Estate administration can be a frustrating experience for families and their advisors, because it’s an occasion when families fight. Sometimes the fights are necessary, and unavoidable. Many other times, to a detached observer, the fights seem silly.
Whether justified (or not), whether necessary (or not), conflict makes estate administration cost more (even when litigation doesn’t occur). When tensions boil over into litigation, costs skyrocket.
Because I think preventable conflict is wasteful, I want to offer some perspective on some of the most predictable conflict triggers in estate administration, along with suggestions for how clients and their advisors can reduce the risk of some of these pitfalls.
Pitfall: End of a Dependent Child’s Financial Support
Many clients have children with very divergent career and life incomes as adults (for more on this, see here). It’s not uncommon for one child to be much less economically secure than his or her siblings. Sometimes the cause is downsizing that ended a career early. Other times, it’s serially unsuccessful entrepreneurship, divorce(s), and/or unresolved addictions.
This sort of child (let’s call them, bluntly, a “dependent” child) has often received financial support from parents that other siblings don’t receive in similar amounts.
In extreme situations, the dependent child continues to live at home with his or her parents and “help” them with various home maintenance and aging issues, often in return for access (direct or indirect) to the parents’ pension income, Social Security, and retirement account required minimum distributions.
Invariably, the dependent child will view financial support he or she received as “gifts,” while his or her siblings will view the same transfers as “loans.”
In a perfect world, aging parents of dependent children would keep clear records clearly proving whether the transfers were gifts or loans. In the real world, those records are usually incomplete or nonexistent.
When the alleged loans aren’t documented, and a sibling other than the dependent sibling is named executor, estate administration can turn into an ugly “witch hunt” that in some ways seems like an effort by the executor to punish a dependent child for having been unsuccessful or irresponsible.
On the other hand, when the dependent child is named executor, any undocumented loans (that weren’t really gifts) are very unlikely to ever be repaid.
Solutions: When a client has a dependent child that receives financial support, keep careful records clarifying whether the support is a gift, a loan, or an advancement against a future inheritance.
Consider not having a dependent child serve as executor, and consider the risks a more financially successful child serving as executor might seek “payback” against a dependent child.
Consider whether use of a bank or trust company executor or co-executor might better preserve sibling relationships.
Pitfall: The Family Home Becomes a Long-Term Holding
Estate administrations often last much longer than they should because children cannot agree about what to do with their parents’ house (particularly if they grew up there and are sentimentally attached to it).
They may claim the housing market is soft (even when it’s not), and that it makes sense to hold the house until a better time to sell. Market timing is difficult to do even when it’s not sentimentally motivated, and I have not seen many of these decisions pay off well for families.
Sometimes adult children have a difficult time accepting that their parents’ house may have failed to keep up with neighborhood trends, because of deferred maintenance, an overgrown yard, or an interior that’s dated. Deferring the pain by waiting to sell usually doesn’t work well.
A parent may have put an amount of money into a “dream” or “trophy” home that wasn’t sensible. In those instances, it can be painful for beneficiaries to compare the “dollars in” to “dollars out,” but as above, deferring the issue doesn’t usually help.
A related situation can involve both a “museum” parental home and a dependent child. Especially if the dependent child has been living in the parents’ home, sheer inertia often means he or she wants to keep living there. The dependent child sometimes arranges to receive the home as part of their overall estate distribution.
Often, this leaves the dependent child with a very distorted balance sheet once the estate administration is over.
Instead of taking income-producing marketable securities as their inheritance and renting a smaller place, the child can end up with a house that demands cash for taxes and repairs, rather than producing it.
The result is a lost chance (often the last chance) to place the dependent adult child on a better footing for his or her own retirement.
Solutions: Consider placing explicit directions in a Will that a house be sold in the course of estate administration, and that good cause be shown by an executor why any sale doesn’t occur within a reasonable period of time (for instance, two years).
Pitfall: Blended Family Discord
As the leading edge of the Boomer generation begins to see more estate administrations, an increasing fraction of these administrations involve blended families.
In my observation, even when a second spouse and step-children get along reasonably well while the step-children’s biological parent is living, once they’re not, the situation often deteriorates.
There are so many things that can be difficult (at best) and/or litigious (at worst) in these blended family situations.
- Will a step-parent inherit all of the biological parent’s personal property (including items the children find sentimental)? If not, will a surviving second spouse lose the use of many ordinary household items like cars and furniture?
- How will a step-parent be supported economically?
- When the step-parent is much younger than the biological parent (and, therefore, not that much older than the children), will supporting the step-parent delay eventual inheritance of whatever’s left by the children until they are, themselves, in their late 70s?
- If the step-parent has his or her own biological children, should he or she be allowed to divert assets to those children in his or her own estate plan?
- When there is a family business, how will adult children who continue to work in the business feel about business cash flows supporting the lifestyle needs of a step-parent?
The particulars of any blended family’s demography and balance sheet are very important variables in specific estate planning and administration approaches that make the most sense. Nonetheless, in general outline, consider…
Solutions: Using a corporate executor and/or trustee may provide very reasonably priced insurance against a blended family fight, or litigation.
Relatively moderate amounts of life insurance coverage can provide a “stipend” for adult children whose “core” inheritance will be delayed by its being needed to support the lifestyle of a surviving step-parent who might not be much older.
Great care is probably warranted in deciding whether a surviving step-parent should have powers of appointment over assets held in trust, and if so, the scope of those powers of appointment.
When a family business is key to supporting a step-parent, consider capping annual trust payouts for a step-parent to the greater of trust income or an inflation-adjusted dollar amount. This may increase motivation for children in the business to grow the business, and decrease temptations to boost salaries to insiders at the expense of distributions to shareholders.
No amount of planning by clients and their advisors can remove all of the discord and litigation risks from estate administration, but thoughtful, individualized planning tailored to each client’s particular situation can make better outcomes more likely.