By Attorney Philip J. Kavesh
When you think about it, everyone has these same goals for your estate plan:
- To distribute your lifetime’s assets to the right people of your choosing and at the right time (as they need or can handle their inheritance).
- To properly manage your estate, for you when you may become incapacitated and for your heirs after you’re gone, by the right person you name.
- While minimizing attorney, trustee and court fees, as well as taxes.
We design every Living Trust “vehicle” to help achieve these objectives. But, like any other vehicle, your Living Trust must be periodically maintained or serviced and it needs to be driven properly when the time comes by the Successor Trustees you appoint.
If you feel your Living Trust is OK and your Successor Trustees are fine as is, you may want to check out these (post-Halloween) Estate Horror Stories, real ones we have encountered too many times over the years.
Estate Horror Story #1:
The Wrong Successor Co-Trustees
Here’s a common, unfortunate situation.
You name several children or other beneficiaries to act together as “Co-Trustees”. It seems like the right (or at least diplomatic) thing to do. But you really haven’t deeply considered how they (and their spouses or other “influencers”) get along, or will when you’re no longer in control. Or you just don’t want to acknowledge or deal with some of their interpersonal or psychological issues. And even if you did think about all this when you set up your plan, a lot may have changed with their relationship since then (or when you last reviewed your plan).
Here's how this Co-Trustee horror story unfolds. If even one can’t agree with the others on such important matters as payments of expenses, investment or sales of assets or distributions to beneficiaries, they wind up hiring their own attorneys to fight it out. By the time all the warfare is over, a good chunk of their inheritance is paid out by them as attorney fees and the trust has its own attorney fees too. Not to mention, no matter who wins or loses the battle, hard feelings remain among the Co-Trustees and beneficiaries, so much so that the legacy you leave behind is family disharmony.
Solution: Periodically review your Living Trust estate plan, including your choice of Successor Trustees or Co-Trustees (and check your health care decision makers too!).
Estate Horror Story #2:
Not Enough Successor Trustees . . . Who Will Actually Act!
We generally recommend at least 2 alternate Successor Trustees after your initial one. It’s a good idea in order to avoid a vacancy in the position of Trustee. That may require unnecessary delays, expenses and court involvement to fix. Not to mention, a vacancy may stimulate another fight over who the court should appoint in charge!
The problem is, you may not have given enough consideration to whether a named Successor Trustee will actually choose to act when the time comes (they are not legally required to, as you may think). Or, you may have believed your first named Trustee will serve and your estate matters will never have to be taken over by the successors you named. However, again, lots of things may change over the years. The initial Trustee or second or third one may have become ill, disabled, deceased, moved away, no longer be in touch with or get along with your beneficiaries, or for whatever other reasons won’t act. That may create a vacancy and a court disaster waiting to happen!
Solution: Periodically review your estate plan and reassess if your named Successor Trustees will be willing or able to act (or you still want them to act at all!). That includes not only family members you may have named, but also third parties like a friend, accountant, or bank or trust company.
Estate Horror Story #3:
Your Asset Titles or Account Beneficiaries are Wrong!
When we create your Living Trust estate plan, we assist you with getting your asset titles or beneficiaries right into the Trust from the start. We typically get your real estate into the Trust by preparing deeds. Plus, we give you instruction letters to take to places where you have bank accounts, mutual funds, securities accounts, life insurance, annuities, IRAs, company retirement accounts and other, non-real estate assets. The goal is to get all your titles and account beneficiaries into “the tank” of your Living Trust vehicle as its “fuel”, so it will run properly as intended.
Let’s assume you did get your titles into the Trust. Unfortunately, you may not realize you may have to do it again. You could have acquired new assets or opened new accounts. Or you could have gotten a new mortgage loan and not realized that the real estate deed was taken out of your Trust. When assets are not properly in your Trust, and you become disabled or pass, a long and costly conservatorship or probate court proceeding may need to take place to correct it. At least, your assets will wind up getting into your Trust and passing to the people you intended.
However, the conclusion of the story will be much worse if you have the wrong beneficiary designations, particularly on certain kinds of bank accounts or IRAs and company retirement plans. If not fixed during your lifetime, these assets could wind up going to the wrong persons or at the wrong time rather than the way you stated in your estate plan! Unfortunately, most Courts will say the beneficiary form overrides the provisions of your Will or Living Trust. For example, the U.S. Supreme Court itself has ruled that a long-divorced spouse still named as beneficiary of an IRA was entitled to multi-millions even though it clearly was not in line with the divorce agreement or decedent’s estate plan!
Solution: Yes, you guessed it. A periodic review of your estate plan documents, as well as your asset titles and beneficiaries, makes good sense.
Estate Horror Story #4:
Forgetting about Loans Given to Your
Beneficiaries or Otherwise Providing Them
Unequal Shares Without Explanation
Most likely, you’ve already treated your children (or other beneficiaries) unequally, at least financially. Maybe you’ve helped one to buy a house or start a business. Maybe you’ve paid for one’s higher education but not another's. There’s no “rule” that says your estate plan should dock the future share of the one who financially benefited from your previous help or that these larger amounts should be deemed as “loans” to be repaid. On the other hand, you may want to do that out of a desire to be fair to all. There is no right or wrong here. However, if you don’t address these issues purposefully in your estate planning process, the beneficiaries who perceive they got the short end of the stick may later “lawyer up” and fight it out. (Note: even if your estate plan does treat the prior gifts as “loans” to be repaid after you’ve gone, have these loans been repaid to you over time or has the balance due changed? More points of potential attack by other beneficiaries!)
The same issues may arise when you legitimately want some beneficiaries’ shares larger than others. For example, one may be well off financially and another has greater financial needs. Again, unequal estate shares may spawn a Court fight between beneficiaries!
Solution: Before you set up your Trust, or periodically thereafter, you should address these lifetime “loans” or unequal estate shares with your attorney (perhaps also writing a letter to your attorney, in his or her office, to verify why you have decided to treat them in a certain way in case someone later questions or contests your plan). There may even be some planning alternatives which will avoid beneficiary fights, such as providing for life insurance proceeds to “equalize” to certain beneficiaries.
Estate Horror Story #5:
A Trustee Just Doing Whatever
They Want (Often Because They
Don’t Know Any Better)
Now here, we could tell you lots of horror stories that happen when your Trustee winds up being power-mad, greedy and/or wants to “get even” with your other beneficiaries. We’ve seen Trustees use estate funds for their own personal expenses, refuse to distribute beneficiaries' shares, decide to change the distribution set out in the estate plan documents because they don’t like it or flat out refuse to do anything at all!.
This might be avoided by naming the right Trustee (as indicated in stories 1 and 2 above). However, many times we see a Trustee fail to carry out their duties faithfully, timely and properly because they’ve never before acted as a Trustee and simply don’t have a clue what they should be doing (and not doing). Unfortunately, they’re also unaware that, if they “breach their fiduciary duties”, they may be responsible for monetary damages, out of their own pocket!
Solution: We offer a free consultation to get your Trustee started on the right path, when the time comes for him or her to act. But, much more than that, we offer two other invaluable kinds of assistance to keep your Trustee properly on track. First, a Trustee Manual, with checklists and plain English explanations of what needs to be done by a Trustee. (If you’re already a client of ours, but don't have this manual, call us about getting one.) Second, we present, a few times a year, a special Trustee Seminar where we prepare your Trustee in advance. Call our office at 1.800.756.5596 to find out the date and time of the next Trustee Seminar and reserve your seats, not only for you but your Trustee too.
And you may also want to schedule a Trust review meeting with one of our attorneys soon.
Hopefully, you can then sleep peacefully and never have to dream about these Estate Horror Stories ever again!