in bad faithfor purposes of an equitable exception to theAmerican Rule did not necessarily mean that Riggsand Goldstein were entitled to reimbursement oftheir own legal fees, which must be supported by ashowing of “good faith and just cause.”

A lack of bad faith does not establish good faith.

The probate court had found that “all attorneys’fees were necessary and reasonable,” having been“convinced that the Personal Representatives had aduty to monitor and protect the interests of theestate in the lawsuit that was technically filed againstthe Trustees.” According to that court, “[s]uch feesare a basic bill that must be paid by the estate.”

But the appeals court noted that:

In the context of the requests for attorneys’fees, which must be based on an evaluationof [Riggs and Goldstein’s] conduct..., how-ever, the court cannot blind itself to thefact that throughout that litigation [their]responsibilities as trustees had been super-seded, as of Ms. King’s death, by their du-ties as personal representatives.

So, the question was not simply whether the trust-ees had a good legal defense to the lawsuit. It was:Should they have continued to defend the lawsuit,

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with its drain on the assets of the estate, when theyeasily could have met their reporting obligations?

Riggs and Goldstein didn’t owe the heirs any fidu-ciary duty when they were wearing their “trusteehat;” but they did when they were wearing their“personal representative hat.” The appeals courtnoted that these dual responsibilities were “inex-tricably connected in the controversy.”

The dual responsibilities shouldered by Riggs andGoldstein resulted in them simultaneously defend-ing—as trustees—a lawsuit from the heirs but moni-toring it—as personal representatives—on behalfof the estate. They were not free to act as if theywere solely trustees when they also were gettingpaid in their capacity as personal representatives.

The appeals court suggested that an independentpersonal representative would have demanded thefinal trust account from the trustees, so as not todissipate the assets of the trust/estate with unnec-essary legal expenses. And that was the standardthat needed to be applied:

Having taken on dual conflicting roles,[Riggs and Goldstein] are not relieved oftheir responsibility to act independently inthe fiduciary roles which they occupy.[They] had a duty to demand a formal ac-count from the [t]rust and take appropri-ate actions concerning the Trust account-ing if it was not forthcoming.

The lower court had determined that the attorneys’fees were “well earned” and “not unreasonable” and

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that the fiduciaries—not the lawyers—were respon-sible for the failure of reporting. The issue, there-fore, was not whether the lawyers should be com-pensated but whether they should be compensatedby the fiduciaries or the estate.

On this note, the lower court had determined thatthe bulk of the Riggs and Goldstein’s legal fees (to-taling approximately $125,000) were incurred inthe exercise of their duty, as personal representa-tives, to monitor the litigation on behalf of the es-tate. That suggested the estate should have to paythe fees. But the lower court had not explained what“bulk” meant in detail. Why the need for the ex-tensive monitoring represented by a fee of thatmagnitude?

The appeals court sent the case back to the lowercourt to resolve the details of how much the estatewould have to pay...and how much Riggs andGoldstein would have to pay.

When all was concluded, administering King’s es-tate was probably not a money-maker for the trust-ees. And it was a money-loser for her heirs.

C O N C L U S I O N

As this chapter has shown, living and dying getsexpensive. We haven’t even gotten to the heart offamily expenses—taxes, which make family moneymatters even more problematic. But first, the ques-tion must be asked: What happens when somebodydies? The answer is in the next chapter.

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CH

AP

TER

WHAT HAPPENS

WHEN SOMEBODY

DIES

6

Through the first half of this book, we have assumedthat the “you” reading each chapter is the personwho is creating family money...or at least planningwhat to do with family money that’s in his or hercontrol.

Starting in this chapter and continuing for the restof the book, we’re going to adjust the focus slightly.Assume—for the most part— that the “you” read-ing the book is the person who’s been given theresponsibility of managing family money. The“you” might be an executor...or an heir who’s alsoin charge of making estate decisions.

This different focus doesn’t change the mechanicsof how to use wills, trusts and insurance. And itshouldn’t change the attitudes that you have aboutmoney—it’s still best to try to live beyond moneyand to plan for retirement in a way that preservesas much wealth as possible for your heirs.

But the different focus does reflect the specific chal-lenges that an executor or heir faces. What happensimmediately after a death in the family? How do

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W H A T H A P P E N S W H E N S O M E B O D Y D I E S

you deal with problem siblings or cousins? How doyou deal with taxes...even if the older generationanticipated them?

Of course, matriarchs and patriarchs will want toconsider these issues, too. Hours of advice from somecommission-based life insurance agent isn’t worthas much as a few minutes of thinking in concreteterms about what your eldest child will face afteryou’re gone.

The first point to make as we head into this topic isthat advance planning can make a big difference inensuring that things go smoothly after someone hasdied. If someone asks you to be his or her executor,make sure that you have a working knowledge ofthe estate and the maker’s wishes. Things like spe-cial burial or organ donation arrangements shouldbe discussed in advance; make sure that you knowwhere financial and other important documents arekept so that you can get them quickly, when youneed to.

F O L L O W I N G T H E W I L L

No matter how contentious relations may have beenin life, most family members want to honor thegeneral spirit of what parents, grandparents or otherelders wanted to do with their resources.

And there’s more to this process than familial honor.Usually, the fastest and least expensive way to dis-tribute family money is to follow the guidelines setup by existing wills and trusts. You can changethem...but it’s time-consuming and expensive.

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So, the first thing to do when an asset-controlingfamily member dies is take a look at the paperworkhe or she has left. Hopefully, you will have had somecommunication with the person before, so this lookwill be a review of plans.

Usually, this is done with the assistance of a lawyer(often the dead person’s); but you may also needthe help of a financial advisor, CPA or other profes-sional. In most cases, these professionals will be paidfrom estate funds.

Don’t confuse advice for decision-making. Tragedy

often follows families who let hired guns make deci-

sions. If you’ve been named executor of or heir to

family resources, your family wants you to make the

decisions. You don’t need a law degree, MBA or

other license to know what’s best for your family.

No matter how intimidating it may be to makedecisions about wealth that belonged to a spouse,parent or in-law, it’s usually better to have a familymember make an imperfect decision than an out-sider make a “perfect” one. Your memory of whatyour father said during a Thanksgiving dinner 10years ago is worth as much—or more—than thedetails of some subparagraph of the tax code.

If a lawyer or financial advisor is pressing too hardabout what you should do and when you should doit, take a step back from the process. Estate plan-ning and inheritance laws don’t usually require im-mediate actions. In fact, they’re more likely to re-

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quire some time to lapse in order to maximize thechance of good judgment. One good tactic formanaging professionals is to ask for a memoran-dum or letter outlining at least three options to anytrust structure, tax strategy or investment. Insistthat the pro’s and con’s of each option be simple;this shouldn’t take more than a page or two.

As the person dealing with the fallout of death inthe family, you may have to navigate come confu-sion that came at the end of the dead person’s life.In dramatic fashion, this can mean things like death-bed wills or codicils; in less dramatic fashion, it canmean bad decisions on things like power of attor-ney agreements.

A power of attorney is normally given to allowsomeone (sometimes called a recipient or assign) toact for another person. Common examples are giv-ing a power of attorney to sign checks or buy orsell stocks. A power of attorney normally becomesvoid when the person granting it dies or loses men-tal capacity.

A durable power of attorney remains valid whenthe person granting it becomes incapacitated. Acommon example is to allow the donee recipient tomake medical care decisions even after the donorbecomes incapacitated.

A properly obtained and properly given power ofattorney is often an indication of whom the persontrusts. Sadly, when a person is sick or quite old,matters of trust can become...unpredictable.

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Powers of attorney are normally good until the per-son relying on the power of attorney knows thatthe giver of the power is dead or incapacitated. Bythe time an executor or personal representative comesinto the picture, the power of attorney—durable ornot—will have expired. But the results can still befresh. The potential for financial abuse is obvi-ous. A dishonest person holding a power of attor-ney could use the giver’s banks, stocks and assetsfor their own use after the giver was legally inca-pacitated and no one would know the money wasbeing taken.

If you’re named executor, you become responsible

for your friend’s estate from the moment of death.

The law requires you to fulfill your duties with the

utmost integrity and restricts your investment of

assets unless you are explicitly given more discre-

tion in the will.

As executor, your duties may include:

• arranging for funeral services and burial(at least paying for these things, if notplanning them);

• preparing an inventory of assets, invest-ments and debts; the list should includepension assets, bank accounts and in-surance policies naming the estate asthe beneficiary;

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• collecting legal documents; includingwills, trusts, power of attorney docu-ments, bank account information, so-cial security information, birth certifi-cate, marriage license(s), citizenshippapers, employee benefits and recenttax returns;

• determining the status of titles ordeeds to property in the estate (in otherwords, did the dead person really owneverything he or she seemed to own?);

• making sure that all insurance poli-cies are assembled and complied with;this will mean notifying life insurancecompanies and providing death certifi-cates, etc.; it may also mean keepingpayments to home and car insurers cur-rent, at least for an interim period;

• informing the benefits departmentsof dead person’s place of employment andthe Social Security Administration...andproviding them with any necessarydocumentation;

• contacting any creditors;

• scheduling a reading of the will;

• filing for probate...that is, certificationthat the will and related documents arevalid.

Remember: The term “executor” can mean differ-ent things in different situations. Some wills givethe executor broad discretion to make decisions thatresolve conflicts or allocate assets; other wills makethose decisions and only want the executor to fill

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out required documents. Make sure you know therole you’re supposed to play.

W H A T E X E C U T O R S D O N ’ T D O

As we’ve noted before, trusts are usually designedto operate outside of the will and probate process.So, strictly speaking, an executor will usually nothave to get involved with trusts. However, an ex-ecutor may also be called upon to manage trust fundsestablished by the will for minors, mentally dis-abled or financially irresponsible beneficiariesand other family members who need help.

A good executor needs to know the complete picture

of what resources are flowing through which chan-

nels. If you’re an heir and an executor, you’ll prob-

ably be involved in both the probate work and the

trusts.

When probate has been concluded by a court (and,as we’ve seen, this process can take years), the ex-ecutor is responsible for transferring and distrib-uting assets.

If these assets are piles of cash in bank accounts, theexecutor will have a relatively easy time. But assetsaren’t usually so liquid. Personal assets belongingto the deceased are usually transferred into the nameof the executor or personal representative of theestate and then distributed to family members orother beneficiaries. This process is intended prima-rily to be a single method for calculating tax val-

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ues. But it can create family squabbles. Familymembers who haven’t been in contact in years havebeen known to go to court over grandpa’s collec-tion of blown glass.

When it comes to personal assets, the executor hasto handle various difficult issues, including:

• confirming payment of debts and ob-ligations, which may include mort-gages or liens on assets or complexmatters created by things like divorcesor legal settlements;

• distributing personal possessions, suchas family mementos or heirlooms, tonamed recipients...or those best situ-ated to receive them;

• collecting and depositing any incomefrom rents, licenses, partnerships orother activities of the deceased; and

• determining the value of personal as-sets and selling them, when necessaryor in the best interest of the estate.

That last item can be a killer. Family members havebeen known to pounce on what they think are be-low-market valuations of family assets. And they’renot always wrong to be worried about this issue—as we’ve already seen, executors will sometimes con-coct sweetheart deals whereby they acquire valu-able assets on the cheap.

Generally, an executor’s actions are judged accord-ing to the “prudent person rule.” Obeying thisrule is part of a fiduciary duty imposed by law on

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executors (and trustees) to act cautiously, as thoughdealing with their own affairs. If this duty is vio-lated and a loss of assets results, the executor mightbe ordered to pay compensation personally to thebeneficiaries; but this is a rare occurrence. The pru-dent person rule may seem like a burden—but it’sactually a protection for an executor.

Still, any executor—family member or not—has tobe aware that any decision or action he or she makesmay be scrutinized later by family members whothink they haven’t gotten enough money.

The best ways to minimize these problems are re-ally just common sense housekeeping matters:

• keep complete accounting records (de-posits and receipts for all transactionsinvolving the estate and its assets); theseaccounts should be organized chrono-logically and kept current;

• ensure the estate funds are earning anincome and are not wasting (the invest-ments an executor can make may belimited and should always be supportedby a written legal review);

• defend or prosecute actions on be-half of the estate—this usually in-cludes legal actions for the collectionof debts owing to or by the estate;

• distribute the estate according to theterms of the will—contesting or chal-lenging the will is rarely...veryrarely...the executor’s job;

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• arrange the transfer of titles of cars,home, or other properties; and

• file a terminal tax return and ensurethat all required taxes are paid.

An executor is entitled to reasonable compensa-tion, often limited to a certain percentage (5 per-cent is common in many states) of the property inthe probate estate. (Extra compensation, related tohandling some special matter, may be allowed by aprobate or other civil court.) In many cases, though,an executor will agree to take less—especially if heor she is a family member and also an heir.

S U R V I V O R S H I P

When it has fallen to you to make sense of an estateand the interests of its various heirs, a key issueyou’ll need to consider is survivorship. If you don’tkeep this in mind, someone may challenge the es-tate and a court may force you to think about it.

In short, different rights of survivorship may applyto different assets in the same estate. And this maymean that the dead person didn’t actually own ev-erything that he or she seemed to own.

A common example: The dead person had named a

spouse or children as “joint tenants with rights of

survivorship” in the title of a home. At death, the

house passes to the co-owners easily, without go-

ing through the probate process.

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Some state laws recognize joint ownership of ahome with rights of survivorship. By taking titleunder a survivorship deed, each owner holds an in-terest in the property. When one party dies, thatperson’s interest automatically transfers to thesurvivor(s). The most common alternatives are toown property in one name, in a trust, or betweenco-owners holding title as tenants-in-common.

With tenants-in-common ownership, each ownermay pass on his interest to the other through awill...but that transfer goes through probate.

In most first marriages, joint and survivor owner-ship with a spouse is fine. But people who’ve beenmarried more than once, people who are unmarriedand parents considering adding children to theirdeeds should think twice before taking title by sur-vivorship deed.

How can holding title by survivorship deed causelegal problems? One problem arises from the auto-matic transfer of ownership from one party to theother upon a death.

For example: A man is in a second marriage whenhe dies. He had intended to provide something forchildren from his first marriage out of the value hehad accumulated in his home—but he had a survi-vorship deed with his second wife. So, the entireinterest in the home passes to his second wife at hisdeath. Unless she knows his intent...and is kindenough to honor it...his children are left out of thepicture.

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Also, many people don’t realize that a survivorshipdeed takes precedence over a will. The will mayleave everything to all children equally but the onechild named on the deed will get the house.

In our discussion of real estate investments, wementioned that—in some states—joint survivor-ship may expose the property to the survivor’s credi-tors or ex-spouses. These parties are prone to nastylawsuits, especially if they think an asset is beingsold or transferred. This is another reason that anexecutor or personal representative needs to makesure that title to personal property in an estate isclear.

S E E K I N G A C O U R T ’ S A D V I C E

State law allows heirs and executors to ask ques-tions in advance of making any legal or investmentmove. This can make for a tedious process...and somepeople use it to excess. But it’s a good idea to usethe probate court as a sounding board—especiallyif you’re dealing with a complex estate.

The April 1998 California Appeals Court decisionin Janis Pittman et al. v. Susan Lee et al. dealt with acomplex estate made even more troubled by someill-advised moves on the part of one group of heirs.

Val and Donna Pittman, a married couple who eachhad children from previous marriages, created atrust in 1993. The trust estate was comprised oftheir personal property, which was described inSchedule A to their trust agreement. Schedule Awas further divided into three separate parts—Schedules B, C and D. The property described in

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schedule B was their community property; the prop-erty in schedule C was Val’s separate property; andthe property in schedule D was Donna’s separateproperty.

Upon Val or Donna’s death, the estate was to bedivided into three separate trusts:

• a survivor’s trust;

• an exemption trust; and

• a marital trust.

This structure was intended to answer the needs ofeach spouse’s children. The survivor’s trust includedall of the surviving spouse’s separate property andthe surviving spouse’s interest in the deceased’scommunity property. The exemption trust con-sisted of the “maximum pecuniary amount that canbe allocated to a trust that does not, to any extent,qualify for the federal estate tax marital deduction,without producing any...federal estate tax.” Themarital trust consisted of the balance of the estate.

Upon the death of one spouse, the exemption trust

and martial trust could not be amended, revoked or

terminated. However, the surviving spouse was al-

lowed to amend, revoke or terminate the survivor’s

trust—and could do whatever he or she wanted with

the income from the martial trust.

During the surviving spouse’s lifetime, the trusteecould pay to the surviving spouse the income from

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the exemption trust and utilize assets from the mari-tal and exemption trusts as necessary for the surviv-ing spouse’s health, education, support and main-tenance. The trust assets were to be distributed fol-lowing the death of the surviving spouse.

To make matters even more complicated, Val haddisowned one of his children. In fact, the trustagreement contained the following no contest clause:

Settlors have intentionally and with fullknowledge failed to provide for BARRYVALDEAN PITTMAN, the son of VALPITTMAN, or his issue. If any beneficiaryunder this trust, singularly or in conjunc-tion with any other person or persons, con-tests in any court the validity of this trustor the settlors’ Last Will and Testament...thatperson’s right to take any interest given tohim or her by this trust shall be determinedas it would have been determined as if theperson had predeceased the execution of thisDeclaration of Trust without surviving is-sue.

Donna died in February 1995 and Val died in March1995.

Donna’s distribution consisted of the balance ofthe marital trust and exemption trust and pro-vided for a $20,000 gift to her niece, Carrie AnnLee. The remainder of Donna’s trust was to be dis-tributed 40 percent to her son, Bradford Lee, and60 percent to her daughter, Susan Lee.

Val’s trust provided that $20,000 was to be distrib-uted to his nephew, Ronald Koftinow. The remain-

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der of the survivor’s trust was to be divided equallybetween his children, Janis Pittman and MarkPittman.

After Val died, Susan and Bradford Lee—Donna’schildren—asked to be appointed successor trusteesand requested an accounting of the estate. Theyclaimed that the designation of certain property inthe trust as either separate or community propertywas done without their mother’s knowledge—and that some assets listed as Val’s separate prop-erty were actually community property.

The Lees asked the court to modify the trust agree-

ment to move some of Val’s property into the com-

munity category.

When Val’s children—at least the ones he hadn’tdisowned—found out about what Donna’s childrenwere doing, they filed their own papers with thecourt. They argued that the Lees’ petition consti-tuted a contest of the Pittman trust and that theno contest clause should be activated.

This made Donna’s children nervous. They quicklyresponded that they hadn’t sought to void or in-validate the Pittman trust but merely sought “clari-fication” of its provisions.

This argument didn’t hold up very well. In Octo-ber 1995, a trial court found that the Lees’ effortsamounted to a contest. The court granted Val’schildren’s request to activate the no-contestclause.

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Donna’s children made a weak request that the courtreconsider because their original filing had been mis-takenly prepared using an incomplete copy of thePittman trust. The trial court denied their petition;they appealed.

The appeals court looked at the quadratic equa-tion of a will from the start. It pointed out that:

a no contest clause is enforceable against abeneficiary who brings a contest within theterms of the no contest clause…. Whetherthere has been a “contest” within the mean-ing of a particular no-contest clause dependsupon the circumstances of the particularcase and the language used. …[T]he an-swer cannot be sought in a vacuum, butmust be gleaned from a consideration ofthe purposes that the [will maker] soughtto attain by the provisions of [the] will.

According to Donna’s children, their petition wasfiled to clarify ambiguous provisions of the trustand to determine whether assets in the survivor’strust were property characterized as Val’s separateproperty. But the appeals court didn’t buy this ar-gument:

Val and Donna Pittman meticulously setforth pieces of property to be included inthe trust estate and characterized each pieceof property.... It is clear from the terms ofthe trust that Val and Donna intended theirproperty to be distributed according to theirprecise identification of the property as com-munity or separate property and according

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to their distribution scheme; they did notset forth their property in general terms.

So, according to the court, Donna’s children soughtto thwart this clear intent by recharacterizing prop-erty expressly placed in the trust and specificallycharacterized.

The court pointed out that state law allowed ben-eficiaries of a will to ask the court in advance whethera particular action would count as a contest. HadDonna’s children followed this statutorily autho-rized procedure, they could have avoided any for-feiture of benefits. They didn’t; so they lost.

C O N T E S T S A N D O T H E R D I S P U T E S

As we’ve seen throughout this book, contests andother legal challenges to wills and estate plansare a big concern for the people trying to maintainthe value of an estate. Unfortunately, there’s notalways much an executor or personal representativecan do about the fundamental matters that deter-mine a will’s validity—they’re not necessarily aroundfor or involved with the drafting of the document.

What can actually make a will invalid? Any dis-gruntled relative that can argue that the will failedin some basic requirement—it has internalcontradictions...it’s witnessed only bybeneficiaries...and, the old chestnut, the will makerwas not of sound mind.

Something we’ve noted before may warrant repeat-ing. It’s tough to show someone was not of soundmind when making a will. For example: California’s

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Due Process in Competency Determination Act startsfrom a rebuttable presumption that people do havethe capacity to make decisions and to be respon-sible for their acts and decisions. The person whowishes to challenge the acts or decisions of a willmaker or trust maker has to prove mental deficits—and prove a connection between the deficits andthe decisions in question. That’s a heavy legal bur-den.

Most people who contest a will, trust or an estatebelieve they are entitled to something or that theyhave received unfair treatment. A son or daughtermay feel that all the children should be treatedequally. On the other hand, a child might feel thathe or she should receive more because of specificthings he or she did for their parents.

People with conflicting claims in estate disputesoften carry the emotional baggage of many thingsthat were said and done over a period of many years.There may be a history of hurt feelings and bro-ken promises that affect how deep the feelings run.

Mediation and arbitration sometimes allow all the

people involved to have their say and agree among

themselves what they consider to be a fair and rea-

sonable argument. Mediation and arbitration can

be used as part of litigation or in some cases in-

stead of litigation.

What does the executor or personal representativedo if the contest works? A court will usually look to

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see if there is a former will. If the will maker had awill that was written before the invalid one, and heor she did not revoke the will upon the creation ofthe second, the court will treat that former will asvalid.

If there is no former will or the former will was re-voked, the court will treat the property in the es-tate as if the testator had died without a will. Andwe’ve already discussed how tough that canbe...though it gives the executor a lot to do.

Contests can also be based on things that trusteesor executors do in the wake of a will maker’s death.The August 1999 Texas Appeals Court decision inRichard K. and John G. Sorrel v. Frank Sorrel Jr. dealtwith the sloppy aftermath of some lazy post-mortem actions.

Frank Sorrel died on February 6, 1981. He left awill that established two trusts: a wife’s trust and afamily trust. Sorrel appointed his wife, Katherine,and their three sons—Frank Jr., John and Rich-ard—to serve as co-trustees of the Family Trust.Katherine removed Frank Jr. as a co-trustee in 1991.She died in 1994.

According to its express terms, the family trust ter-minated upon Katherine’s death and the trust prop-erty was to be distributed per stirpes to her thenliving descendants. But John and Richard kept itgoing for almost three years...until October 1997.Compounding this problem: They failed to keepclear financial records and didn’t make timely re-ports about the condition of the estate.

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Frank Jr. eventually sued his brothers, complain-ing that they had failed to wind up the trust anddivide the property in accordance with its terms.He also alleged impropriety in their capacities astrustees and sought their removal—plus damagesfrom the estate.

The trial court largely agreed with him, ruling that:

• the family trust terminated uponKatherine’s death and the only dutiesof John and Richard were to wind upthe affairs of the trust;

• John and Richard continued operatingthe trust three years longer than theyshould have;

• John and Richard had not filed eitheran annual accounting or the final ac-counting of the trust; and

• the real estate belonging to the trustvested in the beneficiaries, Frank Jr.,John and Richard, as tenants in com-mon upon termination of the trust andcouldn’t be partitioned in any othermanner.

All three brothers appealed, though for differentreasons. John and Richard wanted to be able topartition the real estate. Ironically, Frank Jr. alsowanted to divvy up the real estate—but in a differ-ent manner.

The appeals court, however, affirmed that the broth-ers didn’t have the power to partition the trustproperty. Texas law on this matter stated:

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A trust terminates if by its terms the trustis to continue only until the...happeningof a certain event and the...event has oc-curred. If an event of termination occurs,the trustee may continue to exercise thepowers of the trustee for the reasonable pe-riod of time required to wind up the affairsof the trust and to make distribution of itsassets to the appropriate beneficiaries.

So, when the trust terminated, John and Richardcould only continue as trustees for a reasonableperiod of time.

They argued that, because their powers as trusteesexpressly included the power to partition assets ofthe trust, they were endowed with that right be-yond the termination of the trust. The appeals courtdisagreed.

The express terms of the family trust stated thatupon Katherine’s death “the trust...shall terminate,and the trust property shall be distributed per stripesto [her] then living descendants.”

The trust provided for how the property should bedisposed of upon termination. After that point, thetrustees retained only the powers necessary to windup the affairs of the trust or to distribute the prop-erty in accordance with the terms of the trust. Thiswas because title, in effect, had already passed tothe beneficiaries.

The appeals court noted:

On the termination of a trust, the estate ofthe trustee ceases, and the legal, as well as

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the equitable, title vests in the beneficialowner without the necessity of any act orintervention on the part of the trustee, un-less the intention of the creator appears thatthe legal title should continue in the trustee.The termination of a trust leaves the trusteewith a mere administrative title to thefund....

Upon Katherine’s death, the trust terminated andthe trust property passed according to the trust in-strument to her living descendants. On termina-tion of the trust, legal and equitable interestsmerged and the beneficiaries acquired full owner-ship interest in the property.

The court held that trustees could not partition trustproperty prior to distributing it in accordance witha trust agreement. They could only convey it tobeneficiaries in the manner instructed by the trust.The court went on the rule:

The settlor may bestow upon the trusteespowers to distribute realty of the trust bypartition upon termination, but such poweris not present here. Hence, these trusteeswere acting outside their authority in at-tempting to convey trust property in 1997,and the trial court was correct in holdingthat conveyance void.

John and Richard could not partition realty afterthe trust had terminated. The appeals court affirmedthe lower court’s ruling—and the brothers remainedlinked as tenants in common in their inheritedproperty.

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S T A T E I N T E N T I O N S C L E A R L Y

Careless wording of beneficiary designations—inwills or in life insurance policies—can result in familydisasters. Each year in courtroom litigation thou-sands of hours are spent trying to sort out benefi-ciaries and heirs, all because of poorly worded ben-eficiary designations.

For example, if you just designate your “wife” (with-out specifically naming her) as the beneficiary, aproblem may arise. If you have been married sev-eral times, does “wife” mean your current wife orthe woman you were married to at the time thebeneficiary was designated? Or does it apply to,perhaps, a different wife who is now caring for yourminor children? Who was the intended beneficiary?

Be sure to designate your beneficiaries by theirfull name to avoid misunderstanding. Likewise ifyour “children” are designated as a class to receiveyour life insurance proceeds, it may be unclearwhether you intend to include an adopted child inthe disposition. The insurer will make every effortto comply with your wishes, as long as they areclear. When the intention is not clear, the insurermust distribute the funds according to the appar-ent intent of the policyholder, or pay the funds intocourt and seek a judicial determination of the properdistribution.

In naming children as beneficiaries, a class desig-nation is the best idea. Class designations shouldbe used when individuals of a specific group (suchas your children) are to share equally in your lifeinsurance proceeds.

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If you designate your children as beneficiaries by

naming each child specifically, other children might

be accidentally excluded, especially if you failed to

update your beneficiary provision to include chil-

dren who joined the family since the original desig-

nation was made.

The wording of the class designation must care-fully specify your intentions. “My children” willinclude children of other marriages or other unions,when in fact you might prefer to exclude both. Inaddition, this classification would exclude a post-humous child (born after the father’s death) fromreceiving a portion of the proceeds. If you wish torestrict your designation to the children of yourpresent marriage, you might designate your presentspouse “Anne Marie Salvage” as primary benefi-ciary and use the term “our children” or “childrenborn of this marriage” as contingent beneficiaries.By using your spouse’s name, followed by the des-ignation “my wife,” no question can arise as to yourintent to have her as the primary beneficiary. Like-wise, your intent to restrict the contingent benefi-ciaries to children of this marriage is clear.

As we’ve seen before, per capita and per stirpes des-ignations are also used to benefit children. The percapita designation means “by heads,” (individual)and per stirpes means “by stock” (family line orbranch).

Under a per capita designation each surviving childshares equally in the death benefit. Under a perstirpes designation each child, grandchild, or great

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grandchild, etc., moves up in a representative placeof a deceased beneficiary. A per stirpes designa-tion can become quite involved and it is importantto know how the line of representation works be-cause of the way courts interpret this designation.

S I M U L T A N E O U S D E A T H

Although life insurance isn’t usually something ex-ecutors or personal representatives deal with directly,its terms and conditions can influence the size andshape of an estate.

A problem can arise when the policyholder and theprimary beneficiary—often a married couple—diesimultaneously with no evidence as to who diedfirst. Many states have adopted the Uniform Si-multaneous Death Law. Under it, if there is noevidence as to who died first, the policy will be settledas though the policyholder survived the beneficiary.Accordingly, the life insurance proceeds would bepaid to the estate of the policyholder, not the estateof the beneficiary. In this case, the money flowsinto the estate...and the executor’s oversight.

An exception: If contingent beneficiaries are desig-

nated in the policy, the proceeds would be payable

to them.

For example, policyholder Paul has designated hiswife, Joanne, as primary beneficiary on a $100,000life insurance policy. Paul’s children from a previ-

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ous marriage are named as contingent beneficia-ries. Paul and Joanne are killed in an auto acci-dent.

If it’s determined that Joanne survived Paul by 15minutes, the insurance proceeds would be payableto Joanne’s estate and may not benefit Paul’s chil-dren.

However, if—in accordance with the Uniform Si-multaneous Death Act—it can’t be determinedwhether Joanne survived Paul, the proceeds are pay-able to Paul’s children as contingent beneficiaries.

If the children were not designated as contingentbeneficiaries, then the proceeds are payable to Paul’sestate.

To avoid the problem of the primary beneficiaryliving for a very short time following the death ofthe policyholder and thus receiving the insuranceproceeds, some life insurance policies include a com-mon disaster provision. This provision places atime element on the survival period of the primarybeneficiary; if the beneficiary doesn’t survive thepolicyholder by at least 30 days (the specific num-ber of days may vary) both will be assumed to havedied at the same time. And, in that case, benefitswould be paid to contingent beneficiaries or theestate.

I N S U R A N C E A N D C R E D I T O R S

One of the unique features of life insurance is thatthe life insurance proceeds are exempt from theclaims of the policyholder’s creditors as long as there

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is a named beneficiary other than the policyholder’sestate. Even the cash value of a life insurance policyis generally protected from creditors. Althoughthe life insurance contract is between the policy-holder and the insurer, once that person has died, acontractual arrangement exists between the insurerand the beneficiary. The beneficiary may even suethe insurer if payment is not received upon properproof of death.

The spendthrift clause is designed to protect the

beneficiary from losing the life insurance proceeds

to creditors, assigning the proceeds to others, or

spending large sums recklessly.

The spendthrift clause is not applicable to lumpsum settlements but is operative with settlementoptions. It only protects the portion of proceedsnot yet paid (due, but still held by the insurer) fromthe claims of creditors to the extent permitted bylaw. You would normally elect to include this pro-vision at the time you apply for life insurance. Aslong as your proceeds are paid according to a settle-ment option where the insurer keeps the proceedsand sends a monthly payment to the beneficiary,then the amounts received by your beneficiary areexempt from the claims of the beneficiary’s credi-tors.

This provision allows the insurer to select a benefi-ciary if the named beneficiaries cannot be foundafter a reasonable amount of time. To facilitate thepayment of the death proceeds, the insurer may

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select a beneficiary if this provision is in the policy.This provision is found most often in policies withsmall death benefits, such as industrial life insur-ance. The insurer would usually select someone whois in your family’s immediate blood line (a brother,sister, aunt, etc.).

W H E N I S T H E P R O C E S S O V E R ?

In most cases, a closed probate estate cannot be re-opened after a final decree. It is usually the publicpolicy of the courts and the state to administer andclose estates as rapidly as possible. In some rare situ-ations—where exceptional fraud has been perpe-trated on the court—a closed probate estate canbe reopened. But this is extremely rare.

Most estates count on the quiet whimper of a closedprobate file as the sign that the process is finished.That’s the cheapest way to go. Of course, some es-tates have to suffer the bang of a contentious courtdecision to resolve the matters.

The May 2001 Arkansas Supreme Court case JuanitaJackson v. Jerry Kelly was one such bang. And it raiseda new legal issue in Arkansas: Is there such a thingas a tort of “intentional interference with inher-itance?”

With the exception of a few minor details, the storyis a familiar one. Mother has a will that splits every-thing equally to her son and daughter. Daughterleaves her brother and his wife to assist mother inpersonal matters, including execution of a new will.Son and wife spin details involving a loan mother

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co-signed for daughter’s son so that daughter is even-tually written out of will.

Some say it’s the perfect crime. The brother hasnothing to lose. Even if he’s found liable for tor-tious interference, the original will is reinstated andhe’s only out the half of the estate he tried to pilferfrom his sister.

Alta Austin died in 1997. Following her death, herson, Tommy Austin, petitioned to have her willadmitted to probate. The will named Tommy asthe sole beneficiary and specifically excluded his sis-ter, Juanita Jackson.

The point on which the whole story turned was afinancial one. In August 1993, Juanita’s son An-drew borrowed $30,000 on a short-term basis froma local bank. Alta co-signed the note and placedtwo certificates of deposit in the amount of $37,600as collateral for the loan to her grandson. He failedto repay the loan by its due date.

According to Juanita, Andrew had contacted thebank about an extension on the loan and Alta hadagreed to continue her security through the exten-sion.

In January 1994, Andrew’s wife Betty—who assistedAlta in personal matters—set a date for Alta to meetwith attorney Jerry Kelly. At the meeting, Alta pre-pared a new will and disinherited Juanita. Kellyalso prepared a complaint for Alta, alleging thather grandson had breached his loan agreementwith the bank and that the bank “presently or willin the immediate future execute upon the certifi-

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cates of deposit to the extent of the loan balance[.]”The complaint, which alleged that both Juanita andAndrew had persuaded Alta to pledge her certifi-cates of deposit as security for the loan, sought$30,553.32 to compensate her for losses, costs andattorneys’ fees.

The lawsuit was eventually dismissed after Andrewrepaid the loan in full.

According to Juanita, all of this occurred becauseTommy and his wife had misleadingly convincedAlta that she would lose her certificates of depositbecause of Andrew’s delayed repayment of the loan.Juanita believed that attorney Kelly and herbrother’s wife had jointly and severally conspiredto have Alta leave all of her estate to Tommy, inter-fering with Juanita’s expected inheritance.

As a result, Juanita contested the will in the pro-bate court on the following grounds:

• her mother did not have the requisitetestamentary intent to execute thedocument as required by Arkansas law;and

• her mother was subject to undue influ-ence in preparing and executing thedocument.

The probate court found that Juanita had failed tomeet her burden of proof to invalidate the will; itadmitted the will that Kelly had drafted for Altainto probate. Juanita appealed.

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The Arkansas Court of Appeals affirmed the court’sdecision. Juanita then filed a separate lawsuit in statecourt, claiming civil conspiracy and tortious in-terference with an expected inheritance.

Kelly disputed Juanita’s allegations and pointed toseveral legal theories that nullified her claims. Mostimportantly, he pointed out that the tort of inten-tional interference with expected inheritance hadnot been recognized in Arkansas.

The circuit court dismissed Juanita’s claims againstKelly and Betty. Juanita appealed again, arguingthat although there was no Arkansas case directlyon point an Arkansas appeals court had impliedlyrecognized interference with an expected inherit-ance as a tort in a 1990 decision.

The appeals court disagreed:

In that case, we affirmed the trial court’ssummary judgment dismissal of a claim fortortious interference with expected inher-itance. In doing so, however, this court didnot decide whether such a cause of actionactually existed under Arkansas law becausethe issue was never raised by the parties.

Juanita then changed her argument, pointing toan obscure section of the Restatement (Second) ofTorts entitled “Intentional Interference with Inher-itance or Gift.” This section read:

One who by fraud, duress or other tortiousmeans intentionally prevents another fromreceiving from a third person an inherit-

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ance or gift that he would otherwise havereceived is subject to liability to the otherfor loss of the inheritance or gift.

But the Restatement (Second) of Torts is a kind ofhandbook for states to use. It’s not law. And theArkansas Appeals Court wasn’t inclined to make itso, simply “to provide Juanita with a remedy inthis case.”

The appeals court went on to write:

[Juanita] had access to an adequate remedyin probate court. Her claim for interferencewith inheritance in this case was based onher own assertion that her mother “hadmany times represented to [her] that shewould inherit one-half of [the] property....”Thus, in her complaint, Juanita sought com-pensatory damages equal to one-half of theproperty.

Had Juanita prevailed in her will contest, she wouldhave inherited one-half of Alta’s estate. A suc-cessful will contest would have provided Juanitawith the same remedy that she sought in her tortaction in circuit court. If either action would pro-vide an adequate remedy, a plaintiff is usually lim-ited to the probate action because that is the pre-ferred method for resolving issues related to wills.The appeals court ruled:

Most states that have considered the issuehave held that a claim for tortious interfer-ence with expectancy of inheritance mayonly be brought where conventional pro-bate relief would be inadequate.... If a will

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contest is available to the plaintiffs, and asuccessful contest would provide completerelief, no tort action is warranted.

In a last-ditch gambit, Juanita tried a public goodargument. She claimed that the appeals court shouldrecognize intentional interference with inheritancebecause, if it didn’t, other plaintiffs would be leftwithout an adequate remedy in probate court. Shehypothesized that “there would be no adequate pro-bate court remedy where the plaintiff is not an heirof the testator or where the property purportedly tobe left to the plaintiff was in a trust.”

But this argument was simply too wacky for thecourt. It concluded:

the undisputed facts of this case are thatJuanita was an heir of the testator, and theproperty was not in a trust. In this case, therelief available in probate court would havebeen adequate had she prevailed; she wouldhave inherited one-half of the decedent’sestate.

So, the appeals court decisively rejected makingnew law because the probate court offered a suffi-cient remedy. If the claim had been sustainable....whichit was not.

C O N C L U S I O N

Among the most daunting things for survivors todeal with when someone dies, besides what we dis-cussed in this chapter, is taxes. We’ve dedicated anentire chapter to this subject, and it’s coming upnext.

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President George W. Bush’s campaign promises toabolish the death tax—an estate tax levied on es-tates worth more than $675,000—has focused fur-ther attention on what was already a heated debate.Conservatives have spearheaded the effort to havethe tax repealed, claiming that it is nothing morethan an unfair tax on death.

Opponents of the tax point out further that it fallsparticularly hard on family-owned small businessesand farms.

But supporters of the estate tax contend that, whileno one wants to see families lose their farms, abol-ishment of the death tax is unnecessary. They arguethat the tax only applies to 2 percent of the popula-tion. Within this 2 percent, only 6.5 percent ofthose who pay the estate tax are farmers or smallbusinessmen. The majority of the $18 billion raisedannually by the estate tax is drawn only from thepockets of the very wealthy. Repealing the tax wouldalso be subtracting 1.2 percent of the federal taxrevenue, which would have to be made up else-where.

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And, while the current amount of the exemption is$675,000, it is $675,000 after subtracting unlim-ited transfers to spouses and charities.

In February 2001, wealthy Americans like BillGates, Sr., Paul Newman, George Soros and War-ren Buffett came out publicly against a repeal ofthe estate tax.

T A X E S S T I L L L O O M L A R G E

Despite President Bush’s best efforts, taxes domi-nate most people’s thoughts about managing fam-ily money. Issues among family members may beemotional...familial loyalty can be a blessing and acurse...greed and materialism can warp good in-tentions. But, above all of these matters, the taxmanwants to be paid everytime anyone inherits any-thing of substantial value.

If someone gives someone else money or property,

the giver (though not the receiver) may be subject

to federal gift tax. The money and property some-

one leaves in an estate when he or she dies is usually

subject to federal estate tax. The proceeds of a life

insurance policy can avoid the tax bite...unless

they’re paid into an estate, in which they are taxed

at the estate’s rate.

And these are all just federal taxes; there may alsobe state and local taxes on gifts and inheritance.

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Many families avoid gift and estate taxes altogetherbecause the amounts of money they have are smallenough to qualify for various exemptions.

There is usually no tax if you make a gift to yourspouse or if your estate goes to your spouse at yourdeath. If you make a gift to someone else, the gifttax does not apply to the first $10,000 you givethat person each year. You don’t even have to file agift tax return in these situations.

Even if tax applies to your gifts or your estate, it

may be eliminated by the so-called unified credit.

The unified credit applies to both the gift tax and

the estate tax—you simply subtract the unified credit

from any gift tax that you owe. But the unified credit

is a one-time thing; any part that you use against

gift tax in one year reduces the amount of credit

that you can use against gift or estate taxes later.

Through the 1980s and 1990s, the unified creditwas $192,800, which eliminated taxes on a total of$600,000 of taxable gifts and estate value. Begin-ning in 1997, this exempt amount was increasedgradually each year—to $675,000 in 2001. Andthe amount will continue to increase during the2000s, to a maximum of $1 million in 2002 andthen completely repeal in 2011 when—accordingto the estate tax reform advocated by PresidentGeorge W. Bush—there will be no estate tax atall.

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For now, most families avoid the estate taxes eitherby having estates worth less than $675,000 or bybeing smart enough to use gifts and trusts in away that lowers their estate value beneath that num-ber. In these cases, they don’t have to pay estatetaxes.

That leaves three types of families facing the big-gest tax bite:

• families with very large amounts ofmoney;

• families who owns businesses or otherassets that are tough to break apart andmove out of an estate; and

• families who don’t start moving assetsout of the estate early enough to makeit seem small.

At its top level, the federal estate tax is 50 percentof an estate’s value, so the tax bite can really hurt.

I T ’ S B E T T E R T O G I V E

The term “gifting” has the irritating ring of bu-reaucratic double-speak. The term comes up fre-quently in financial planning—and with good rea-son. It’s a useful tool.

Gifting refers to working around the federal gifttax, which applies to the transfer—for no compen-sation—of any property. You make a gift if you giveproperty (including money)—or the use of or in-come from property—without expecting to receivesomething of at least equal value in return. If you

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sell something at less than its full value or if youmake an interest-free or reduced interest loan, youmay be gifting.

The general rule is that any gift is taxable; how-ever, there are many exceptions to this rule. Gener-ally, the following gifts are not taxable:

• the first $10,000 you give someone dur-ing a calendar year (this is called theannual exclusion);

• tuition or medical expenses you pay foranyone (these are called the educationaland medical exclusions);

• gifts to your spouse;

• gifts to a political organization for itsuse; and

• gifts to charities.

Most tax plans stem from these five exclusions.

A separate $10,000 annual exclusion applies to eachperson to whom you make a gift. Therefore, youcan give up to $10,000 each year to each of anynumber of people or entities—and none of the giftswill be taxable.

If you are married, both you and your spouse canseparately give up to $10,000 to the same personeach year without making a taxable gift. And, sinceyou can give your spouse a limitless amount ofmoney without paying tax, married couples havedouble gifting capacity.

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In fact, you don’t have to play gifting games if you’remarried. If you or your spouse make a gift to a thirdparty, the gift can be automatically considered madehalf by you and half by your spouse. This is knownas gift splitting.

If you split a gift, you do have to file a gift tax

return to show that both spouses agree to the gift;

and you have to file a return even if half of the split

gift is less than $10,000.

Generally, you must file a gift tax return on IRSForm 709 if:

• you gave more than $10,000 (annualexclusion) during the year to someoneother than your spouse;

• you and your spouse are splitting a gift;

• you gave someone other than yourspouse a gift that he or she cannot ac-tually possess, enjoy or receive incomefrom until sometime in the future (thiswould cover some trusts); or

• you gave your spouse an interest inproperty that will be ended by somefuture event.

If the only reason you must file a gift tax return isbecause you and your spouse are splitting a gift,you may use IRS Form 709-A, which is a shorterand simpler version of Form 709. See the form in-structions for details on who qualifies.

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It’s best to keep your gifts during any calendar yearunder the tax-free limit. If you go over, you eitherhave to pay some money to the Feds or use up someof your unified credit. That’s why gifting takes dis-cipline and an early start; it works best when youmove money gradually to family members over anextended period of time.

The following is an example of how the unified creditmight apply to your gifting strategy.

In 2001, you give your niece Ginger a cash gift of$8,000. You also pay the $11,000 college tuitionof your friend Sporty, who’s gone back to schoolafter a bad divorce. You give your 25-year-olddaughter Baby $25,000; you also give your 27-year-old daughter Posh $25,000.

You’ve never given taxable gifts before, so you’redoing a lot of paperwork for the first time. Youapply the exceptions to the gift tax and the unifiedcredit as follows:

• under the educational exclusion, thegift of tuition to Sporty is not taxableat all;

• under the annual exclusion, the first$10,000 you give someone during ayear is not a taxable gift; therefore, yourentire $8,000 gift to Ginger, the first$10,000 of your gift to Baby and thefirst $10,000 of your gift to Posh arenot taxable;

• you’re left with taxable gifts of $30,000($15,000 over the annual limit on your

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gift to Baby plus $15,000 over the an-nual limit to Posh); at the standard gifttax of 20 percent, you owe the Feds$6,000;

• after all those gifts, you don’t have an-other $6,000 to pay the IRS, so yousubtract the $6,000 from your unifiedcredit for 2001. The amount of unifiedcredit that you can use against the giftor estate taxes in later years is reducedby $6,000.

C A L C U L A T I N G E S T A T E T A X

A taxable estate is determined by calculating thegross value of a dead person’s estate minus variousallowable deductions. Once this calculation is made,the IRS uses this number to assess estate taxes.

As we’ve seen before, a gross estate includes thetotal value of all owned assets or property in whicha person had an interest at the time of his or herdeath. The estate also includes:

• life insurance proceeds payable to theestate or, if the dead person owned thepolicy, to his or her heirs;

• the value of certain annuities payableto the estate or its heirs; and

• the value of certain kinds of propertytransferred out of the estate within threeyears before the person died.

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The allowable deductions used in calculating thetaxable estate include:

• funeral expenses paid out of the estate;

• debts the person owed at the time ofhis or her death; and

• the marital deduction (generally, thevalue of the property that passes fromthe estate to a surviving spouse).

For more information on deductions that you might

be able to make from a family estate, check with IRS

form 706—the detailed list of allowed deductions.

Once you’ve calculated the taxable estate value,you can apply the unused portion of your unifiedcredit against the taxes to be paid.

For example, Jon gave his daughter Angelina$100,000 in 1998. This was Jon’s first taxable gift;he filed a gift tax return, subtracting the $10,000annual exclusion and figuring the gift tax on histaxable gift of $90,000. The gift tax turned out tobe $21,000. Jon didn’t want to pay this tax, so heused $21,000 of the unified credit to eliminatethe tax on the gift.

Jon made no other taxable gifts and died in 1999.The available unified credit that could be usedagainst his estate tax was $190,300. This was theunified credit for 1999 ($211,300) less the unifiedcredit used against the tax on the gift to Angelina

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($21,000). Jon would be able to avoid taxes on about$550,000 in taxable estate value.

An estate tax return must be filed if the gross estate,

plus any adjusted taxable gifts and specific gift

tax exemption, is more than the filing requirement

for the year of death.

The adjusted taxable gifts is the total of the tax-able gifts you made after 1976 that are not includedin your gross estate.

Prior to President George W. Bush’s estate tax lawchanges—scheduled to take effect in 2002—alltransfers of money or property (outright, or by willor trust) were subject to a single, federal unifiedgift and estate tax system. President Bush’s changeshave set the estate tax (though not the gift tax) forrepeal after 2011.

The new law still allows some significant transfersto be excluded from the estate tax, while it lasts,and the gift tax, which is likely to remain.

I N C O M E T A X O F A N E S T A T E

The estate’s income, like an individual’s income,must be reported annually on either a calendar orfiscal year basis. An estate’s fiscal tax year can beany period that ends on the last day of a month anddoes not exceed 12 months. Normally, the personalrepresentative selects the estate’s accounting periodwhen he or she files its first income tax return (IRSForm 1041).

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Income that a dead person had a right to receive is

included in his or her gross estate and is subject to

estate tax. This income is also taxed when received

by the recipient (estate or beneficiary). However,

an income tax deduction is allowed to the recipient

for the estate tax paid on the income.

Once you choose the tax year, you generally cannotchange it without IRS approval. Also, on the firstincome tax return, you must choose the account-ing method (cash, accrual or other) you will use toreport the estate’s income. Once you have used amethod, you ordinarily cannot change it withoutIRS approval.

Every domestic estate with gross income of $600 ormore during a tax year must file a tax return. If oneor more of the beneficiaries of the estate are non-resident aliens, the personal representative mustfile IRS Form 1041—even if the gross income ofthe estate is less than $600. That nonresident alienwill also have to file U.S. tax forms...though that’snot usually an executor’s concern.

The estate’s taxable income generally is figured thesame way as an individual’s income, with a few ex-ceptions.

Gross income of an estate consists of all items ofincome received or accrued during the tax year. Itincludes dividends, interest, rents, royalties, gainfrom the sale of property—and income from busi-nesses, partnerships, trusts and any other sources.

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During the administration of the estate, you may

find it necessary or desirable to sell all or part of the

estate’s assets to pay debts and expenses of ad-

ministration, or to make proper distributions of the

assets to the beneficiaries.

While an executor may have the legal authority todispose of the property, title to it may be vested(given a legal interest in the property) or partly vestedin one or more of the beneficiaries. This is oftentrue of real estate. So, again, the executor needs toconfirm clear title before closing any deal involv-ing estate property.

B E N E F I C I A R I E S

The personal representative has a fiduciary respon-sibility to the ultimate recipients of the income andthe property of the estate. Although the courts usevarious names to designate specific types of benefi-ciaries or recipients of various types of property, theIRS calls all of them “beneficiaries.”

A personal representative or executor of an estatemust file a separate Schedule K-1 (to IRS Form1041) for each beneficiary receiving money fromthe estate in a given year.

The filing must show each beneficiary’s taxpayeridentification number. So, when you assume yourduties as the personal representative, you shouldask each beneficiary to give you their taxpayer iden-tification number.

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The personal representative or executor doesn’t have

to provide any taxpayer ID information about him-

self or herself—unless, of course, he or she is also a

beneficiary.

The income tax liability of an estate attaches tothe assets of the estate. If estate income must bedistributed during the current tax year, it’s report-able by each beneficiary on his or her individualincome tax return. If the income does not have tobe distributed and is retained by the estate, the in-come tax on the income is payable by the estate.

In other words, income of the estate is taxed to ei-ther the estate or the beneficiary—but not to both.

If the income is distributed later without the pay-ment of the taxes due, the beneficiary can be liablefor tax due and unpaid, to the extent of the value ofthe estate assets received.

A note for executors who are also family membersand may be managing the personal finances of otherbeneficiaries: Even if you don’t take money out ofan estate in a given year, you may have to file IRSForm 1099-DIV, Form 1099-INT, or Form1099-MISC if you receive the income as a nomineeor middleman for another person.

Any beneficiary (including a spouse that is not thedesignated beneficiary) must include in gross in-come the fair market value of the assets in the ac-count on the dead person’s date of death. This

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amount must be reported for the beneficiary’s taxyear that includes the dead person’s date of death.

The amount included in gross income is reducedby the qualified medical expenses for the deadperson that are paid by the beneficiary within oneyear after the death.

T W O P E R S O N A L R E P S

If some estate property is located outside the statein which the dead person’s home was located—or iffamily politics require it—more than one personalrepresentative may be designated by a will or ap-pointed by a court. The person designated or ap-pointed to administer the estate in the state of thedecedent’s permanent home is called the domicili-ary representative; the other is called an ancillaryrepresentative.

Two personal representatives can create paperworkproblems. Each must file a separate tax returns fol-lowing IRS Form 1041. The domiciliary represen-tative includes the estate’s entire income in his re-turn; the ancillary representative should provide thefollowing information on his or her return:

• the name and address of the domicili-ary representative;

• the amount of gross income receivedby the ancillary representative; and

• the deductions claimed against that in-come (including any income properlypaid or credited by the ancillary repre-sentative to a beneficiary).

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T A X B E N E F I T S F O R S U R V I V O R S

The U.S. tax code gives some major breaks to mar-ried couples and so-called “traditional families.”

Survivors can qualify for certain benefits when fil-

ing their own income tax returns. A surviving spouse

can usually file a joint return for the year of death

and may qualify for special tax rates for the next

two years.

If the deceased qualified as your dependent for thepart of the year before death, you can claim theexemption for the dependent on your tax return,regardless of when death occurred during the year.(This is the same treatment the tax code gives to achild born during a tax year.) If the deceased wasyour qualifying child, you may be able to claim thechild tax credit.

If your spouse died within the two tax years pre-ceding the year for which your return is being filed,you may be eligible to claim the filing status ofqualifying widow(er) with dependent child andqualify to use the married filing jointly tax rates.These are better than unmarried person rates.

Generally, you qualify for this benefit if you meetall of the following requirements:

• you were entitled to file a joint returnwith your spouse for the year of death—whether or not you actually filed jointly;

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• you did not remarry before the end ofthe current tax year;

• you have a child, stepchild or fosterchild who qualifies as your dependentfor the tax year; and

• you provide more than half the cost ofmaintaining your home, which is theprincipal residence of that child.

For example: Robert Browning’s wife Elizabeth diedin 1998. Browning did not remarry and continuedthroughout 1999 and 2000 to maintain a homefor himself and his dependent child from the mar-riage to Elizabeth. For 1998 he was entitled to filea joint return for himself and his deceased wife. For1999 and 2000, he qualifies to file as a “qualifyingwidow(er) with dependent child.” In later years, hemay qualify to file as a head of household. All ofthese classifications mean lower tax rates than fil-ing as an unmarried person.

I N H E R I T E D I R A S

We’ve talked before about the importance of nam-ing a beneficiary to pension accounts or IRAs.

If a beneficiary receives a lump-sum distributionfrom a traditional IRA or a Roth IRA that he or shehas inherited, some or all of it may be taxable. Therule here is that these monies are taxed once. If thedead person had put pre-tax money into the IRA,the beneficiary will have to declare the inheritanceas taxable income; if the dead person contributednet dollars, the beneficiary is free from taxes later.

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Either way, the distribution is taxable in the yearreceived as income.

If the beneficiary of a traditional IRA is the deceased’s

surviving spouse and that spouse properly rolls over

the distribution into another traditional IRA or to a

Roth IRA, the distribution is not currently taxed.

Generally, Roth IRAs are complicated when it comesto taxes. So-called “qualified distributions” from aRoth IRA are not subject to tax. A distributionmade from a Roth IRA is “qualified” if it is madeafter the five-taxable-year period beginning withthe first tax year in which a contribution was madeto any Roth IRA of the owner.

In most cases, the entire interest in the Roth IRAmust be distributed by the end of the fifth calen-dar year after the year of the owner’s death—unlessinterest is payable to a designated beneficiary overhis or her life or life expectancy.

Any portion of a distribution to a beneficiary thatis not a qualified distribution may be included inthe beneficiary’s gross income. This is an outcomethat most estates try to avoid.

G I F T S A N D I N H E R I T A N C E S

Property received as a gift, bequest or inheritance isnot included in your income.

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If property you receive in this manner later pro-duces income—such as fees, interest, dividends orrentals—that income is taxable to you. The incomefrom property donated to a trust that is paid, cred-ited or distributed to you is taxable income to you.If the gift, bequest or inheritance is the income fromproperty, that income is taxable to you.

If you receive property from a deceased’s estate insatisfaction of your right to the income of the es-tate, it is treated as a bequest or inheritance ofincome from property.

I N S U R A N C E , A N N U I T I E S , E T C .

The proceeds from a dead person’s life insurancepolicy paid by reason of his or her death generallyare excluded from income. The exclusion applies toany beneficiary—whether a family member or otherindividual, a corporation or a partnership.

Veterans’ insurance proceeds and dividends arenot taxable either to the veteran or to the beneficia-ries. Interest on dividends left on deposit with theDepartment of Veterans Affairs is not taxable.

Life insurance proceeds paid to you because of the

death of the insured policy-holder are not taxable

unless the policy is turned over to you for a price.

You can exclude from income accelerated deathbenefits you receive on the life of an insured indi-vidual if certain requirements are met. Accelerated

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death benefits are amounts received under a life in-surance contract before the death of the insured.These benefits also include amounts received on thesale or assignment of the contract to a viatical settle-ment provider.

If you receive life insurance proceeds in installments(as sometimes happens to beneficiaries of annuities),you can exclude details of each installment fromyour income.

For example: As beneficiary, you choose to receive$40,000 of life insurance proceeds in 10 annualinstallments of $6,000. Each year, you can excludefrom your gross income $4,000 ($40,000 ÷ 10) asa return of principal. The balance of the installment,$2,000, is taxable as interest income.

If each installment you receive under the insurancecontract is a specific amount based on a guaranteedrate of interest, but the number of installments youwill receive is uncertain, the part of each install-ment that you can exclude from income is theamount held by the insurance company divided bythe number of installments necessary to use up theprincipal and guaranteed interest in the contract.

Example: The face amount of a policy is $200,000;

as beneficiary, you choose to receive annual install-

ments of $12,000. The insurer’s settlement option

guarantees you this amount for 20 years based on a

guaranteed rate of interest. You accept. You’re left

paying income tax on everything you get over $2,000

each month.

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If, as the beneficiary of an insurance policy, you areentitled to receive the proceeds in installmentsfor the rest of your life without a refund or period-certain guarantee, you figure the excluded part ofeach installment by dividing the amount held bythe insurance company by your life expectancy.

Example: As beneficiary, you choose to receive the$50,000 proceeds from a life insurance contractunder a “life-income-with-cash-refund option.” Youare guaranteed $2,700 a year for the rest of yourlife (which is estimated by use of mortality tablesto be 25 years from the insured’s death).

The amount held by the insurance company, re-duced by the value of the guarantee, is $41,000($50,000 - $9,000) and the excludable part of eachinstallment representing a return of principal is$1,640 ($41,000 ÷ 25). The remaining $1,060($2,700 - $1,640) is interest income to you. If youshould die before receiving the entire $50,000, therefund payable to the refund beneficiary is not tax-able.

S P E C I A L I Z E D T R U S T S

We considered how various types of trusts work pre-viously. It’s no secret that people use trusts to avoidtaxes and pass more wealth to survivors—while re-taining the maximum control permitted by law.On the next few pages we’ll take a quick look at thetax issues addressed by various types of trust.

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M A R I T A L A N D B Y P A S S T R U S T S

This is the tax planning cornerstone for many com-bined marital estates (all property owned by thehusband, the wife and jointly) worth over $675,000in 2001 (increasing to $1 million in 2002). Usu-ally, husband and wife serve as their own trust-ees. Most people specify the broad outline of theirintentions at the time the trust is prepared but leavethemselves great discretion as to all kinds of de-tails.

While both spouses are alive, there can be a single

initial trust, that is revocable and completely in their

control. It is similar to, and serves all the purposes

of, a simple living trust. The initial trust ends at the

first spouse’s death, by splitting into two new trusts

(“A” and “B”).

The B trust (some planners joke that B refers tothe “Below-the-ground” spouse) is irrevocable, andmakes use of the deceased spouse’s estate tax shel-ter. The B trust is designed for the ultimate ben-efit of heirs; it’s designed to conform to the federalestate tax “shelter limit.”

The B trust is also called the “bypass trust,” be-cause property in it bypasses taxation.

The tax goal of the B trust is to get this money outof the couple’s combined estate, so that it escapesestate taxation after the second spouse’s death.

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The A trust is also called the “marital deductiontrust.” Property in this trust is absolutely and com-pletely under the control of the surviving spouse,who can even revoke the trust at any time.

With proper planning, both spouses add a disclaimerclause in their wills giving the surviving spouse theright to disclaim as much of her inheritance fromthe other as she wants. Anything she disclaims goesinto the tax shelter trust, which pays her incomeand—at her death—goes to the kids. The trust,also set up in a will, is just a shell unless the surviv-ing spouse disclaims money to fund it.

Then if the surviving spouse inherits $1.5 millionand the estate tax exclusion is only $1 million, shecan opt to disclaim $500,000 to the trust. Her es-tate won’t be taxable; her heirs inherit $1 millionfrom her and $500,000 from the credit sheltertrust—both amounts untaxed because neither isabove the $1 million exclusion.

When it comes to using A/B trusts, you need to becareful about the beneficiaries you select. TheMarch 2001 Massachusetts state Supreme Court de-cision in Estate of Stuart D. Mackey dealt with someinadvertent tax problems.

Stuart Mackey died in February 1997. Accordingto his will, the residue of his estate poured over intothe Stuart D. Mackey Trust, which was made up oftwo subtrusts: trust A, the marital deduction, andtrust B, the “non marital deduction.”

Stuart’s wife Gloria was the sole beneficiary of trustA. Under the terms of Stuart’s will, Gloria was to

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receive either one-third of the entire trust estate or$500,000, whichever was less. Trust A stated that,upon Stuart’s death, if Gloria survived him (andshe did), the property targeted for trust A was to bedistributed by the trustee to Gloria “free of trust.”

Trust B, which was to receive the balance of thetrust estate, was for the benefit of the Stuart’s son,Richard, during Richard’s lifetime. Richard had alimited power of appointment that enabled himto designate the person or persons to whom the restof trust B would be distributed on his death. Indefault of appointment, the rest of trust B wouldbe distributed evenly to Richard’s three sons.

Simple enough, right?

Wrong. Because trust B’s assets went to Stuart’sgrandsons, the trust was subject to the federal gen-eration skipping transfer (GST) tax. UnlessStuart’s family could divide trust B into severalsmaller parts, it was going to be over the standard$1,000,000 personal exemption from the GST tax.At the time of Stuart’s death, trust B was valued at$1,730,770.59; so, his family was going to pay alot to the IRS—on the entire amount.

Stuart’s son and grandsons asked the state court todivide trust B in two, and administer it as two sepa-rate trusts with identical provisions. One of thetwo newly created subtrusts would be subject tothe GST tax, and the other (through allocation ofthe $1,000,000 exemption to it) would effectivelybe exempt from the GST tax.

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The family pointed to earlier Massachusetts case law

that allowed this kind of “administrative change.”

The court was remarkably supportive of the family’sargument. It concluded:

Mackey’s trust referenced trust A as a “mari-tal deduction” trust, reflecting an aware-ness of, and an intent to minimize, the fed-eral estate tax consequences, regardless ofwhether the instrument actually accom-plished that goal. We are satisfied that[Mackey] did not intend his will and trustto operate in a manner that would enrichonly the taxing authorities. We also notethat many other states, including New Yorkand New Jersey, have statutes that expresslyauthorize the division of trusts withoutcourt approval. The New York statute ex-pressly permits division for purposes of GSTplanning.

So, it authorized the division of trust B as the fam-ily had proposed. The decision was a win for StuartMackey’s heirs...but it’s an extra step that is stillbest avoided. Make sure any trusts that result froman estate comply with tax guidelines.

T R U S T S F O R M I N O R S

Gifts to trusts established for minors qualify—bylaw—in whole or part for the annual gift tax ex-clusion. These trusts are irrevocable, yet permitsome control over the timing of wealth transfer tothe next generation.

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In the so-called Section 2503(c) Trust (the sectionrefers to U.S. tax code), annual income may be ac-cumulated and not paid out—but the trust mustprovide that, if necessary, both income and princi-pal can be used for the minor’s benefit. When thebeneficiary turns 21, he or she must be given theright to receive all 2503(c) trust assets in an out-right distribution. The beneficiary can, however,elect to allow the trust to continue.

In the related 2503(b) Trust, annual income can-not be accumulated; it must be paid to the benefi-ciary each year. However, in this case, the principalneed not be made available for distribution uponthe beneficiary’s 21st birthday. Unlike the 2503(c)Trust, the 2503(b) Trust principal is not requiredto ever be distributed to the income beneficiary; itcan go to somebody else.

Since the beneficiary has no immediate (if any) rightto the trust principal, the beneficiary’s only presentinterest in the 2503(b) Trust is an income interest,the right to receive annual income payments fromtrust investments. So, the amount of each gift thatqualifies is the present value of the series of incomepayments that the gift will produce over the years.A financial calculation is necessary.

Both types of 2503 Trust can receive annual gifts,including gifts used by the trustee to pay life insur-ance premiums. If the insured (or spouse) is thegrantor, trust income should not be used to paypremiums—or the grantor may be considered theowner of the policy for estate tax purposes.

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This is an often overlooked point; so, consider us-ing trust principal or yearly gifts to pay premi-ums.

C H A R I T A B L E R E M A I N D E R T R U S T S

Charitable remainder trusts (CRTs) are best forpeople that have a lot of money tied up in invest-ments that have appreciated over the years, such asstock, bonds, a home or a business. When you sellthat asset, you will be liable for a lot of taxes. But ifthe asset is not providing you with a lot of divi-dends, interest or other income you may need tosell the asset and buy some other investment thatwill provide you with income. If you intend to givea large gift to charity, you may want to consider acharitable remainder trust.

Once you have placed your assets in this type oftrust, the trust can sell the assets without payingtaxes, and then invest the assets into investmentsthat will provide a good source of current income.You (and your spouse) are entitled to that incomefor as long as you live, and when you die what’s leftgoes to the charities of your choice.

In another variation, called a charitable remain-der unitrust (CRUT), the grantor receives a fixedpercentage of the trust’s value each year, rather thanan unchanging dollar amount. The CRUT is oftenpreferred because it can provide inflation protec-tion: As the trust (presumably) grows in value eachyear, so, too, will the dollar amount of the grantor’sannual draw.

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With either a CRT or CRUT, the remainder interest that

will eventually go to charity has a value today,

established with a financial calculation, using an

“assumed” future interest rate.

IRS publishes the interest rate each month to beused in this calculation of the value—in today’sdollars—of the charity’s right to receive the remain-der of trust assets at the specified future date. Thatis the amount the grantor is giving away. It is, there-fore, the value of the current income tax deduction.A big additional benefit is that the donated prop-erty, and all future price appreciation, is removedfrom the grantor’s taxable estate.

G R A T S

The grantor retained annuity trust is an irrevo-cable trust, good for shifting some of the value ofan asset out of the estate. The grantor places assetsin trust for the ultimate benefit of the children (i.e.,they have a remainder interest), but retains the rightto an annual payout for a period of years.

By accepting some gift tax liability at the time theGRAT was set up, the grantor has reduced his es-tate tax liability later and the heirs end up withmore. If the grantor dies within the term of thetrust, all property is included in the estate, and thereare no tax consequences—just as if nothing had beendone.

The key to the GRAT technique (and the CRUT) isthe relative values given the two interests involved:

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The gift of the remainder interest in the trust prin-cipal, and the value of what the grantor has re-tained—the present right to collect a certain cashpayout from the trust each year for X years. Thereis a financial calculation that depends on the cur-rent interest rate published by the IRS, the num-ber of years during which the grantor will take thetrust payout, and the amount of the payout. Thegreater the annual payout, and the number of yearsof payments, the greater will be the value thegrantor has retained for himself—and the smallerwill be the value the IRS gives to what is left over.

Q P R T S

The qualified personal residence trust is an irre-vocable trust, similar in concept to a GRAT, butwith a confusing name. It is a good method of shift-ing the value of the family home out of your estate,for the purpose of lowering the ultimate estate tax.

In this scenario, the house is placed into a trust forthe future benefit of the children. The value todayof this remainder interest is a taxable gift. As with aGRAT, the grantor accepts some federal gift taxliability now, to save more on federal estate tax later.What is retained here by the grantor is not income,but the right to live in the house for a term of years.If the grantor outlives that term, the value of thehouse—plus any property appreciation since it wastransferred to the trust—passes to the children withno additional federal estate tax. As with a GRAT, ifthe grantor does not survive the term of the trust,it has no tax effect.

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The QPRT does, however, have two significantdrawbacks: First, the children will have receivedthe house by lifetime gift, not inheritance, so thereis no step-up in the tax basis of the property. Forhomes purchased decades ago at a fraction of today’sprice, this means that income tax (at the 20 percentcapital gains rate) must be paid on the increase invalue—if the property is ever sold by the children.

Note that a new tax regulation—applicable toQPRTs created after May 1996—has eliminated thecommon technique of permitting the grantor theright to buy back the residence for his continuedoccupancy at the end of the trust term.

M E D I C A I D T R U S T S

These trusts were designed to hold assets that were“given away” to impoverish the grantor, in order toqualify for Medicaid benefits. The purpose was topreserve one’s life savings for heirs, should end-of-life nursing home care become necessary. Thesetrusts are seen in many variations, which all shouldbe considered obsolete—and unsuitable for almostevery purpose or situation.

This was a tricky game, even before 1993 changesto the U.S. tax law. Under prior law, the grantorwas allowed to derive significant benefits from atrust he himself created. Now, if a grantor sets up atrust—and there are any strings attached or pos-sible benefits to the grantor—the assets are not pro-tected from Medicaid.

Also today, any transfer to an irrevocable trust withina period of five years of applying for a Medicaid

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nursing home bed is presumed by law to have beenmade in order to qualify for Medicaid.

G E N E R A T I O N S K I P P I N G T R U S T S

A generation skipping transfer (GST) trust is anirrevocable arrangement that provides income only,not access to trust principal, to the grantor or thegrantor’s spouse and/or children. It terminates whenall have reached a specified age or died, with trustprincipal then distributed to grandchildren orgrandnieces and nephews.

Some people shy away from these trusts because

they aren’t confident that any financial plan can

remain valid through three generations of family;

but these trusts are extremely popular with old

money mandarins—precisely because they look so

far into the future.

Under a loophole in traditional estate tax law, byskipping over the children in the final distributionof principal, a grantor could save gift and estatetax. In the late 1990s, this advantage was largelyeliminated. In 2001, such transfers were taxed atthe maximum federal gift and estate tax rate of 55percent. But...there is a high cumulative exemp-tion of $1,030,000 (adjusted annually for inflation)per donor that can be used to avoid tax on genera-tion skipping transfers (by trust or gift). So, theGSTs are still useful. But they are tricky business.

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The 1998 Indiana Appeals Court decision in Estateof Harold G. Meyer considered the tax payment pro-visions of a complicated estate. More specifically, itconsidered how death taxes should be allocated be-tween an estate and subsequently created genera-tion skipping trust.

In April 1985, Harold Meyer executed a will whichprovided, that after the “payment of all taxes andexpenses,” the remaining assets were to be placedin a residuary pour-over trust with beneficiariesbeing Janet Cleland, his only daughter, and Janet’schildren after her death. This was a common...andsimple enough...structure.

But there was more to the story. About five yearslater, Meyer also created a living trust in which heretained rights to the income for life and named hisgrandniece, Kathy Burke, and her husband—whowas also Meyer’s lawyer at the time—sole benefi-ciaries upon his death. Meyer funded this trust withhis most valuable possession, Bank Calumet stockvalued at over $8 million.

Meyer died in March 1997. His daughter challengedthe validity of the grandniece’s trust; both theClelands and the Burkes argued over whether Meyer’sestate or the Burke trust should pay the federal andstate taxes.

In June 1997, the Clelands filed a lawsuit asking astate court to determine how the death taxes shouldbe allocated. A few months later, the Burkes filed aclaim against Meyer’s estate to pay all of the deathtaxes.

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Bank One, the institutional executor Meyer had cho-sen to handle his estate, filed legal papers that sup-ported the Clelands’ arguments.

The trial court determined that both entities—theestate and the Burke trust—had to pay death taxes.It ordered each party to “pay the death taxes, fed-eral estate and generation skipping transfer and stateinheritance tax and estate tax...proportionately tothe amounts each received.”

This meant that Kathy Burke was going to have topay more in inheritance tax than she had expected;because she was Meyer’s grandniece, the generation-skipping transfer tax only applied to her trust. In-stead, she clung hard to the language in Meyer’swill that said the estate would pay all taxes. Sheappealed.

The Indiana Appeals Court looked straightaway tothe documents. According to the Payment of Taxessection of Meyer’s will:

I direct my Executor to pay out of my es-tate all estate, inheritance, transfer, succes-sion or other taxes or governmental chargesthat shall become payable upon or by rea-son of my death with respect to propertypassing under my Will, by operation of lawor otherwise, including any interest andpenalties thereupon without apportion-ment....

On the other hand, the Burke trust provided, inpart:

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Only to the extent that the residue of myprobate estate is insufficient or upon requestof my Personal Representative, the Trusteeshall expend such amounts as are necessaryto pay...all federal and state death taxes pay-able because of my death.

Kathy Burke and, presumably, her attorney hus-band argued that the tax provision in the will pre-vailed because a “trust may not direct or empowerthe personal representative to act in a manner in-consistent with the will.” More specifically, theBurkes argued that the language in their trust al-tered the testamentary intent and conflicted withthe clear language of the will. And, according tothem, when a conflict exists, the will controls.

They also pointed out that the language in Meyer’swill was even clearer in directing payment of alltaxes without apportionment to various beneficia-ries. (And they made other arguments based on le-gal technicalities that ended up not being relevant.)

The Clelands argued for the pro rata apportion-ment of the federal estate tax because neither theestate nor the Burke trust provision waived the pre-sumption by referring to specific law. They also ar-gued that the ruling on the generation skippingtransfer tax and state inheritance tax should bereversed because federal and state law did not sup-port pro rata apportionment of these taxes.

Instead, they argued, the Burke trust should payall of the generation skipping transfer tax and anystate inheritance tax generated by the trust. TheBurke trust would be taxed at a higher rate under

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Indiana inheritance law because the Burkes weremore remotely related to Meyer.

The Clelands downplayed the “accidental effect ofthe boilerplate tax language placed in the will.” Theyargued that Meyer didn’t mean his probate estateto be exhausted by the payment of inheritance taxeson non-probate assets (namely, the Burke trust).

They also cited an earlier U.S. Tax Court decisionthat held that a clause in a will directing that “allfederal estate taxes, state and city inheritance or es-tate transfer taxes, or other death taxes attributableto the bequests...shall be paid from the residuumof my estate” was not sufficient to cover trusts madelater. Instead, that decision had held, the will mustcontain “an explicit reference to generation skip-ping transfer taxes” in order to pay the trusts’s taxes.

The appeals court agreed with the Clelands on sev-eral points. It noted that living trusts had becomeso common that Indiana case law had allowed theterm “will” to include trusts in certain situations.With regard to the Meyer estate, the court wrote:

[W]e hold that the last instrument in timecontrols when there is a conflict betweenunambiguous tax provisions in a will andan inter vivos trust. Thus, ...the trust pro-vision controls because it is the final ex-pression of Meyer’s testamentary intent.

The appeals court then decided that the languagefrom the Burke trust—which had sounded optionaland secondary to Kathy Burke—was, in fact, con-troling. The appeals court decision was beginningto look very bad for the Burke trust.

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The appeals court ruled:

...Meyer’s last expression of intent is foundin the Burke Trust. The language in thetrust is clear. It specifically provides thatthe personal representative may requestpayment from the trustee and to what ex-tent. Specifically, Bank One may requestpayment of the estate’s federal and statedeath taxes...from [the Burke] Trust.

The decision was a complete loss for the Burke trust.The trust was responsible for all of the Indiana in-heritance and federal estate taxes because the pre-sumption of apportionment was sufficiently rebut-ted by its own language and timing; and the Burketrust was required to pay the generation skippingtransfer tax because only it involved a generationskipping transfer.

This was an even more complete loss for the Burketrust than the trial court’s decision had been. KathyBurke shouldn’t have appealed.

T O O S L I C K B Y H A L F

One reason to set up a tax strategy as early as pos-sible is that, if a family waits until after asset-controling elders die, they may act too hastily toavoid or minimize taxes.

This may not seem like a big problem...but it is.Even when lots of money is at stake—or espe-cially when lots of money is at stake—people canmake nervous decisions. And nervous decisionsare often bad decisions.

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The November 2000 South Carolina Supreme Courtdecision in Estate of William D. Holden, Sr. consid-ered the affairs of a family that was a little too slickabout avoiding estate taxes.

Holden died in January 1992. He was survived byhis wife Julia, two sons—William Jr. and Robert—and one grandchild. A second grandchild was bornwithin 10 months of his death.

After Holden’s death, William Jr. and Robert wereadvised that their father had died without a validwill and, following state law, they would be heirsto his estate. If they disclaimed their rights as heirs,the property in the estate could go to their mothertax-free. So, the sons filed disclaimers of their inter-ests in their father’s estate. The disclaimers stated,in part:

I hereby disclaim and renounce any inter-est in the estate and relinquish any claim Imay have to it.

Subsequently, the personal representative distrib-uted the proceeds of the estate to Holden’s wife,Julia. A short time later, though, the probate courtinformed the personal representative that, as a re-sult of his sons’ disclaimers, Holden’s grandchildrenwere eligible to inherit a portion of the estate. Ac-cording to South Carolina law, half of Holden’s es-tate would pass to the surviving spouse and half tohis grandchildren.

It turned out that this advice the sons had gottenwasn’t so good for them.

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To avoid the unintended result of estate propertygoing directly to the grandchildren, the sons eachexecuted a document entitled “Revocation andWithdrawal of Disclaimer.” This revocation stated,in part:

It was my intent in entering into this saidDisclaimer and Renunciation of Interest todisclaim and renounce my intestate inter-est in favor of [Mother]...the spouse of [Fa-ther], so that she would become the soleheir of the Estate....

The revocations were filed almost 13 months afterthe disclaimers were filed. The probate court didn’tlike these revocations; it ruled that the sons’ dis-claimers were valid for federal tax law purposes butthat the revocations were not. Thus, the court or-dered 50 percent of the estate’s assets to be distrib-uted to Holden’s grandchildren.

The family appealed to trial court. There, its attor-ney pointed to a filing letter that had accompaniedthe disclaimers; the letter expressly stated that thesons meant to direct their interest in the estate totheir mother. However, the circuit court also foundthat this intention was contrary to applicable pro-visions of the Internal Revenue Code. It agreed withthe probate court.

So, the family pressed the appeal to the state Su-preme Court. The high court agreed to considerthe case, focusing on the following questions:

• Did the Court of Appeals err by deter-mining sons filed valid disclaimers oftheir interest in their Father’s estate?

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• Did the Court of Appeals err by failingto rule on sons’ claims that they hadeffectively revoked their disclaimers?

• Did the Court of Appeals err by refus-ing to apply equity principles to setaside the disclaimers?

The high court started by reading the section ofSouth Carolina inheritance law dealing with dis-claimers. The law said, once an heir had filed a validdisclaimer, his or her interest in an estate is consid-ered “never to have been transferred to the disclaim-ant.”

The court also considered federal law on this mat-ter. The Internal Revenue Code defined a “quali-fied disclaimer” for purposes of federal estate andgift tax laws:

...the term “qualified disclaimer” means anirrevocable and unqualified refusal by aperson to accept an interest in property butonly if—such refusal is in writing..., [thedisclaimant] has not accepted the interestor any of its benefits, and as a result of suchrefusal, the interest passes without any di-rection on the part of the person makingthe disclaimer and passes either to thespouse of the decedent, or to a person otherthan the person making the disclaimer.

The sons focused on the “without any direction”language in the law. They argued that, because theyhad intended the estate assets to go to their mother,they had attempted to direct the estate. This, theyargued, made their disclaimers invalid.

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But they made a big mistake—in legal terms—bygoing on to argue that their revocations were fur-ther proof of their intent to direct the estate to theirmother. The court interpreted this as contradic-tory logic. The sons were claiming both that thedisclaimers were void from the start...and that thecourt should give credence to their revocations ofthe disclaimers.

According to the courts, this meant that the revo-cations were filed to correct a mistake of law. And“since equity will not correct a mistake of law, itwould have been improper to consider the revoca-tions as evidence of sons’ intent in filing the dis-claimers in the first instance.”

The high court concluded:

A mistake of law occurs where a person iswell acquainted with the existence or non-existence of facts, but is ignorant of, orcomes to an erroneous conclusion as to, theirlegal effect. [The sons’] execution of thedisclaimers was not the result of a mistakeof fact. [They] were fully aware of all facts,but they did not realize the legal conse-quences of their disclaimers. [Their] errorwas a mistake of law and is not subject toequitable relief.

The high court affirmed the appeals court decision—the estate would be split between Julia and her twograndchildren. And the tax advantage of transfer-ring everything to the spouse was lost.

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C O N C L U S I O N

As you can see, taxes are a big issue when it comesto family money. And, despite the current effort tochange estate taxes—as well as other types of taxes—they still loom large in our lives today and will con-tinue to do so in the future.

Putting taxes behind us, however, we now turn toother issues that can have a major impact on yourfamily’s money: disabled children, family violence,terrible in-laws, suicide, etc. All of these things cloudthe family photo album and complicate familymoney issues.

In Chapter 8, we’ll take a look at some of theseproblems and provide some tools—both practicaland mechanical—that you can use to best managethe most unique and odd of situations.

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CH

AP

TER

PROBLEMS AND

PROBLEM PEOPLE

8

We mentioned before that some rich people—BillGates and Warren Buffet are two—have said pub-licly that they won’t leave their great wealth to theirfamilies. In most of these cases, these billionairesdon’t like the idea of creating generations of disso-lute heirs dependent on scheming advisors...peoplelike Barbara Hutton, certain Kennedys and variousother movie-of-the-week cases.

Money doesn’t solve all problems...in fact, it cancause quite a few. A whole book could be writtenabout how family money, badly used, can screw upthe very people it’s supposed to help. But we’veonly got one chapter to deal with money and peopleproblems that go far beyond trust fund brats.

These problems affect a lot of families. If you have amentally disabled daughter, how do you make sureany money you leave her isn’t swindled by shadytrustees? If your drug-addled brother kills your fa-ther and you’re left in charge of everything, shouldyour brother inherit any money from your father’sestate? If your wealthy uncle writes what seems likea coherent will changing all of his bequests...and

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then kills himself the next day, should you chal-lenge the will? These are the kinds of issues we’llconsider in this chapter. They range from the fi-nancially practical to the psychologically bizarre.They detail odd situations and relationships. Andthey don’t offer easy solutions for the courts or thefamilies involved.

L E G A L C A P A C I T Y

One of the most common people problems thatcomplicates the smooth transfer of family money iscapacity. This word is sometimes confused withcompetence. They aren’t exactly the same...but theyare similar enough that they’re often used inter-changeably.

Competence is the mental or intellectual fitness (or

lack of disqualifying disabilities) to enter into con-

tracts or give testimony in a court of law. Capacity

is the qualification—including competence but also

things like age—to enter into agreements. Capacity

is a more broad term; competence, a more narrow

one. Strictly speaking, the terms mental capacity

and competence are closer to the same.

Legal competence is generally required in mosttransactions. For example, to sign a lease you mustbe legally competent. However, legal competencebecomes especially significant where wills are con-cerned. Because wills are so often made by the eld-erly or by persons in their last illnesses, disputesover mental capacity come up a lot.

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As we noted before, the concept of capacity is usedin a number of legal contexts. Interestingly, the stan-dard of capacity to make a will is often not as strictas to enter other contracts. In most states, the willmaker must have a sound mind at the time the willis signed; it’s not enough that he or she had a soundmind when the will was planned.

But what, in terms of a will or trust, constitutes a soundmind? Most courts agree that there are four require-ments for testamentary capacity. They are:

1) Understanding the Nature and Ex-tent of Property. The first test is the willmaker’s understanding of the nature andextent of his property. To satisfy this re-quirement he must have a general knowl-edge of his property. For example, there isno need for him to know the names of in-dividual stocks in his portfolio; it is onlynecessary that he knows that he owns somestock or investments. However, there maybe problems if the will maker has little ideaof how large his estate is.

2) Recognizing the “Natural Objects ofHis Bounty.” Second, the will maker mustknow the members of his family—even ifthey’re not all included in the will. Someolder will makers may have excellentmemories of their childhood, but may beunable to recall which of their children arecurrently alive. In such a case, the require-ment would not be satisfied and the indi-vidual would not be legally competent tosign a will.

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3) Understanding the TestamentaryAct. The third requirement for legal com-petence is that the will maker has a basicunderstanding of testamentary law. In otherwords, she must understand that the willoperates to dispose of her property at death.

4) Understanding the Relationship Be-tween the First Three Elements. Thefourth criterion of legal competence is thewill maker’s understanding of the relation-ship of the first three criteria to one another.In other words, she must be able to under-stand the relationship between her family,her property and the operation of her will.

P R O O F

Determining a person’s competency can be trouble-some. It is often hard to distinguish simple confu-sion from incompetence. This is especially so if theperson is ill and under medication. If he can recallboth his family and property but is confused abouthow the will is supposed to work, it’s probably toolate to make a will. Even if the will is signed andwitnessed, it may be found invalid if challenged.

People who challenge a will on grounds of compe-

tence must demonstrate to the court that the will

maker lacked one or more of the four elements of

testamentary capacity—at the time the will was

made. It’s not enough to show that the person lacked

capacity at some later date.

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This is why witnesses are required for most wills. Ina contest, the court will call on the witnesses todescribe the condition of the will maker when thedocument was signed. Of course, there may be otherwitnesses. A doctor, nurse or caregiver can be calledon to describe the will maker. Because these peoplehave experience in dealing with sick people—andusually have no interest in the outcome of thecase—their testimony may also carry weight.

Also, mental capacity isn’t only an issue for the per-son making a will or trust. The person adminis-tering it—an executor, personal representative ortrustee—must have capacity to fulfill his or her role.

In contentious fights over family money, it’s fairlycommon that an executor or personal rep will havehis or her capacity challenged. Sometimes thesechallenges cause even more trouble than challeng-ing the will maker’s capacity.

The requirements for capacity are the largely thesame for will makers and administrators. In Mary-land, for example, an administrator can’t be:

• a person under 18;

• a mentally incompetent person;

• a person convicted of a serious crime;

• a person who is not a citizen of the U.S.(unless that person was the spouse ofthe will maker and a permanent resi-dent of the U.S.); and

• a nonresident of the state.1

1Unless there is an “irrevocable designation of a person who residesin the state on whom service could be made.”

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However, courts may not give administrators theleeway they give will makers.

S L A Y E R S T A T U T E S

Family members kill each other more often thanmost people would like to think. When this hap-pens, all kinds of problems surface. For one thing,there are laws in most states known as slayer stat-utes—premised on the notion that killers shouldn’tprofit from their wrongful acts. In Georgia, for ex-ample, the slayer statute provides that propertywhich would have gone to the slayer (or slayers)will go, instead, to the nearest heirs “under therules of descent and distribution.”

In the Georgia decision Bradley v. Bradley, a manleft a well-thought-out will. In it, he left his sonJames only $100 because James had previously re-ceived an advance on his inheritance in a certainland deal. The balance of the estate was left to hisother son Benjamin, with the provision that, if Ben-jamin was not alive when his father died, his sharewould go to four alternative beneficiaries.

Despite its specific language, the will did not pre-dict what actually transpired: Benjamin had killedhis father. It was obvious to the court that Ben-jamin didn’t deserve to take anything under thewill. James, however, wanted more than what theslayer statute provided; he wanted Benjamin’s shareof the estate to pass through the laws of intestacy tohim. The court of appeals didn’t agree, and barredBenjamin and his heirs from taking anything. Jamescould not take any of Benjamin’s previous sharebecause the will limited his claim to the $100

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legacy. Thus, the balance of the estate passed to thefour alternative beneficiaries.

The mechanics of slayer statues are also seen in in-

surance codes. A person who kills an insured in the

hopes of reaping the reward of a policy is barred

from taking anything as a beneficiary. If you kill

your sister, for example, thinking her $5 million life

insurance policy will go to you, you’re wrong. You

won’t be entitled to any part of the proceeds.

D I S A B L E D C H I L D R E N

Roughly 14.7 million people have a “severe” dis-ability, as defined by the Americans with Disabili-ties Act, according to the U.S. Census Bureau.

Virtually all of these people face financial planningchallenges, largely because their medical expensestend to be far higher—and their incomes far lower—than the average American, according to govern-ment statistics. But the financial planning chal-lenges are usually even greater for the parents ofmore than half of those individuals—roughly 7.5million—who are mentally retarded.

Many of these children are likely to require physi-cal and financial help for their whole lives. Whilethis assistance is often provided by parents whilethey are alive, few parents outlive their children.

An adult with severe mental retardation or physicaldisabilities will usually qualify for a host of gov-

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ernment-paid services, ranging from health careto custodial care.

If the disabled individual has no income or assets ofhis or her own, the state (which administers thefederal Medicaid programs) will pay for specialschooling, physical therapy, doctors, medicinesand—when necessary—convalescent home care.

Through Supplemental Security Income (SSI), awelfare program for people who cannot work, dis-abled people also get a monthly allowance that canhelp pay for incidentals. However, in most states,the SSI stipends must be used to repay the state forthe cost of other services. This is where family usu-ally steps in, providing the disabled person withmoney and the things he or she needs for daily liv-ing.

The challenge comes when the disabled person hasfinancial resources. In this scenario, the medical careprovided by the state is means-tested—that is, gov-ernment case workers will apply various financialformulas to determine whether a disabled personqualifies. If he has too much money, the child maybe disqualified from state programs.

Some disability rights advocates complain that

means testing doesn’t affect the very poor and very

rich but does hurt middle-class people who have

some financial resources to leave disabled family

members. So, if traditional estate planning leaves

assets to the disabled child, it can leave the child

just enough money to disqualify him or her from

state programs.

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In most cases, a disabled person’s inheritance istreated in the same way as assets of older people innursing homes. The government seizes the inher-itance to pay for current—and, sometimes, past—food, board and medical expenses. It will “runthrough” the resources until the child is again de-pendent on the state’s small, monthly allowance.

This is where supplemental needs trusts come into play.

People receiving government benefits cannot have

more than a minimal amount of assets in their name

to remain eligible. In these cases, family members

should establish special-needs trusts, or discretion-

ary trusts; in these cases, assets belong to the trust

but the trustee can use the money for nonbasic care

items such as transportation, education or recre-

ation. A similar trust can be set up for a nursing-

home patient to pay for supplemental needs.

S U P P L E M E N T A L N E E D S T R U S T S

These trusts are allowed by state and federal law fordisabled people. The trusts insulate personal as-sets, making the disabled person eligible for pub-lic aid and other government benefits.

In some places, these are called “payback” trusts.That name gets to an important element of thetrusts: They must pay back the government for as-sistance received to the extent of trust’s value re-maining at the disabled person’s death.

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Generally, there are two types of supplemental trustfor disabled persons:

• Third-Party Trust. This trust is estab-lished for a disabled person with thefunds of someone other than the dis-abled person, the disabled person’sspouse, or someone legally responsiblefor the expenses and care for the dis-abled person. The trust is funded withthe monies obtained by the disabledperson by a court or through settlementof a medical malpractice or personalinjury case.

• Pooled Trust. Pooled trusts are createdby a non-profit association. They areavailable to disabled persons over theage of 65. Also, a pooled trust may beestablished not only by a parent, grand-parent, guardian or court, but also bythe disabled individual him or herself.

The most cost-effective way for middle-class fami-lies to set up a trust is as part of a will. After ex-penses and taxes are paid, the money is sheltered—only one administrative step away from the personwho needs it but isn’t capable of managing it.

S P E N D T H R I F T T R U S T S

A family member may have problems other than amental or physical disability. In some cases, the chal-lenge posed by a family member has to do withchronic or irresponsible behavior: problems withalcohol or drugs...or simply bad judgment that isconstantly getting the person into financial or legaltrouble.

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In these situations, many families choose to work

around the problem person—excluding him or her

from the ordinary distribution of family money by

moving focus to children or siblings, etc.

Another useful tool for assisting a troubled personis to leave him or her life estate in a home, whichwill ultimately be passed on to other family mem-bers, charitable institutions or other beneficiaries.A life estate (the mechanics of which we’ve alreadyconsidered) gives a person a place to live—but notthe ability to sell or mortgage the actual property.

Important questions to ask when you’re consider-ing granting a life estate:

• Should there be any limits or restric-tions on how the person can use theproperty during his or her life?

• Will the life estate create any problemsfor benefit eligibility (most often, re-lated to Medicare or Medicaid) for ei-ther the grantor or beneficiary?

• Does the life estate create any capitalgains, gift or estate tax consequences?(It usually will, in at least one category.)How will they be paid?

Otherwise, the best solution may involve a spend-thrift trust, which is—simply said—a testamen-tary trust that comes with particularly strict terms.It will usually rely on an institutional trustee orattorney to administer; and it will usually include

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detailed instructions for how money can be distrib-uted and how long the trust will remain in place.

A caveat: Spendthrift trusts (and the wills that es-tablish them) are often contested by beneficiariesfrustrated with what they perceive as overly restric-tive terms. As long as the trust has been clearlydefined and explained, most courts will defer to theperson or persons who established them. But thatclarity—which is always important—is particularlycritical in these situations.

P O W E R S O F A T T O R N E Y

If your family has some problems or problem fam-ily members that you think might make the smoothtransfer of financial resources difficult, you may needto rely on tools like living wills and powers of attor-ney to avoid disputes.

A living will is a directive to health care providersas to your wishes with regard to specific treatmentsor procedures to use in the event of your incapacity.Often the document describes the nature of lifesustaining medical treatments desired. In somecases instructions include a directive that any andall medical treatment available should be used.

A health care power of attorney authorizes an-other person to make decisions for you, your mi-nor child or disabled family member in the event ofincapacity. This authority generally includes theright to authorize use or withdrawal of life support,admission to hospitals or nursing homes, consentto operations and access to medical records. Like a

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living will, the health care power of attorney canset parameters on the authority of the trusted per-son.

Some states have surrogate health care laws thatallow a spouse, relative or friend to make healthcare decisions on your behalf in the event of yourincapacity if there is no power of attorney. How-ever, a guardianship proceeding have to be com-menced in the absence of a health care power ofattorney.

P R O P E R T Y P O W E R O F A T T O R N E Y

A property power of attorney allows another per-son to make financial decisions and execute docu-ments on your behalf. Most people specify that it isto take effect in the event of their disability or inca-pacity. You can have a property power take effect inwhatever circumstances you desire.

You can specify how a determination of incapacity

(or other specified condition) is to be made. You

can also specify the powers and responsibilities of

the agent. These may include paying family ex-

penses, managing real estate and engaging in real

estate transactions; collecting government or other

benefits, making investments, executing financial

transactions, filing and paying taxes; operating a

business, claiming property you inherit or are oth-

erwise entitled to, representing you in court or hir-

ing someone to represent you; and managing your

retirement accounts, carrying out a gifting program

and creating and funding trusts on your behalf.

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Remember: If you become incapacitated and youdon’t have a power of attorney, a family membermay have to seek court authority to obtain guard-ianship over your affairs. The disadvantages ofguardianship are that the guardian often has topost a bond, prepare and file financial reports (orhire a lawyer or accountant to do so) and get courtapproval for certain transactions, such as selling realestate. Someone with power of attorney doesn’t haveto.

A living trust can substitute for a power of attor-ney because your successor trustee can carry out thefunctions of a property agent—but only with re-spect to property held by the trust. A separate powerof attorney is advisable. The power of attorney endsat your death unless your agent has power to dis-pose of your remains.

O L D A N D S A N E

Aging can be a nuisance, especially when peoplebegin to question your mental capacity and chal-lenge your ability to make decisions. Such was thecase with Carl Hone. Hone died in the spring of1998, but the problems that his wealth causedwithin his family had started years earlier.

At the age of 82, Hone suffered a disabling strokein late October of 1996. He had been a bachelorhis whole life and had amassed a considerable es-tate. He owned over 500 acres of property that in-cluded residences, outbuildings, farm land and landsuitable for logging in Oregon. It was no wondereveryone in his family—siblings, nieces and neph-ews—wanted a piece of Hone’s estate when he died.

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After his stroke, Hone was hospitalized for severaldays and then spent several months in a nursinghome. During that time, Hone’s niece, JudithDoyle, began taking care of his personal finances.The family hired Ledadeane Hagedorn to help carefor him when he returned home. In early Februaryof 1997, three days after Hone returned home, hewas readmitted to the hospital suffering from inter-nal bleeding. Things looked grim, but his life wasn’tover yet. While in the hospital, Hone executed awill and trust with Doyle as trustee. Miraculously,Hone recovered and returned to his residence bythe end of the month.

Almost immediately upon Hone’s return home, hisrelationship with his family began to deteriorate.He complained of his inability to get access to hisbank accounts or take care of his finances and ex-pressed his displeasure with Doyle’s handling of hisfinances.

His family members, on the other hand, complainedof “restricted access” to their rich uncle and brother.And they soon pinned all of their issues onto Hone’shired caretaker, Ledadeane Hagedorn.

This called for a family meeting in late March 1997.As a result of that meeting, Doyle and another nieceresigned their positions as trustee and successortrustee of Hone’s estate. The situation got worse,however, as Hone became distressed by his siblings’assertions that he belonged in a nursing home andby his inability to regain control of his assets. Byearly May, Hone took action and he met with anattorney to change his estate plan.

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Hone’s siblings were still in hot pursuit. In earlyJune, they initiated a protective proceeding incircuit court seeking to appoint a guardian andconservator for their brother. The siblings wereappointed temporary guardians and conservators,and two hearings were scheduled.

It didn’t take long for the court to conclude thatHone did not need a guardian, but that he was inneed of assistance with his financial affairs. Honewasn’t incompetent. In fact, he had executed a newwill in August of 1997 that revoked the previouswill and trust and effectively cut out most of hisfamily.

In this new will, he gave nominal sums to his fam-ily and he gave Hagedorn a life estate on his farmand surrounding land. He also established a trustin the remaining lands for the benefit of Hagedornand named a hospice facility as trustee. He alsogave some sums outright to the hospice; and, inthe event of Hagedorn’s death, the entire estatewould pass to the hospice. Hone died shortly after-ward, leaving an angry family behind.

In their attack on the new estate plan, Hone’s fam-ily claimed undue influence. The trial court onlyneeded four days to determine that his wills were,in fact, valid. On appeal, the court referred to theframework established by the Reddaway Estate caseof 1958, which required the court to determinewhether a “confidential relationship” existed be-tween the testator and the challenged beneficiaryand, if one did exist, to evaluate whether “suspi-cious circumstances” were present as defined byseven enumerated factors.

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The seven factors for determining undue influence are:

1) whether the beneficiary participated inthe preparation of the challenged will;

2) whether the will maker had the “ben-efit of the independent advice of hisown attorney in drawing up” the will;

3) whether there was secrecy and haste inthe making of the will;

4) whether there was an unexplainedchange in the will maker’s “attitude to-ward those for whom he had previouslyexpressed affection”;

5) whether there was a discrepancy be-tween the testator’s new and previouswill and whether there was a continu-ity of purpose running through hisformer wills indicating a settled intentin the disposition of his estate;

6) whether the provision for the benefi-ciary amounts to an unnatural or un-just gift; and

7) whether the physical and mental con-dition of the donor made him suscep-tible to influence.

To make a long case short, the appeals court didn’tfind that any of these factors were met. DespiteHone’s health problems, he was a competent manwho was neither dependent upon his caregiver nordominated by her. People testified on his behalf thatdebunked his family members; and the appeals courtconcluded that, although Hone and Hagedornshared a confidential relationship, any suspicious

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circumstances that might have pointed to undueinfluence were overcome by testimony and evi-dence.

The appeals court was compelled to uphold Hone’snew wills. It reproduced a letter of opinion fromthe trial court because it concisely and accuratelysummarized the events and family attitudes thatfollowed Hone’s stroke:

The court wishes to stress that some of theplaintiffs created problems as early as March1997 and the problems had nothing to dowith Hagedorn or any other defendant. Theproblems were exacerbated by the attemptto have the decedent declared incompetentwhen it was clear he was not incompe-tent…. [T]he guardianship hearing thedecedent was basically abandoned, not be-cause of a locked gate but because someplaintiffs were mad and upset with the de-cedent.… Pride seemed to govern the ac-tions of some plaintiffs. The recovery fromthe stroke and subsequent hospitalizationwas, in effect, an inconvenience to them andwhen it was pointed out to them that thedecedent needed rest and should not beupset, they resented receiving that infor-mation.

Then again, as the court suggested, maybe the fam-ily members were just jerks.

S U I C I D E

There are lots of reasons for declaring someone notof sound mind or not capacitated. Medications,

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health conditions and senility can all contribute tosuch a declaration. But what happens when some-one makes a holographic will and then commitssuicide? In the event of a will contest, can the courtfind that feelings of suicide mean that a person isnot “of sound mind” enough to compose a validwill? That’s what the court had to determine in thecase of Estate of W.O. McIntyre.

This case that not only involved the tragic endingto an individual, but it had tragic consequences forthe family left behind. On April 28, 1996, W.O.McIntyre committed suicide at the age of 56. Hewas survived by his wife of 18 years, Jane McIntyre,and his two grown children from a previous mar-riage, Teresa Burns and Keith McIntyre.

It was no secret that McIntyre was in a state of ex-treme depression prior to his death, stemming froma recent diagnosis of diabetes and the resulting fearthat his health would worsen and leave him a bur-den to his family. Before taking his own life,McIntyre had written three suicides notes by hand.In each, he expressed his wish that everything heowned go to his widow—with the exception of be-quests to his son and daughter of $25,000 each.

After his wife admitted the notes to probate as aholographic will, his children filed a lawsuit, con-testing the will. They asserted that their father wasincompetent to make a valid will at the time hewrote the suicide notes. His wife, however, assertedthat her late husband was not incapacitated whenhe drafted the notes and took his own life.

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A jury trial was held in March 1998. Mrs. McIntyretestified that a document, tendered to the probatecourt as her husband’s last will and testament, con-sisted of three notes written on three separate dates.Her husband had shown her the first note shortlyafter he wrote it on March 3, 1996; she found thesecond note on the morning of March 14, 1996. Ather husband’s request, she had kept the first twonotes. The last note was left by her husband on thedining room table of their home on the day that hecommitted suicide. She testified that she was posi-tive that the three notes were entirely in McIntyre’shandwriting.

On March 1, 1996, McIntyre had come home earlyfrom his job as a river boat captain because he wasso depressed that he felt incapable of captainingthe boat.

At his employer’s insistence, McIntyre talked to acounselor, Linda Laney, about his depression. Hemet with Laney twice, on March 7, 1996, and againon March 8. On March 13, Mrs. McIntyre met withLaney and told her that she was afraid to leave herhusband alone, for fear that he would commit sui-cide.

McIntyre was hospitalized briefly for depression inmid-March. Things didn’t get much better, though.On a Sunday afternoon in early April, McIntyre suc-ceeded in killing himself while his wife was awayfrom the home. She found him—as well as the lastnote—when she returned.

Most telling to the jury was the evidence of thenotes. They showed that McIntyre knew what he

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owned and what needed to be divvied up prior tohis death. The relevant parts of the notes read:

To All that I Leave Behind

Dying is part of living and it comes to usone and all. To me it is not such a big deal.and to me in my present state of mind itwould be a relief. I have talked and toldJane all about it and it is a heavy Burdenalmost more than I can bear. To those thatI leave behind do not grieve for me becauseif I am no more I am relieved of my painand mental anguish + turmoil.

As all of you know I am a diabetic and thereis no cure for that only control. Also I haveseen other people get old and become in-valids + not be able to take care of them-selves—and be dependant on family, hos-pitals, nursing homes—and I do not wantthat for myself. and Also the expenses of aserious sickness. can completely wipe out afamily’s money + savings.

Teresa and Family, Keith and Family: I havebeen having suicidal thoughts and if I dothis (take my own life) I want Jane to haveeverything that I leave behind. Because sheis the one that will be affected and hurt themost. And has been a dear + understand-ing partner in life. Also she will need it all—to continue her life and if there is any leftat her time of passing. I want you all tohave your share. Please be good to Jane +help her any way that you can.

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...It seems like that I am deeper in this blackhole, and no hope of ever coming out. AndI just can’t take it. If there was a way that Ichange things + make them better I would,believe me.

Jane: Please give or see that Teresa + Keithget $25,000 a piece of my savings + in-vestments I have always wanted them tohave something when my life was over.Jane, I love you so much + really am sorryI know of no other way.

You and all remember my better years. Iknow that no one can understand this Idon’t myself. but it is bigger than me.

Bye Bye To All And Please Forgive me

In addition to the explanation of his thoughts,McIntyre’s notes meticulously outlined all of hisassets, down to the estimated dollar. This includedinvestments, 401(k) plans, savings bonds, bankaccounts and various other assets. He even had thecorrect account numbers recorded with contactnames of people in banks and financial institutions.

Witnesses testified that McIntyre’s personality hadchanged in the last six months of his life; he wasless active and spent less time with his grandson,but it was clear that he was mentally cognizant.

The hard part, for the court, was deciding upon

how to consider suicide with regard to mental ca-

pacity. The children and the step-mother took dif-

ferent viewpoints. The children wanted to invali-

date the will; the wife wanted the will upheld.

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The trial court ruled that Mrs. McIntyre had mether burden of proving legal execution of the will;the burden then shifted to the children to showthat their father lacked testamentary capacity atthe time he executed it. They relied on his changein personality and his deep depression; they arguedthat he had “faked his way out” of the hospital afterhis short stay there.

The trial court heard testimony from several wit-nesses, including a doctor who had diagnosedMcIntyre as suffering from “major depression with-out psychotic features.” Another psychiatrist, how-ever, felt that McIntyre was having “irrationalthoughts and feelings” when he wrote the suicidenotes. This doctor said that McIntyre’s feelings ofhopelessness about his rather mild case of diabetesdemonstrated that he was, to a degree, “out of touchwith reality.” But only to a very slight degree.

The jury found that McIntyre had been of soundand disposing mind and had sufficient mental ca-pacity to make the will. Consequently, on March30, 1998, the trial court entered an order findingthat the holographic will “was valid in all respects,”and confirmed its previous probate.

The children’s appeal soon followed…and anotherlong round of arguments ensued.

The burden to prove the existence of suspicious cir-

cumstances is always on the person contesting a

will. Deeply enmeshed in family battles, these people

often believe this suspiciousness will be easy to

prove. It’s usually not.

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On appeal, the children argued that McIntyre’s de-lusional belief about the severity of his diabetes,the resulting suicide, and the fact that his will con-sisted of suicide notes, amounted to suspiciouscircumstances that placed the burden upon the wifeto produce evidence of McIntyre’s capacity.

The appeals court didn’t agree. It said: “Under thesecircumstances, we find no error in the trial court’srefusal to shift the burden of showing testamentarycapacity from the [children] to the [wife].” The ap-peals court then turned to the question of mentalcondition. It wrote:

A strong presumption exists that the testa-tor possessed the requisite capacity to knowand understand his actions at the time heexecuted his will…. In this case, ...McIntyrealways knew his family. In the notes,McIntyre listed his various accounts in de-tail, by name, account number and latestaccount balance. He gave Mrs. McIntyredetailed instructions on the location of hissavings bonds and the office of a person withwhom he had placed some investments.Virtually every close family member andfriend was mentioned by name. Moreover,he explained the reason for leaving the bulkof his estate to his wife.

Despite McIntyre’s ultimate ending, he had met thecourt’s requirement for being of sound mind whencontemplating his suicide and figuring out how togo about leaving his estate. If he hadn’t pennedsuch a meticulous and specific will, and if thedoctors hadn’t testified as to his mental problems

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lacking signs of psychosis, the courts may have ruledotherwise. But here, in this story, his final wisheswere upheld and the children were billed for thecourt costs.

C O N C L U S I O N

To review some basic things discussed in this chap-ter on problem situations:

• Competence and mental capacity arethe bases of many disputes over familymoney in problem situations. Preparefor this by making sure will makers andadministrators are competent;

• If your children are minors, they shouldnot be designated as beneficiaries ofyour will. Appoint a trustee for any mi-nors and name the trust as beneficiary;

• Be careful when leaving money to fam-ily members who are receiving gov-ernment benefits. The gift may com-promise their benefits. It’s usually bestto leave them money in a supplemen-tal needs trust;

• It’s an unfortunate fact of life that fam-ily members are sometimes foolish aboutmoney—even if they aren’t, legally, in-competent. In these cases, spendthrifttrusts will usually limit the bad thingsa reckless person can do;

• Occasionally, even a good family facesa member who carries bad behavior toa criminal level. In these cases, slayer

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statutes and other laws will usually limitthe inheritance a criminal can receive.

And, finally, one point warrants repeating: Statingyour plans for your estate in clear and cogent termsprior to your death is key. You can’t bulletproofyour wishes from problem individuals, contests andfamily squabbles; but you can do your best to en-sure that your wishes are upheld in the end.

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CH

AP

TER

INHERITING

MONEY

9

Some 115 million families will start inheriting $10trillion this year. But inheriting money isn’t easy.Some inheritors have grown up in modest families,only to receive a substantial inheritance from par-ents or relatives who became wealthy in older ageor had a lot of life insurance. Even some who grewup with wealth find that managing an inheritanceisn’t as easy as they thought it would be.

Part of the challenge is financial. What do you dowith $100,000 or $1 million or $10 million? Asurvey by Oppenheimer Funds found that 40 per-cent of Baby Boomers who have received at least a$50,000 inheritance made a financial decision inless than a week. Many of these go on to rue theirfirst decisions.

Part of the challenge is psychological. Inheriting afamily business or the family farm requires imme-diate attention. You’re more likely to have knownabout such an inheritance, though an unexpect-edly early death may have put it into your handssooner than you planned. But the same advice ap-plies. Try not to make any rash decisions. Take your

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time, think about what you really want to do withit, educate yourself on what it can and cannot rea-sonably do for you. Remember: clear objectives helpyou manage the money better.

I T ’ S A N E M O T I O N A L T H I N G

While the financial side requires patience, atten-tion to detail and professional consultation, the psy-chological side of inheriting is often the more deeplyrooted challenge. It’s not emotionally easy for manypeople to inherit money. Various feelings collide:gratitude, joy, guilt, fear, relief, inspiration, etc. Andinheritance usually comes upon someone’s death—often a loved one’s. So, add grief to the mix.

And that’s not all there is to it. Another commonfeeling is isolation. This is particularly so amongpeople who did not grow up with wealth, and whosefriends and family may not be wealthy. Like lotterywinners, inheritors often worry—sometimes withgood reason—about friends or family badgeringthem for loans or gifts.

The emotional stress tied to inheritance has causedsome inheritors to get rid of the money as quicklyas possible, either by disclaiming the inheritance,giving it away or spending it. Others have beenknown to sit on their wealth and continue livingtheir current, more modest lifestyle, sometimes fordecades. And some people just don’t like talkingabout money—even when they have a lot of it.Only one in three millionaires share their estate planswith their children.1 As we’ve seen throughout thisbook, that’s not a smart thing.

1The U.S. Trust Co. polled millionaires for this result.

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Conflicts are notoriously disruptive in even tightly-

knit families. Inheritance combines death and

money—two things that alone can wreak havoc on

one’s emotions and personal serenity. According to

advice columnist Ann Landers, “Inheriting money is

not nearly as much fun as making it yourself.” Sans

becoming a street entertainer, making money gives

people something to do, and there’s something to

be said for that.

S U D D E N W E A L T H

The mixed emotions that come together when some-one inherits a decent amount of cash or assets hasbeen called “sudden-wealth syndrome” or“affluenza.” (The term sudden-wealth syndrome wascoined by California psychologists Stephen Goldbartand Joan Di Furia.)

Getting a handle on emotions often takes the help of

a professional—besides the tax attorney or estate

planner. Sometimes a psychologist can help. Many

leading private banks encourage clients to seek ad-

vice from psychoanalysts. It’s not just about money

relationships among family members; it’s about

people’s relationships to money.

Interestingly, what troubles rich people the most isthe effect that their wealth will have on their chil-dren. Will their children work? In the face of so

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much money, will they be unmotivated and feelpurposeless? Will they squander it all?

This harkens back to the case we considered at thebeginning of this book, where the dispute over aJohnson & Johnson heir’s legitimacy shined a lighton numerous strange relationships.

Material advantage will sometimes have the effectof taking away a person’s initiative and indepen-dence. A U.S. Trust survey concluded that wealthyparents reckon that an heir’s motivation begins totank once they pass on more than about $3.4 mil-lion.

While heirs can feel the burden of money, theycan also feel the pressure of matching the achieve-ments of those who created the wealth and secu-rity. And that’s not such a bad thing.

Toward this end, incentive trusts have becomepopular within the last decade or so. A more hope-ful variation on the spendthrift trusts we consid-ered earlier, these make inheritance conditional onbehavior. An heir’s ability to take control of theinheritance relies on his life choices—from educa-tion and career to a spouse and habits in general.Smoking? Less money. Drinking? Less money. Phi-landering? Less money.

Some critics decry these incentive trusts as little morethan egocentric parents trying to control their chil-dren from beyond the grave. In some cases, thatmay be what’s going on; in others, the trusts maybe a tool for encouraging behavior that will maxi-mize wealth and wisdom for future generations.

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T I M E - T E S T E D S T E P S

Some things to consider when it comes to manag-ing an inheritance:

• Take time to focus on what you wantto do with inherited money—beforeusing it.

• List all the things you’d like to accom-plish. Put them in order and askwhether having money helps.

• Create a budget, reflecting how muchof your windfall, if any, will go towardcurrent expenses.

• Think about specific goals: a new home,charitable donations, paying off certaindebts, etc.

• Don’t touch an inherited IRA or othersuch account until you’ve seen an ac-countant or tax planner.

• Contribute more to tax-advantaged re-tirement plans like an IRA or 401(k)and use your inheritance to cover thegap in your take-home pay.

• Avoid blowing more than 5 percent inthe initial rush on Versace clothes orhigh-limit craps at the Bellagio. If youneed to, pretend for a little while thatyou have nothing. Let the first rush ofemotions move through you…beforeyour money does.

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W H E N Y O U R S I B L I N G S G E T M O R E

As you’ll see in this next case, the experience of thePosner family is one for a Lifetime Original. It dem-onstrates how important it is to treat family mem-bers equitably, if not equally; otherwise, they’llspend time, energy and family money in courtroomsbattling out issues that would overwhelm SigmundFreud.

Rose Posner died a rich woman. Having been thewidow of a wealthy developer, she left a $20 mil-lion estate to two daughters and a son. To her daugh-ters’ dismay, however, she left them a mere $100each—leaving everything else to her son, David.

Rose’s children weren’t delinquents. Her son was

chief of gastroenterology at Mercy Medical in Balti-

more; one of her daughters, Carol Jean Posner Gor-

don, was a neuropsychiatrist—also in Maryland.

From the court proceedings, though, it was clear

these people didn’t get along. The other daughter,

Judith Geduldig visited Rose only once in 19 years.

Rose had even sued Carol Jean at one point after the

daughter took a photograph from the family home.

David was accused by his sisters of fraudulently

turning their mother against them with various lies

and misstatements.

At the heart of the matter was the will, which waswritten by Rose—for a 12th and final time—be-fore she died in 1996. The daughters filed lawsuitsto invalidate the last will and declare an earlier 1994

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will as valid, which would have divided the moneyequally among the children.

In court, the nasty accusations began to fly be-tween the brother and the two sisters. In the three-week trial, they never looked one another in theeyes and stood in distant corners during breaks.Among the more interesting accusations:

• The children with MDs tried to over-medicate their mother in order to gaincontrol of her and her estate;

• David actively persuaded his mother toreduce the daughters’ inheritance; and

• The man who wrote the will wasn’t al-lowed to do so because he also repre-sented David.

In all, the children filed three sets of lawsuits.They fought over who’d cared for their mothermost...or best. They fought over taxes. They foughtover trust structures. Some of these arguments werestill being made when a Baltimore jury found thatDavid was entitled to the largest share of Rose’s es-tate; it agreed that he didn’t lie to persuade Rose toleave her two daughters so little money.

By the time this ruling came, however, the value ofRose’s estate had begun to dwindle. About $7.5million had gone to pay taxes. In an earlier deci-sion, a jury had ruled that a $7 million trust cre-ated by the estate was beyond David’s control andhad to be split three ways. This gave each child$2.33 million. So, the remainder in question wasabout $3.5 million.

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The key ingredients to David’s case were videotapes.Rose had died at age 87, but she didn’t die senile.Jurors viewed four videotapes of Rose dictating hervarious wills. The tapes showed a spirited, intelli-gent woman who was sick of her children’s bicker-ing. In a 1994 videotape, for example, Rose said,“It distresses me when my children dicker with melike this and they think they know what I want.”This telling testimony rewarded David in the end,as he walked away with the majority of the money.

T H E C O S T O F F A M I L Y B A T T L E S

Warring siblings in a family’s time of need is a badidea; but it happens a lot when inheritance comes.One awful Virginia case (Bruce v. Bruce) saw two verydifferent brothers wage a war against each other,and the losers became everyone involved—includ-ing their incapacitated father. When the court fi-nally was forced to referee and oust the “flamboy-ant” son as co-trustee, his mother must have turnedover in her grave.

Sylvia and Martin Bruce had two children, Paul andSteven. During their early years, Sylvia and Martinhad amassed a sizeable estate and left their estate totheir sons.

Martin was incapacitated by a stroke in 1992. Sylviamanaged her husband’s estate after 1992 but sheherself died of a stroke in 1994. In 1988 the Bruceshad executed revocable trusts into which most oftheir wealth was eventually transferred; most of theirwealth meant real estate in various locations. Theyowned residences in Florida and Virginia and held

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other property in North Carolina, Ohio, New Yorkand Virginia Beach.

The incapacity of their father and the death of theirmother prompted the Bruce brothers to engage insome quick estate planning; the brothers were bothnamed guardians of their father’s person and prop-erty. In the beginning, things between the broth-ers looked okay as they jointly relied upon the ef-forts of an attorney to carry out plans.

Through the guardianship, Martin disclaimed hisdeceased wife’s estate and made a sizeable gift to hissons. Paul asked for and received the cooperation ofSteven in allowing a portion of Martin’s gift to Paulto pass through him to his two daughters. In re-turn, Paul agreed to cooperate in setting up a chari-table remainder trust from their father’s assets tobe used to benefit abused children. Soon, however,animosity between the brothers broke out.

Both brothers attempted to get control of the trustand oust the other as a co-trustee. Steven tried tofile a suit in 1997 in California (where he lived); itwas dismissed for lack of jurisdiction. Virginia—where the elder Bruces and Paul lived—had thejurisdiction to enforce the Bruce trusts, which itdid in a second suit. According to the court:

To say that a court can remove a trusteedoes not mean it can be done easily. Mereunfriendly feelings between trustees are notenough. The antagonism must affect themanagement of the trust. There must be aclear showing of abuse or mismanagement.The antagonism must militate against theprofitable management of the estate.

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Hence, the court had to consider the “unfriendlyfeelings” between the brothers and decide if thosefeelings were strong enough to call for the removalof one of them from the trust. In doing so, the courtrelied on Florida law, stating “When it is necessaryto repeatedly resort to court action to resolve con-flicts...the interests of the estate may best be solvedby removing one or both of the representatives.”

First, the court turned to each of the brothers’ per-sonalities. It noted:

The brothers each display ample intelligence.However, Paul is methodical in his expla-nations, somewhat stoic and measured inhis response to questions. Steven, on theother hand, is impulsive, impatient, mer-curial and flamboyant in his testimony.…[T]hey present very different personalities.

Clearly, the brothers weren’t one in the same whenit came to their demeanor.

Second, the court turned to the logistics of thebrothers’ residences. Paul lived in Virginia closeto his dad, Martin Bruce. Steve, on the other hand,lived in California and could not interact with hisfather nearly as much as Paul.

Third, the court considered each of the brothers’jobs. Paul was a real estate broker and had been inthe business since 1982. He was knowledgeable ofreal estate, particularly of those holdings in the Brucefamily. Steven, on the other hand, was a lawyer.Although he was completely capable of understand-ing real estate transactions, he did not have the same

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experience as Paul with regard to the family hold-ings, nor was he in close proximity to the proper-ties themselves. This unfortunate position made formore frustration when Steven tried to gain control.

It was easy for the brothers to argue over every-thing, from surgery procedures for their father toreal estate matters. When one made decisions with-out getting the other’s clear permission, fury fol-lowed from either coast. The issues related to theBruces’ real estate holdings took center stage inmost of the arguments. Steven frequently accusedPaul of breaching his fiduciary duties. More outof spite, he demanded that he receive every piece ofpaper in connection to the Bruce real estate hold-ings, even when Paul was doing all the work on theother side of the country.

After one such squabble, Paul explained his pre-dicament very clearly in a letter to Steven datedNovember 1993: “There is no personal reason whyyou have not received the copies of all of the docu-ments. It’s just one of the many things I have notgotten to.” Paul further described the volume ofmaterials involved (“a full foot of documents,” etc.)and what was happening with regard to several ofthe properties.

Paul’s attempts to comply with Steven’s incessantrequests for copies culminated in his mailing threefile storage boxes full of materials in March 1995.

Although Steven complained frequently and bitterly

about Paul’s failure to provide him with informa-

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tion or copies of material, the court found no evi-

dence “of Steven ever attempting to take the bull by

the horn, so to speak, and arranging himself to have

the documents copied.”

The constant bickering over real estate matters re-sulted in delays in getting business done. Paul wasreduced to sending copies of his phone and faxrecords to pinpoint various times during which hespoke to or faxed someone something in order toshow Steven that his complaints were groundless.The court found this paranoia and endless paper-work to be the antithesis of good management.

Steven’s allegations continued. The court found noevidence that Paul had breached his fiduciary du-ties; but Steven didn’t give up. He wrote threaten-ing letters to Paul over his fiduciary duties at least13 times (that the court could count).

The administrative bickering compelled the courtto sound like some comic exaggeration of a radiopsychiatrist. For example, it wrote, Paul, “had atendency to tune his brother out.” According tothe court, “This only infuriated Steven more andbrought about attacks that became more intense.”

The court was unable to determine which camefirst—Paul’s reserve or Steven’s tendency to distrust.The family history that came out at trial led one tospeculate that the differences did not begin at thedeath of Sylvia Bruce.

At any rate, the situation could not continue andthe court determined that the level of discord be-

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tween the brothers was a detriment to the manage-ment of the estate. In other words, it reached thelevel of dysfunction that had been recognized bythe Florida courts as sufficient to justify the re-moval of a trustee.

The court retained Paul Bruce as the trustee for afew reasons. First, he had experience in the realestate field and in particular with the properties inthe Bruce estate. Second, his calm demeanor wouldserve him well as a trustee. And third, the courtbelieved that his conservative approach benefitedthe estate.

“He cannot act alone,” however, the court said. Thecourt noted that Steven’s interests had to be pro-tected, so it appointed an attorney to act in Steven’sstead. The fact that the estate had to pay for hisservices was the price both Paul and Steven had topay for their inability to get along.

Both brothers continued as co-guardians over their

father’s person. “This responsibility is too intimate

to the family for one brother to displace the other,”

the court said.

The court acknowledged that this was a difficultdecision. It doesn’t like to referee in family squabblesat the expense of one person’s ego. Here, StevenBruce clearly lost the war, and lost more as a resultof his personality rather than his actions.

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A N I N D I V I S I B L E E S T A T E

As the Bruce decision shows, courts often force fam-ily members who don’t get along to deal with eachother, regardless. And this is probably a good thing;probate court isn’t family counseling.

But some estates require cooperation among heirs,because the most valuable assets can’t be broken upand sold off. This usually applies to family-ownedbusiness, but it can also apply to real estate.

What happens when an estate is indivisible, andthe heirs all want an equal amount? The Steinbrechercase proves how tough these situations can get, andhow cumbersome they can be in a legal system thatwants to settle things as quickly as possible. Likemost cases of inheritance and sibling rivalry, thisone started with the death of the last parent.

Francis Steinbrecher died in January 1991, leavingthree noncontiguous parcels of property—totaling409 acres—in Illinois worth well over $4 million.Of course, all of his three children—John, Jeromeand Rosemary—wanted a piece of the pie. Theyheld title to the property as tenants in common.John Steinbrecher was the first to take action, want-ing to partition the land among the heirs. In April1996, he filed a motion to appoint a commissioner;later that summer the trial court appointed MichaelCrowley as “substitute commissioner.” After esti-mating that the land was worth close to $5 millionwhen appraised as three separate parcels, Crowleytestified at a partition hearing that the property wasincapable of being equitably partitioned amongthe three heirs.

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On October 28, 1997, the trial court approvedCrowley’s report and found that “the whole or anyof the premises sought to be partitioned cannot bedivided without manifest prejudice to the ownersthereof” and that “the entire property at issuebe...sold at public sale.”

This is when the real trouble began. The courtagreed to the listing of the property by an agency,and by January 1998 a company by the name ofMoser Enterprises, Inc. had offered $3,550,000 topurchase it. And, on August 19, 1998, the trialcourt entered an order “approving the offer/bid ten-dered by Moser Enterprises, Inc.”

Rosemary and Jerome Steinbrecher didn’t like anyof this—particularly the ordered sale of the prop-erty. Rosemary raised hell over and over again in aflurry of appeals and motions. Jerome never filedan appellate brief in the matter, so despite his angerthe court dealt only with Rosemary. She argued sev-eral points, among which were:

• The trial court didn’t have jurisdictionover the partition suit;

• The court should not have ordered apublic sale and that the conduct of thesale was wrong; and

• The judges should have recused them-selves.

Rosemary didn’t give up her fight...but did man-age to waste a lot of the court’s time. It denied manyof her motions, most of which were filed at the lastminute and had little to do with the core of herarguments. She tried to get a change of venue; she

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tried to get extensions for her appeals; and she triedto dismiss judges because they had “some personalor venal motivation.” At one point, the court threat-ened to impose sanctions on her, stating, “We’renot going to be disrupting everybody’s life simplybecause you want to file a motion, especially whenI’ve given you a date in the future.”

Rosemary didn’t have the court on her side; never-theless, the appeals court still listened to her issues.Finding that her appeal was not moot, the courtaddressed the sale of the property.

Most of her claims were worthless. But the courthad the hardest time dismissing her claim that theland was, in fact, divisible and could be divvied up.Crowley had stated that the property was dividedinto three noncontiguous parcels; the land on theseparcels ranged from farmland to heavily woodedacreage on a flood plain. The trial court had foundthat the land was not capable of being fairly di-vided among the three heirs:

It would be a momentous job to try to eq-uitably divide the…parcels among thethree heirs to the point where each one feltthat they were getting an equal one-thirdvalue of the property regardless of whetherit was sold or not. That being the case, andthe heirs being unable to agree amongthemselves, it is the Order of this Court thatthe premises shall be sold at a public salepursuant to the Statute.

But this wasn’t necessarily so. Commissioner Crowleyhad told the court that he’d formulated a division

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of the property in which the one-third shares of theproperty would have estimated values of$1,595,000, $1,608,000, and $1,656,000. Theappeals court hopped on this opportunity to settlethings, stating: “Commissioner Crowley could havearranged a fair and equitable division of the prop-erty.” It then cited previous case law that dealt withthis issue:

The law favors a division of land in kind,rather than a division of proceeds from asale of the land and, therefore, an unequaldivision with owelty is preferred over a saleof the premises.

The appeals court concluded that the trial court’sfinding that the property could not be equitablydivided was against the weight of the evidence. Theappeals court declined to comment on Rosemary’sother claims, remanding the case to the trial courtfor further determination of a possible division. Itacknowledged, however, that the trial court couldagain determine that the property was indivisiblewithout manifest prejudice to the parties. In thatcase, the property would have to be sold.

The appeals court also admitted that Rosemary hada point when she argued that the proposed Mosersale was not a public one that involved “competi-tive bidding in a public place upon proper no-tice.” But this didn’t really matter anymore becausethe court had already reversed the order of the saleand sent the case back for reconsideration. Rose-mary Steinbrecher would have to sit through an-other round of hearings to determine whether theland could be partitioned and, if not, she’d have toensure that a legal public sale took place.

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This case makes the standard advice all the more

valuable: Get your affairs in order before you die—

especially if you’ve got lots of children who don’t

necessarily see eye to eye—or you will not leave be-

hind a family in harmony.

S T E P - D A U G H T E R / S T E P - M O T H E R

Money matters get sticky when it comes to step-relatives and in-laws. The issues around the estateof Maurice A. Gervais landed in Rhode Island’s Su-preme Court, and it’s worth talking about it if onlyfor the sake of the court’s final say.

Gervais died in 1998, leaving two women whodidn’t get along. One was his daughter, and theother was his second wife. After his will was dulyfiled for probate, his daughter, Jeanette, was namedexecutrix to the will. His widow, Lillian Gervais,elected to waive and renounce the bequests madeto her in her late husband’s will and instead, sheclaimed her right to a life estate interest in thehouse. Note, however, that she didn’t possess anyownership interest in the house at the time ofGervais’s death. Her claiming of rights to it prob-ably didn’t sit well with Maurice’s daughter. To makematters worse, once her claim was granted, Lillianleft the property and leased the house out for a pe-riod of two years, terminable immediately upon herdeath or by court order.

Meanwhile, Jeanette filed a motion in the probatecourt to “Enjoin and Restrain Widow from LeasingPremises.” She asserted that Lillian had “abandoned”

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the premises when she vacated it and that she hadfailed to pay her proportionate share of the real es-tate taxes assessed against the property. On April 5,1999, the probate court granted Jeanette’s motionand ordered that “[t]he interest of Lillian Gervaisin the real estate...shall be valued and paid over toher in lieu of her interest in said property.”

Lillian appealed. When the case reached the state’sSuperior Court, it turned to what the state Legisla-ture had written in 1978:

Whenever any person shall die leaving ahusband or wife surviving, the real estateowned by the decedent in fee simple at hisor her death shall descend and pass to thehusband or wife for his or her natural lifesubject, however, to any encumbrances ex-isting at death.... If any estate, real or per-sonal, be devised or bequeathed to a sur-viving spouse, the devise or bequest shallbar the life estate unless the survivingspouse shall, within six (6) months after thedate of the first publication of the qualifi-cations of the fiduciary of the estate of thedeceased spouse, file in the probate courtgranting probate a written statement waiv-ing and renouncing the devise and bequestand claiming his or her life estate in thereal estate of the decedent.

Thus, it was clear that the law provided for Lillianto claim a life estate in her late husband’s real es-tate. And if Maurice had owned more property thanthat one house, she could have claimed a life estatein all of his real estate—residential and nonresiden-tial alike. This made it easy for the court to also

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find that having a residency requirement wouldbe absurd. It said, “Lillian did not ‘abandon’ herlife estate in the former marital domicile when sheattempted to lease the property to a third party.”

In his decision, the Superior Court judge found thatbecause the property had been neither sold nortaken and, because Lillian hadn’t asked the courtfor the payment of the value of her life estate in lieuof it, the probate court had made a mistake. TheRhode Island Supreme Court later affirmed the Su-perior Court’s ruling, leaving Jeanette with noth-ing pursuant to her claims. She couldn’t kick herstepmother out.

A D I S P U T E W I T H E V E R Y T H I N G

Time and time again, we see that large assets cansever family ties upon the death of someone impor-tant in the family. We’ve also seen how in a greatmajority of these cases, those assets come in the formof real estate—homes and land. The case involvingthe estate of Samuel C. Mumby, however, casts along shadow over this area of family money. Mumbyliked his neighbors well; but his plan to leave thema piece of his property didn’t sit well with his daugh-ter. For the daughter, the friends were a big thornin her side. Could she nix the neighbors’ share sim-ply because they weren’t heirs by blood? That’swhat a Washington court had to decide.

Mumby died in January 1997 at the ripe old age of94. He was survived by his only daughter, DarleneWood, and four grandchildren. Mumby had donewell for himself, and his estate was comprised of 44acres of property on an island near Seattle, Wash-

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ington, as well as liquid assets worth half a milliondollars. In 1992, he had executed a will, a quit claimdeed and a durable power of attorney. Through thedeed, he conveyed approximately 38 acres of woodedproperty to James and Erma Caldwell, his long-timefriends and neighbors. The will left the balance ofthe estate to Wood.

Then, in 1995 Mumby had executed a pour-overwill and a living trust. The trust again providedthat the Caldwells would receive the 38 acres, inaddition to a $20,000 cash bequest. He left his resi-dence, a six-acre waterfront parcel, and the residueof the estate to his daughter.

The pour-over will and trust named James Caldwellas executor and trustee. The daughter was also thedirect remainder beneficiary of a family trust fundvalued at approximately $175,000.

This didn’t make Darlene happy, however, and inMay 1997 she filed a petition to invalidate the truston the grounds that James Caldwell exercised un-due influence over Mumby. The Caldwells coun-terclaimed that the no-contest provision in thetrust barred Wood from taking as a beneficiary.

This started the battle for control of Mumby’s es-tate, as both sides had bones to pick with regard totheir relationship with Mumby. For starters, the fa-ther-daughter thing between Darlene Wood andMumby wasn’t so clear. She had limited contact withher father during her youth, and only during thelater years of his life did she resurface. Althoughshe visited her father about once a week to helparound the house since 1992, there was evidence of

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some tension. At one point, she asked her father toco-sign a $250,000 promissory note needed to re-finance a loan, which he refused. The attorney whoprepared his trust documents testified that Mumbydid not feel his daughter supported, visited or caredfor him as much as he would like. The reason hedidn’t leave the wooded part of the land to her wasthat he feared she’d clear-cut the timber. In betweenthe lines, it’s not so hard to see why she showed upin the later part of his life.

The Caldwells, however, shared a very different re-lationship with Mumby. In 1976, Mumby sold hisneighboring property to them, and thereafter, theCaldwells regularly helped Mumby with chores suchas splitting wood, mowing grass, assembling pa-perwork, cutting his hair, driving him into town,cooking for him, providing him with desserts andmending his clothes.

It was through the Caldwells’ help that Mumby wasable to live on his own and in his own home untilhis death. In the summer of 1995, the Caldwellsreferred Mumby to Earnest Dill for “asset manage-ment” services. According to Dill, Mumby wantedto “tighten up his estate plan” against a challengeby Wood. From Dill’s perspective, Mumby had rea-sons to suspect his daughter would contest thewishes set forth in his will. This was why the trustcontained a no contest clause virtually identical tothe clause in the 1992 will. And, any questionsabout Mumby’s competency were quickly dispelled.

It didn’t take long for Wood to learn about the trustand her father’s gift to the Caldwells. Wood dideverything she could to disinherit the Caldwells;

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she hired investigators, attorneys, and consultedwith other family members about her options. Sheinitiated a will contest and a guardianship proceed-ing against her father.

Nothing worked in her favor. Mumby remainedfirm, albeit at an advanced age. He remained aslucid and clear as could be to convince the courtsthat Darlene wasn’t a nice person by trying to doaway with a dying man’s final wishes.

The trial court ruled that there was no undue influ-ence and that Mumby was competent to executethe living trust and pour-over will. Finding no validbasis for Wood’s challenge, the court applied theno contest clause and ruled that Wood should takenothing under the trust document. Consequently,the property that would have gone to Wood underthe trust was distributed to her children.

She really lost big time in this contest. When sheraised the issue of fraudulent inducement on a mo-tion to reconsider, the court denied that motionbecause “[t]he testimony did not begin to establishthat theory.”

On appeal, Wood argued that the trial court erredwhen it failed to find that Caldwell fraudulentlyinduced Mumby into leaving him the 38-acre par-cel of property.

The appeals court disagreed:

The right of testamentary disposition ofone’s property as an incident of ownership,is by law made absolute.” Thus, to estab-

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lish fraud and set aside a will, the contes-tant must present “clear, cogent and con-vincing” evidence of all of the elements offraud. “To sustain an order premised uponclear, cogent and convincing evidence, theultimate fact in issue must be shown byevidence to be ‘highly probable.’

The court said: “[W]here a will is attacked because

allegedly induced by fraud, it may be avoided, not

because the testator’s mind was coerced, but be-

cause his mind was deceived.”

In the context of a testamentary disposition, theelements of fraudulent inducement are:

1) representation of an existing fact;

2) materiality of the representation;

3) falsity of the representation;

4) knowledge of the falsity or reckless dis-regard as to its truth;

5) intent to induce reliance on the repre-sentation;

6) ignorance of the falsity;

7) reliance on the truth of the representa-tion;

8) justifiable reliance; and

9) damages.

C H A P T E R 9

301

Wood failed to establish any of these things, whichfurther made it easy for the appeals court to affirmthe trial court’s ruling against her. The appeals courtalso determined, as did the trial court, that Woodhad acted in bad faith.

Remember: Bad faith is defined as “actual or con-structive fraud” or a “neglect or refusal to fulfill someduty...not prompted by an honest mistake as to one’srights or duties, but by some interested or sinistermotive.”

All of the independent witnesses testified thatMumby was competent and exercised his own judg-ment until his death. Moreover, Mumby’s expressedintent was consistent from his 1992 will throughthe 1995 trust to his death—he wanted theCaldwells to have the 38 acres. The trial court didnot err in enforcing the no contest clause.

In all, the trust was upheld. Mumby could rest inpeace. The same probably couldn’t be said for hisdaughter, however, who would have to share landon a small island with her enemies. She didn’t nec-essarily lose because of the no contest clause, as hav-ing such a clause doesn’t make any will bulletproof.

The lesson here: If you think there’s a high prob-ability of problems surfacing over your dead bodyand over your prized possessions, worry most aboutthe language of your will. Make it bulletproof withclear and cogent language that does not containconflicting material between the pages...or the lines.

302


C O N C L U S I O N

In the end, this is the best advice anyone can makeabout building and transferring family money. Clar-ity is key. Keep clear about your financial goals—which may be longer term than early retirement orgolf every day after 65.

Keep clear about your plans for leaving money tofamily members. This is especially true if you havea non-traditional or blended family. The law maynot give your family the breaks it gives others...so,spell everything out, no matter how awkward orpainful.

Leaving money to heirs is one of the most profoundthings a person can do. It’s tough—but possible—to do it well. We hope we’ve given you a few tools.

I N D E X

303

I N D E X

accelerated death benefits 228administration expenses 127administrator 24, 27, 78, 112, 255-256, 275administratrix 32ancillary representative 224annual capital contribution 42annuities 109, 147, 218, 228-229asset inventories 38

bad faith 89, 166, 172-173, 301beneficiaries 14, 16-17, 19-20, 39-40, 56, 78, 81, 85,

88-93, 101, 103-104, 113-114, 127, 130, 133, 136, 143-144, 149, 156, 159, 161-163, 167-168, 181, 183, 185, 190, 192, 196-203, 205, 221-224, 226-230, 232, 235, 241, 243, 256-257, 261-262, 266-267, 275, 297contingent beneficiaries 81sole beneficiary 156, 205, 232, 241beneficiary designation 144, 199

bequest 75, 78, 81, 130, 164, 227-228, 244, 251, 269,294-295, 297

bonds 24, 61, 107, 134, 167, 236, 272, 274

charitable bequest 78charity 22, 93, 108-109, 236-237child care costs 23codicils 85, 165, 180community property 83-84, 100, 131, 133, 189, 191conservator 88-89, 133, 151, 266creditors 113, 144, 182, 188, 202-203

debt 46, 52, 54-55, 77, 112-113, 134, 142, 181, 184-185, 219, 222, 281

304

I N D E X

deed obligation 71disabled children 250, 257disinherit 66, 205, 298dissolute heirs 251divorce 38, 70-71, 83-84, 105-106, 124, 131-132, 184,

217domiciliary representative 224

educational exclusion 217equity 46, 70, 77, 124, 134, 145, 248-249estate planning kits 154executor 75-76, 82, 93, 99, 112, 114-115, 140, 159-

160, 162-166, 177-179, 181-186, 188, 193-195,201, 221-223, 242, 255, 297

exemption 111, 189-190, 212-213, 220, 225, 233, 240

family-owned business 117, 123, 143, 161, 290fees 89-90, 96-97, 100, 112, 149-153, 160-163, 166,

168-175, 206, 228attorneys’ fees 89, 100, 112, 129, 173-174, 206excessive fees 97executor’s fee 112, 162-163legal fees 5, 68, 152, 163, 168, 171-173, 175trustee’s fees 160

fiduciary duty 93, 114, 163, 174, 184final decree 32, 204financial assets 2, 5-6, 78financial hardship 30fixed annuity 147fundamental fairness 19

generation skipping transfer (GST) 233-234, 240, 242-245

gift splitting 216grantor 92-94, 98-100, 102, 104, 108-111, 149, 167,

235-240, 261guardian 24, 74-75, 78, 88, 104-105, 107, 260, 263-

264, 266, 268

I N D E X

305

guardianship 24, 104, 263-264, 268heir at law 26holographic will 75, 87-90, 269, 273

income 11-12, 15, 83-84, 91, 93, 95-97, 101-108, 110-111, 126, 134, 139-141, 143-144, 146-147, 153, 162-163, 166-167, 184-185, 189, 214, 216, 220-230, 232, 235-241, 257-258income interest 103-105, 235income of the estate 221, 223, 228income tax-free transfer 143

individual investment plans 7inherited IRAs 226insurance 8-9, 24, 77-78, 90-91, 101-102, 104, 119,

123, 136, 143-147, 159, 177-178, 181-182, 199, 201-204, 212, 218, 228-230, 235, 257life insurance 90, 101-102, 104, 119, 136, 143-147, 178, 182, 199, 201-204, 212, 218, 228-230, 235, 257whole life insurance 145-146Veteran’s insurance 228

intentional interference with inheritance 204, 207, 209inter vivos transfers 73interest rate 108, 139, 237-238intestate 74, 78, 247intra-family loans 139investment properties 126investment return 11-12, 103investments 11-12, 77, 101, 103, 107-108, 114-115,

117, 126, 134, 136, 147, 181, 185, 188, 235-236,253, 263, 272, 274capital investment 107fixed income investments 134

joint tenancy 91, 100, 133legal capacity 252legal competence 252, 254legitimacy 17-20, 22-23

306

I N D E X

liability 7, 10, 104, 109-110, 122-123, 137, 142, 208,223, 237-238

life estate 96, 105, 139, 261, 266

marital deduction 40, 82, 189, 219, 232, 234Medicaid 111-112, 239-240, 258, 261Medicare 8-9, 261mentally-impaired 85, 151mortgage interest deduction 126no contest clause 190-192

paternity 14, 18, 20, 23, 25-26pension accounts 226per capita 56-57, 200per stirpes 56-57, 195, 200-201person interested 28personal inventory checklist 76personal representative 27, 88-89, 114, 141, 166-175,

181, 183, 188, 193-194, 201, 220-224, 243, 245-246, 255

power of attorney 2, 180-182, 262-264probate 2, 6, 24-29, 32, 70, 74, 78-80, 89-90, 94, 96,

98, 100, 102, 112-115, 128, 132-133, 136, 140-142, 144, 149, 155, 157-160, 164, 166, 168-171, 173, 182-183, 186-188, 204-206, 208-209, 243-244, 246-247, 269-270, 273Probate Act 208probate estate 113-114, 186, 204, 243-244non-probate estate 113probate property 90

property settlement agreement 32property transfer 81, 95, 218

qualified disclaimer 248real estate 77, 104-106, 125-127, 130-135, 143,

151, 159, 188, 196, 222, 263-264real estate deeds 132real estate investments 126, 188real estate transfer 130

I N D E X

307

retirement 77-78, 91, 119, 136, 146, 177, 263royalty interests 136-139

settlor 92, 190, 198shareholder’s agreement 119, 121, 143slayer statutes 256, 275Social Security 182sound mind 84-85, 88, 90, 193, 253, 268-269, 274spendthrift clause 203statutory distributions 80stewardship 117succession 100, 118, 122, 242suicide 250, 268-270, 272-274survivorship 73, 84, 91, 100, 132, 186-188

taxestax advantages 122, 133, 147estate taxes 75, 81-82, 91, 93, 98, 101-102, 143-144, 155, 213-214, 218, 244-246, 250federal gift tax 110, 212, 214, 238federal unified gift and estate tax system 220generation skipping transfer tax 243-245gift tax 40, 103, 109-110, 133, 144, 212-214, 216-220, 234, 237-238, 248income tax 39, 50, 91, 101-102, 104, 108, 110,139-140, 143, 162-163, 220-221, 223, 225, 229,237, 239inheritance tax 82, 163, 242-243benefits for survivors 225savings 125structure 122

tax-advantaged savings plans 60tenants in common 196, 198, 290testamentary capacity 88-90, 253-254, 273-274testamentary transfers 73trusts

A trust (marital deduction trust) 232B trust (bypass trust) 231-232charitable remainder trust 2, 107, 236, 285

308

I N D E X

charitable remainder unitrust (CRUT) 108, 236-237exemption trust 189-190generation skipping trust 240-241grantor retained annuity trust (GRAT) 109, 237-238irrevocable trust 40, 94, 101-102, 109-111, 237-239life insurance trust 101-102, 104living trust 92, 94-95, 97-100, 130, 136, 153-155, 158, 160, 231, 241, 244, 264, 297, 299Medicaid trust 111, 239parol trust 104pooled trust 260qualified personal residence trust (QPRT) 110,238-239revocable trust 92, 94, 101-102, 109-111, 136,140, 166, 237-239supplemental needs trust 259, 275testamentary trust 94-95, 158, 261third-party trust 260unfunded irrevocable life insurance trust 102

trusts for minors 103-104, 234undue influence 65, 68, 85, 165, 206, 266-268, 297,

299unified credit 213, 217-219

wills 2, 26, 38, 59, 73-75, 80-82, 85-87, 98, 100, 115,117, 144, 156, 158-161, 165, 177-178, 180, 182, 193, 199, 208, 232, 252, 255, 262, 266-268, 284attested will 86, 90holographic will 75, 87-90, 269, 273pour-over will 99, 297, 299reciprocal will 80-82self-proved will 87

will kit 74, 152, 154

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