10 Ways to Lawsuit-Proof Your Estate #6

FORBES Magazine online blog, The Best Revenge – by Ashlea Ebeling, has an excellent article called 10 Ways to Lawsuit Proof Your Estate that covers a lot of the advice that we at Ainer & Fraker, LLP give to our clients.

Please read the entire article by clicking on the following link: 10 Ways to Lawsuit-Proof Your Estate.

Today, we examine Part 6 – Get your own lawyer

It’s common for one lawyer to do the estate planning documents for a couple and perhaps even more family members. But if the lawyer represents someone other than the testator (the person writing the will), trouble can result. Say the law[yer] represents both the testator and a second spouse—children from a first marriage could cry foul and say that the lawyer was doing the secret bidding of the second spouse and not what their own deceased mom or dad wanted.

~ Ashlea Ebeling, 10 Ways to Lawsuit Proof Your Estate

Ainer & Fraker, LLP Analysis

Carefully defining who is the client is one of the most important tasks of any estate planning attorney.

It may seem simple at first, but many times circumstances change during the course of the representation – or in the life of the family – making it difficult to ascertain who truly must be represented by the attorney.

Consider the following circumstance:  Mother and Father are in their late 70’s, but have full mental capacity to execute legal documents.  Because they are living on fixed income, Oldest Child pays the attorney for an estate plan.

Mom and Dad are fine with Oldest Child serving as Trustee and Executor.  However, once Mom and Dad begin to show signs of dementia, Younger Siblings challenge the decision to have Oldest Child serve as Trustee.

It is common in many cases for the drafting attorney to continue representing Trustee, since that was Mom and Dad’s wishes.   However, if there is a conflict between the children as Beneficiaries, the drafting attorney may become disqualified due to the Conflict of Interest.

Also common is the Conflict of Interest that arises from blended families.

Husband and Wife are married for 20 years before Wife dies.  Husband remarries Second Wife and they remain married for another 10 years before Husband dies.

Husband had sought to leave his part of the Estate to his children, but wanted Second Wife to be his Trustee and Executor.

In this case, the original drafting attorney will find it difficult to avoid a Conflict of Interest, because the needs of his Clients (Husband and Second Wife) are very different.

If not managed carefully, these types of representations can lead to family friction and potentially litigation.

Careful determination of “who is the client”, combined with the appropriate Conflict Waivers, are required if the client seeks joint representation in a case like this.

Better yet, each spouse should ideally have their own independent counsel, to avoid litigation down the road.

 

10 Ways to Lawsuit-Proof Your Estate #5

FORBES Magazine online blog, The Best Revenge – by Ashlea Ebeling, has an excellent article called 10 Ways to Lawsuit Proof Your Estate that covers a lot of the advice that we at Ainer & Fraker, LLP give to our clients.

Please read the entire article by clicking on the following link: 10 Ways to Lawsuit-Proof Your Estate.

Today, we examine Part 5 – Check ownership of what you leave

This sounds ridiculous, but make sure you own what you’re planning to leave to your heirs…With jointly owned property, the joint owner gets it…If you put your vacation condo in corporate name and the shares are to go into a trust, it doesn’t matter that you say in your will that you want your daughter to get it.

~ Ashlea Ebeling, 10 Ways to Lawsuit Proof Your Estate

Ainer & Fraker, LLP Analysis

One of the most common misconceptions in Estate Planning is that your Living Trust (or Will) will always determine “who gets what.”

However, a Living Trust only controls what is actually in the Trust.

If you never fund an asset to the Trust, the Trust will not determine who gets that asset.

As the article indicates, Joint Tenancy assets go to the surviving Joint Tenant, not through a Trust or Will, which is one of the major problems with Joint Tenancy.

We were involved in a litigation matter where the Father had created a Trust leaving the bulk of his estate to the children of the first marriage.

However, when he died, it was discovered that all properties were held in Joint Tenancy with his second wife.

The children were originally told they got nothing because these assets were never funded to the Trust.

In addition to property owned in Joint Tenancy, there are a number of assets that are not ordinarily subject to Probate – including assets that pass by operation of contract, such as an IRA or 401(k) or Life Insurance or Annuity.

For these assets, a Will is powerless over them, because they pass directly to the beneficiary named on the account form.

This is why it is never enough to create a Living Trust, you must make sure that  your assets are funded to the Trust.

10 Ways to Lawsuit-Proof Your Estate #4

FORBES Magazine online blog, The Best Revenge – by Ashlea Ebeling, has an excellent article called 10 Ways to Lawsuit Proof Your Estate that covers a lot of the advice that we at Ainer & Fraker, LLP give to our clients.

Please read the entire article by clicking on the following link: 10 Ways to Lawsuit-Proof Your Estate.

Today, we examine Part 4 – Transfer a Business with a Contract

Suppose you have a house, $2 million in investments and a coveted family business you want your oldest child to have even though you think everybody else will be ticked off. Consider entering into a contract while you’re alive selling the business to that child, instead of including it as a specific bequest in your will or trust.

~ Ashlea Ebeling, 10 Ways to Lawsuit Proof Your Estate

Ainer & Fraker, LLP Analysis

While the basic advice in Part 4 is sound, it does not come close to eliminating the sources of family friction as it relates to the family business.

While it is harder to contest the lifetime sale of a business than it is to contest a bequest or devise – the real challenge is how to equalize the inheritance to all children, whether they work in the family business or not.

As it was discussed in Part 1 – Treat Siblings Equally – litigation and family friction can be largely avoided when all children are treated equally.

However, when it comes to a family business, even isn’t equal, and equal isn’t even.

If one child has been working in the family business, while others have been pursuing their own passions, it is only right to hand the business over to the child who has invested their life in the long term success of the family business.

However, if the family business is the majority of the family’s net worth, then how can the other children receive an equal inheritance?

Consider using life insurance to save the family business.

If you establish a buy-sell agreement – and fund it with life insurance – you can give company stock to the child who wants it, and cash to those who would prefer cash.

Everybody wins:

  1. The company is wholly owned by the child who can ensure it’s success
  2. The Child who works in the business has total voting control
  3. The Children who don’t want to work in the business aren’t tied to it for money

The Family Business is saved – and Family Harmony is preserved – for the cost of the insurance premium.

10 Ways to Lawsuit Proof Your Estate #3

FORBES Magazine online blog, The Best Revenge – by Ashlea Ebeling, has an excellent article called 10 Ways to Lawsuit Proof Your Estate that covers a lot of the advice that we at Ainer & Fraker, LLP give to our clients.

Please read the entire article by clicking on the following link: 10 Ways to Lawsuit-Proof Your Estate.

Today, we examine Part 3 – Keep track of loans and advances

If you loan money to one of several children, it’s best to have it in writing whether the loan is to be forgiven or repaid at your death. If you make a gift to one of several children, say $50,000 as a down-payment on a house, you can amend your will or trust to say that the gift is an “advancement”…Sometimes addressing this clarifies things, but sometimes the way it’s accounted for backfires and prompts litigation.

~ Ashlea Ebeling, 10 Ways to Lawsuit Proof Your Estate

Ainer & Fraker, LLP Analysis

Family loans and advances are one of the stickiest areas in Estate Planning.

They can almost do more harm than good, especially if family members fail to follow the rules set forth in the Internal Revenue Code.

To begin with, loans between family members are presumed to be Gifts, not Loans, unless the family members can prove that the Loan was made by an “arms-length” transaction.

In short, there should be some documentation of the loan, and – more importantly from the perspective of the IRS – appropriate interest must be charged.

What constitutes appropriate interest?

Well the IRS – in it’s infinite wisdom – will apply the Applicable Federal Rate to the loan, if you fail to assign a different rate.

More importantly, if you choose to not charge interest – the IRS may attribute interest to the transaction anyhow (imputed interest) which can lead to negative tax consequences for failure to pay the imputed interest.

As part of your Living Trust – you should make reference to the loan, the duration of the loan, the rate of interest charged, and any other identifying information (i.e. documentation).

The note (or evidence of the loan) should be assigned to the Living Trust.

If you decide to allow a Child or Beneficiary’s share of the Estate to be reduced in lieu of repayment – you must factor in the applicable interest rate over the term of the loan (from the date the money was lent until repayment).

While inter-family loans are extremely common – the rules surrounding them are complex, and must be followed to avoid negative tax consequences or litigation.

Bay Area courts to be hit hard by state budget cuts

The San Jose Mercury News reports in the article Bay Area courts to be hit hard by state budget cuts that California courts will suffer $350 million in cuts this year which is why at Ainer & Fraker, LLP we tell our clients you should Avoid Probate at All Cost.

California’s courts have long suffered from budget shortfalls, and this year and next year will be especially harsh.

California Probate Courts will suffer as well, as staff and hours are cut back to deal with State Budget Cuts.

In addition, some courts may consider closing on certain days, and other courts may close satellite locations.

All of these cutbacks add to the Bureaucratic Nightmare that is Probate, and slow down the already Lengthy Probate Process.

This is why at Ainer & Fraker we tell our clients you should Avoid Probate whenever possible.

Read the full article at the Mercury News.

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10 Ways to Lawsuit Proof Your Estate #2

FORBES Magazine online blog, The Best Revenge – by Ashlea Ebeling, has an excellent article called 10 Ways to Lawsuit Proof Your Estate that covers a lot of the advice that we at Ainer & Fraker, LLP give to our clients.

Please read the entire article by clicking on the following link: 10 Ways to Lawsuit-Proof Your Estate.

Today, we examine Part 2 – Decide who gets which treasure.

Most wills and trusts say to “divide my tangible personal property among my children as they shall agree.” Talk about a recipe for disaster…

…List specific items that you want to go to certain heirs in your will or trust. Better yet, if the items haven’t appreciated in value or your kids plan to keep the pieces in the family, give them away while you’re alive…To make the gift totally transparent, [you can draw] up “bills of sale.”

~ Ashlea Ebeling, 10 Ways to Lawsuit Proof Your Estate

Ainer & Fraker, LLP Analysis

Most clients put the most thought into distributing the “residue” of the Estate between the children – i.e. what is left after initial distributions.

However, as the article indicates, personal property items can often lead to friction between beneficiaries – especially if they have significant emotional value.

We refer to these as “Emotionally Encumbered” items – such as family heirlooms or photo albums.

While they may seem too small to fight over, I can assure you this isn’t the case.

Once upon a time, a lady called our firm out of the Yellow Pages and asked us to help her file a suit against her brother – the Trustee of Mom & Dad’s Trust.

When we asked why she wanted to sue him, she said it was because he had refused to share the family photo album with her.

While we politely declined to represent her, this story shows that children attach great significance to personal property items that remind them of Mom and Dad.

While this is a natural part of the grieving process, it can lead to family friction that can be avoided if Mom and Dad are clear as to “who gets what.”

10 Ways to Lawsuit-Proof Your Estate #1

FORBES Magazine online blog, The Best Revenge – by Ashlea Ebeling, has an excellent article called 10 Ways to Lawsuit Proof Your Estate that covers a lot of the advice that we at Ainer & Fraker, LLP give to our clients.

Please read the entire article by clicking on the following link: 10 Ways to Lawsuit-Proof Your Estate.

Today, we examine part 1 – Treat Siblings Equally

You can avoid estate litigation most of the time by treating people with the same degree of relationship to you equally. Three kids get one-third each. Trouble brews when you cut out kids in favor of grandchildren or favor one family line, giving more to the child who bore you more grandchildren.

Decisions get more complicated with multiple marriages. Should you treat the children from a second or third marriage the same as your son from your first marriage, putting a 40-year-old on the same footing as a 20-year-old, who isn’t yet launched?  What about stepchildren? The default rule (that’s what happens if you die without a will or the will is thrown out) treats stepchildren the same as full children.

~ Ashlea Ebeling, 10 Ways to Lawsuit Proof Your Estate

Ainer & Fraker, LLP Analysis

Estate Equalization is one of the greatest ways to promote Family Harmony in Estate Planning.

Where the Estate has mostly non-liquid assets – i.e. Real Estate or a Family Business – it becomes more challenging to treat everyone equally.

Putting all family members on a Deed or giving everyone equal shares of stock in the Family Business is generally a recipe for family infighting.

A much better solution: Use Life Insurance to Equalize the Estate or to Save the Family Business.

In this way, everyone gets what they want – either the asset or the cash.

If they don’t like what they receive, they can always offer to buy a sibling out.

10 Ways to Lawsuit-Proof Your Estate

FORBES Magazine online blog, The Best Revenge – by Ashlea Ebeling, has an excellent article called 10 Ways to Lawsuit Proof Your Estate that covers a lot of the advice that we at Ainer & Fraker, LLP give to our clients.

Please read the entire article by clicking on the following link: 10 Ways to Lawsuit-Proof Your Estate.

We found this article to be full of good ideas, so we are going to dedicate a separate blog post for each of the 10 Ways to Lawsuit-Proof Your Estate, which we will follow up with our own commentary.

In brief, here are the 10 Ways to Lawsuit-Proof Your Estate:

  1. Treat siblings equally
  2. Decide who gets which treasure
  3. Keep track of loans and advances
  4. Transfer a business with a contract
  5. Check ownership of what you leave
  6. Get your own lawyer
  7. Consider a corporate executor
  8. Establish you’re of sound mind
  9. Include a “no contest” clause 
  10. Spell out any disinheritance

Click on any of the links above to take you to the blog post that discusses it.

Life Insurance and the Wealth Replacement Trust

In our prior posts, we discussed how there are many Uses of Life Insurance in Estate Planning, including Estate Creation; Liquidity to Pay Estate Tax; Estate Equalization; and Using Life Insurance to Save the Family Business.

Now let’s look at one of the very best ways to leverage the value of both Life Insurance and Charitable Giving:

Using Life Insurance in a Wealth Replacement Trust

Charitable Giving is one of the best ways for families to deal with Estate Tax issues, as well as to leave a positive legacy for one’s family and community.

The Charitable Remainder Trust (CRT) offers three levels of potential Tax savings: (1) Deferral of Capital Gains Tax; (2) Immediate Income Tax deduction; and (3) Estate Tax credit for amounts passing to charity at the end of the Trust.

The Charitable Lead Trust (CLT) allows a Donor to transfer property to their Children at a greatly reduced Gift Tax level, since it receives a credit for amounts going to Charity during the term of the Trust.

A Private Family Foundation or Donor Advised Fund allows Family members to direct donations to qualified recipient organizations over many years.

In addition, a Private Foundation or Donor Advised Fund can be set up to receive the Charitable Remainder at the end of the Charitable Remainder Trust, and it can also receive the annual Charitable Gift from the Charitable Lead Trust.

However, each of these techniques can have a serious drawback.

For the Charitable Remainder Trust, what happens if the Donor dies early in the CRT’s term, leaving more money to the Charity than anticipated, and depriving the family of the use of those assets?

With the Charitable Lead Trust, what happens when the family can not wait for 10, 20 or 30 years to use the money that is locked up into the CLT?

Families that are concerned about these outcomes will often use a Wealth Replacement Trust (also known as an Irrevocable Life Insurance Trust) to replace assets passing to Charity.

If the Donor of a Charitable Remainder Trust dies early, and the CRT pays more to charity than anticipated, the Wealth Replacement Trust will replace those assets with Life Insurance death benefit proceeds.

If a Charitable Lead Trust is set up for a length term of years after the Donor dies (called a Testamentary Charitable Lead Trust), the Donor can also set up a Wealth Replacement Trust with an equal amount that will pay to the beneficiaries immediately upon his passing.

That way, the Beneficiaries will have immediate use of the Life Insurance proceeds upon the Donor’s death, and also will receive the balance of the Charitable Lead Trust at the end of it’s term of years.

In both cases, Life Insurance is used in a Wealth Replacement Trust to enhance the benefits of Charitable Giving, as well as mitigating the downside of the Charitable techniques.