May 2012 |Eric Rasmussen, Financial Advisor Magazine
Whether it’s sibling rivalries, poorly thought out trusts or simply greed, the estate planning world offers an abundance of horror stories.
Thomas E. Bentley, a CFP licensee with Truepoint Inc. in Cincinnati, was once going over the documents of a new client, an orthopedic surgeon, who had brought him a 10-year-old revocable trust document for review. It was part of Bentley’s routine, and as he sat in his office reading, he found two people set to receive somewhere around $50,000 apiece. Bentley later met the client in his conference room and asked innocently who the two people were. The client had no idea.
As weird as it may seem, two strangers had seemingly popped up in the surgeon’s carefully thought out estate plan. And as Bentley looked into it, he thinks he discovered the culprit: “control-V.”
“More than likely what had happened is the attorney just copied a part of a trust from somebody else’s trust, pasted it into their trust and forgot to remove those names,” he says. “If they never hired us to work with them for wealth management, who knows if they ever would have caught it?”
Most trust problems are, luckily, not boilerplate language jobs gone awry. But they can make a person shudder nonetheless.
Sometimes the real horror of death is what happens after the funeral. Children are often left fighting over family assets. Sibling rivalries percolating under the surface of family harmony suddenly erupt from emotional abstraction into material reality, a fight over dollars and cents—or furniture. Even a father and mother’s good intentions can go bad if a trust document is not well-thought out, is poorly written or if they just haven’t planned five steps ahead.
One child might be left an ample insurance policy, the other a small company that is bankrupt. Siblings from a first marriage might be spoiled after the second marriage and the arrival of new children—or worse, shut out entirely.
Bentley recalls another example in which a client of his asked him to review a family limited partnership that held his family’s lake house for its use by four siblings. The client found out later that if any of the kids wanted out of the partnership, the house could be sold to a third party. The other children couldn’t say boo about it.
Another common mistake is that language in one document does not complement that in another. Say a couple, having two wills, die at the same time in a car wreck. Their wills ought to presume that one of them died first, the other second. And yet, boilerplate language being what it is, the language can sometimes turns out identical in both wills, and thus the couples are in a legal dead heat to the sweet hereafter, leaving behind them a confused estate.
Because there is no survivor, a carefully planned marital deduction meant to pass along the assets from the larger estate to the spouse can be wiped out (depending on a state’s uniform laws) and the wealth instead goes into probate, where it becomes carrion for estate taxes, creditors, and other predators.
Gary Altman, a CFP licensee and estate planning attorney in Rockville, Md., says that many estate planning problems come about because clients turn to general practice attorneys, not specialists, or because clients try to draft the trusts themselves. Some attorneys use computer programs. “They’re selling a product rather than planning,” he says.
“There are attorneys who will do a will or a trust for someone even though they do divorces or real estate or medical malpractice 98% of the time,” he says. “They figure they can get a form someplace.”
So what leads to bad estate plans and trusts most often? Is it flawed language, lawyer inexperience, or is it really just the inability for anybody to see five steps ahead in life?
“I think it’s both,” says Altman. “I think there’s a lot of flawed language out there.” He mentions one family he’s been working with where the father and mother died in an accident. “The income from the trusts that were going to be created after both parents died ‘had to, must, shall’ pay the income to the beneficiaries, even though they’re under 18.
“You’re talking about paying $100,000 to $200,000 in income to a 17-year-old. No estate planner who really does estate planning should ever say that the income shall be paid to a 16-year-old. That doesn’t make any sense. Would you want your infant when he turns 18 to get an income stream of $150,000 every year at 18? Would you want your infant to receive $2 million when he turns 23?”
“When I asked the attorney who drafted the documents ‘Why did you do this?’ his response was, ‘I didn’t think [the parents] would die young.’ That indicates to me that there was no thought given to what was being done because he wasn’t anticipating anything.”
Joseph Alfonso, a CFP licensee at Aegis Financial Advisory LLC in Santa Clara, Calif., and Portland, Ore., recently worked with a couple to redraft the wife’s separate trust, created with her inherited assets before she had married her husband. The wife’s mother was the successor trustee, and the trust hadn’t been changed after the marriage. So under the terms of the trust, if the wife had died, all the assets of the trust would have gone to her mother.
“It effectively disowned her spouse and two children because it had not been amended properly,” he says. “Since the trust held most of their combined assets, the effect of her premature death under these circumstances would have been major.”
What the woman should have done is amended or terminated her trust and instead commingled properties with her husband. Luckily, the disaster was averted.
Part of the problem, Alfonso says, is that when people’s lives change, they often don’t go back and review old trust documents to make sure the documents are current, their priorities the same.
Jeanni Harrison, a CFP licensee in San Diego, had a client in his late 60s, a father, who died with three adult children. He named his eldest daughter as successor trustee of his trust, not his ex-wife, the children’s mother, even though she had recently moved back in with him. Two other siblings and the wife realized that the daughter had control of the assets and went nuts, Harrison says. The daughter wanted to follow the trust to the letter (she wasn’t given, and wouldn’t take, compensation). This came to a head when her mother found out $10,000 was earmarked to go to somebody in Europe, from which the couple had emigrated years before. A female.
“The mother asked, ‘Where’s my $10,000?’” She didn’t talk to the daughter, who was just performing her fiduciary duty, for months, Harrison says.
Harrison thinks the key to avoiding problems is to review trust documents once a year and ask if anything has changed. It’s not about the trusts being ill-conceived.
“I don’t see too many poorly written trusts,” she says.
Christopher Parr at Parr Financial Solutions Inc. in Columbia, Md., says he has the kind of story that keeps an advisor up at night. He had a client, a former state employee with a large pension, whose wife had been a relationship manager at a corporation and enjoyed a large IRA. Both were about the same age transitioning into retirement. They had forged a “Brady Bunch” family years before in a marriage that had lasted 30 years.
“The family raised them all together in a very nice way and they were all equal in their own minds. It was like having a single family with four children.” The couple’s trust held after-tax assets and the wife’s sizable IRA, meanwhile, named all four children as co-beneficiaries.
Some things were amiss, however. The husband was in poor health and frail. There were worries about his ongoing mental capacity. While they were anticipating this future problem, his wife suddenly took ill. A couple of years younger than her husband, she got a diagnosis of breast cancer. She passed away within the year.
“At that point, he’s the sole trustee,” Parr says. The client named the most financially responsible daughter as the successor trustee, and everything could have been fine at that point, says Parr.
Then, within a year, the father claimed he found “the love of his life” and remarried. This was the third marriage for the new spouse, Parr says, who had outlived her other husbands and built up inherited assets.
Though the client had followed Parr’s advice to have a prenup put in place, the client later named his revocable trust as the primary beneficiary of his IRA (90% of which came from his late wife’s IRA), downgrading the kids in the beneficiary chain. And then he named his new spouse as the successor trustee. Parr suggested he change the IRA beneficiary back to the kids. The client said no. He suggested that the client split the IRA between kids and spouse.
The client said no, since the new spouse was in better physical shape and might live a long time, even though she was in her 60s. Parr recommended a corporate trustee to handle trust assets instead of the new wife, somebody to act as a fiduciary. No again.
Parr says these changes effectively put the fox in the henhouse, since the new wife was in the backup slot and would be named trustee if the father was no longer competent, a state that seemed to be imminent. “All of a sudden you have new spouse, who has only known this guy for about a year, and the way the legal chips are falling is that she is potentially all-powerful on a contingency situation.” She could control 100% of the man’s financial resources.
After all the rigmarole, there were cracks in the egg. The couple’s differences in lifestyle and vigor started to create strain, says Parr (the father needed a caretaker for the most part). Within three years, they had filed for divorce. So that they could part on amicable terms, the father promised his new wife a large settlement figure without talking to Parr or an accountant, which triggered a huge gross IRA distribution that, with taxes and penalties, turned the lump $150,000 settlement into something much larger. On the other hand, the children were again named per stirpes beneficiaries of the IRA at 25% apiece.
The client went into an assisted living facility and the financially responsible daughter was again named as the successor. He resigned as trustee when his mental state started to deteriorate beyond repair. Parr currently deals with the daughter.
Now in a retirement home, the client recently got a new girlfriend.
“Our firm is thinking of adding a full suite of concierge services that include sending a ‘Guido’ for a personal visit to put big cement boots on the client if he expresses any thoughts of remarriage,” says Parr.
Though many times, family members are chosen as trustees and it all works out, Parr says that these are cases when corporate trustees can help. Though it’s no sin to keep it simple by hiring a family member who is competent, sometimes a trust company can help when the bookkeeping and accounting is getting too complicated and a referee is necessary for squabbling family members.
It’s expected that financial advisors will increasingly be taking leadership positions in these situations as more baby boomers retire and more assets go into trusts, and many advisors will have to make a decision about which trustee firms to work with. Some are opting to start their own.
Harrison says that when a successor trustee steps into the fold, hopefully there is an AB trust or bypass trust that is there for the kids that can’t be changed.
“If you have an AB trust, that will at least keep [someone new] from taking all the money,” she says. “I have seen a situation where the second wife might favor her own children over the children of the deceased spouse. And it’s legal. If she is the successor trustee, she can do what she darn wants to if it’s not been set up properly.”
Sometimes there can be trouble if a child awaiting a lot of trust assets is being cared for by someone who is not as financially well off. Harrison has a situation in which her client has set up a trust for a grandchild who is in a foster home and is likely going to be adopted by the foster family. “At [the client’s] death, there will be a special trust set up for this grandson, and the attorney’s trust department or the attorney’s trust administration department will be administering it. I would want to keep control of who is controlling that money, because as good as this foster family is, they also have other children and I’d want to make sure that this money would benefit the person it’s intended for. The whole idea is that this money is supposed to go for education.”
Altman says that, again, it’s do-it-yourselfers and lawyers who don’t listen carefully and find out what a client really wants that leads to trouble. He says he’s seen three different trust documents from three different lawyers in three different states in which there is no successor trustee named if the trustee dies and no method of appointing one.
“There are a tremendous number of ways that it can get screwed up, and generally it’s because the person who was writing the document doesn’t get all the possible contingencies, possibilities or someone doesn’t listen, doesn’t know.
It’s frustrating for someone like me who tries hard every day to get every word correct to have documents come in my office that I had nothing to do with that aren’t clear and which sometimes produce very bizarre results—the wrong person getting the assets.”