Crucial Coordination

When the funeral is over, the drama is just beginning. Maybe it’s a brief tug-of-war over Grandma’s handwritten recipe book. Perhaps it’s a heated debate among siblings who have jointly inherited a family vacation home and can’t agree on whether to keep it or sell it. Or maybe it’s an epic family legal battle sparked by a disinherited son who decides to contest a parent’s will.

Such conflicts over inheritance are plaguing a growing number of families, according to lawyers and financial advisers. The disputes are cropping up “way more in the last few years than in the decades before,” says Bernard Krooks, an estate lawyer in White Plains, N.Y. “We used to go into estate work expecting it to go smoothly, and now we go in waiting for the next shoe to drop.”

One factor fueling the increasingly fierce inheritance battles is a still-sluggish economy, which can make families more prone to fights over money, Krooks says. At the same time, a growing number of adult children are providing care for elderly parents, and they may feel resentful if they have to share an inheritance equally with siblings who didn’t help out. The rise of “blended” families, where at least one spouse has children from a previous marriage, also creates inheritance issues that can end in bitterness. Nearly one-third of people in blended families say that there are conflicts among their potential heirs, compared with 12% in traditional families, according to a survey by UBS Wealth Management.

No matter how harmonious your family, you shouldn’t assume you’re immune to inheritance battles, says David Cutner, an elder-law attorney in New York City. “As one client said, ‘When there’s money on the table, even the blind person can see.’ ” Though inheritance conflicts are all too common, they can in many cases be avoided, Cutner and other experts say.

Start talking. Because poor communication is a primary cause of inheritance conflicts, you should consider involving your potential heirs in your decision-making process as you create your estate plan, says Marlene Stum, a professor at the University of Minnesota who has studied these disputes. First, decide who gets to have a voice in the process. If you’re including your favorite daughter-in-law but not your less-esteemed son-in-law, you may be laying the groundwork for future conflict, Stum says.

If you’re downsizing to a smaller home, that may be a natural time to begin the process. Ask potential heirs which of your personal possessions they’d like to have and why. You’ll probably be surprised by the answers, Stum says. A toaster you were planning to toss could be a treasure to your child. “I’m amazed at what people attach meaning to,” she says.

You may want to give heirs some sense of how much they’re inheriting, because even positive inheritance surprises can lead to family feuds. Often, when a parent dies with far more money than the children anticipated, “it becomes a bit of a feeding frenzy,” says Eve Kaplan, a certified financial planner in Berkeley Heights, N.J.

Also talk to heirs about the goals you’re trying to accomplish with your estate plan. If you plan to leave significant assets to a charity, for example, you may want to tell heirs about your decision and why the cause is important to you. “People dispute things when they don’t have an explanation,” Krooks says.

Thanks to open conversations with her three adult children, Trini Costello, 78, says she feels confident that there will be no squabbling over her estate. The retired dance instructor has already told her children that she won’t be dividing all of her assets equally. Since she’s hoping that her IRA will help cover college costs for her grandchildren, she’s leaving the greatest share of that account to the child who has four kids, a smaller share to the child who has two kids and the smallest share to the child who has only one kid.

Costello’s children have raised no objection to her estate plan, and they’ve made the process easier for her by telling her which personal items they want. One wants the music box, another wants the dining room table, and the third wants the tools. “We talk openly about all sorts of things,” says Costello, who lives in Baldwin, N.Y. “I’m not worried at all about conflict.”

Tamp down likely trouble. Conflicts can’t always be avoided. You can’t erase a sibling rivalry that has kept your children at odds for decades. Even a perfectly equal division of your assets may leave one heir feeling he didn’t get a fair shake — as when a child who’s struggling financially gets the same inheritance as a wealthy sibling, Cutner says.

If you foresee conflict among your children, don’t name any of your children as executor. Turn to another relative or trusted friend instead.

Also consider transferring your assets into a trust. A revocable living trust lets you remain in control of the assets and offers greater privacy than a will, potentially heading off disputes after you’re gone, planners say. A will must be promptly filed in court after your death, so it becomes a public document — inviting scrutiny and potential objections. With a trust, your estate details remain private, and the trustee only needs a death certificate to start carrying out your estate plan. “If we’re looking to avoid family disputes, I definitely prefer a trust,” Cutner says.

For added insurance against conflicts, you can appoint an independent trustee such as a financial institution, or appoint a relative who is not a beneficiary under the trust, says Shirley Whitenack, an elder-law attorney in Florham Park, N.J.

To discourage heirs from objecting to your will or trust, consider including a “no contest” clause stating that an heir who challenges any provision gets nothing at all. Enforcement of these clauses varies from state to state, so seek a lawyer’s advice. Even if you’d like to disinherit a child, plan to leave something to him. That way he’s covered by the no-contest clause. “If they’re going to lose a bequest, they’ve got to think about whether it’s worth it” to contest the will, Krooks says.

When equal is not fair. Like Costello, you may have reasons to leave children or grandchildren unequal shares. Perhaps one of your daughters has sacrificed her own job to provide care for you as you age, and you want to reward her with a larger inheritance. Maybe you made a loan to a son that hasn’t been repaid, and you think that amount should come out of his inheritance. Or perhaps you want to disinherit a child altogether.

Ideally, you can communicate openly with heirs about your decision. Including in the will some brief explanation of your decision to leave unequal shares can also help avoid disputes, Cutner says. You can leave a longer explanation in a separate letter to your executor, requesting that a copy be given to each heir.

Before treating children unequally, however, you might consider alternatives. If one child is providing a lot of care for you, for example, you can compensate her during your lifetime through a “personal care agreement.” This agreement details the services that the caregiver will provide and the amount of compensation she’ll receive. The compensation, which will be considered taxable income for the caregiver, should be in line with what you would pay a third party for the same services in your area.

If you are lending money to a child and expect to be repaid, “make sure that there is documentation,” Whitenack says. Create a promissory note showing the amount of the loan, the repayment schedule and the interest rate, if any. If the money isn’t repaid during your lifetime, your estate plan can provide that the child’s inheritance will be reduced by the unpaid loan amount.

You may unwittingly create big disparities in the inheritance left to various children if you add one child’s name as joint owner of your bank account. You may be doing it for convenience, so that child can help you manage your finances. But when you die, the account will generally automatically go to that child rather than your estate. “This happens all the time,” Whitenack says, and it can generate some hard feelings. Consider granting the child a financial power of attorney rather than making him a joint owner of your accounts.

Dividing the stuff. The fiercest inheritance battles can revolve around items that have little monetary value. If you didn’t give any guidance on who should get Grandpa’s pocketknife — because you didn’t think anyone cared — your kids may wrestle over it when you’re gone.

You can write a list of your personal property and how it’s to be distributed. Sign and date the document, refer to it in your will, and update it as often as needed. “When children see that, a lot of times they say, ‘If this is what Mom really wanted, I won’t cause any problems,’ ” Krooks says.

You probably don’t want to dictate how every knickknack should be distributed. After including the more significant items on your personal property list, you can leave it up to your executor to distribute the rest of your personal items. Your will can also give some guidance on dividing all the property and settling any disputes. If more than one heir wants the same item, for example, they could bid for it in a private auction, with the money going into a pot that’s distributed among heirs. Or heirs can simply take turns choosing items, drawing straws for the first pick.

Stum has written a workbook, Who Gets Grandma’s Yellow Pie Plate? ($12.50, University Extension Services), which offers suggestions on distributing personal property and managing conflicts. Free online resources are also available .

The big-ticket items. Real estate often becomes an inheritance battlefield. Vacation homes, for example, “are fraught with all kinds of controversy,” Krooks says, because heirs may not agree on how they’ll use the property or how much it’s worth.

One of Cutner’s clients had several vacation homes that he considered roughly equivalent in value, so he left one to each of his kids. But because the children did not think the homes were of equal value, his efforts to be fair led to a family squabble. If you have several properties to distribute among heirs, consider getting them all appraised. If there’s a significant difference, you can give some additional assets to the heir who gets a property of lesser value.

Leaving a vacation home to multiple heirs can also ignite feuds. Heirs may not agree on how to use the property — for example, renting it out or keeping it for family use. Or one heir may want to sell the house, while the other is determined to hold on. In that case, the heir who wants out could force the sale of a home that’s been in the family for generations.

If you plan to leave a home to multiple heirs, it often makes sense to put the house in a limited liability company and then leave interests in the LLC to your heirs. The LLC’s operating agreement will govern issues such as scheduling use of the property, maintenance and how one heir can sell his interest to other heirs. You’ll need a lawyer to draw up the operating agreement, but you and your potential heirs can decide on many of the details together.

If you have a family business, make sure all heirs are informed about your plans for succession. Linda Davis Taylor, chief executive officer of Clifford Swan Investment Counsel, in Pasadena, Cal., has a strong emotional attachment to her family’s business, a small oil-production company in Shreveport, La. Because the company has been in her family for decades, there are a lot of family stories surrounding it. But she also knew well in advance that her brother would be taking over the company, and “I was encouraged to develop my own talents and not be envious or regretful,” she says.

Blended families. If you have remarried and have children from a previous marriage, maintaining harmony among heirs may be particularly challenging. And only half of people in blended families say that they have open discussions about inheritance, compared with 65% of traditional families, according to the UBS survey.

When both spouses have children from previous marriages, the problems can be compounded. Amy Castoro, senior consultant with The Williams Group, a wealth-transition consulting firm in San Clemente, Cal., recently facilitated a series of family meetings for one such blended family. The father is remarried, to a woman 20 years his junior, and her children are the same age as her husband’s grandchildren.

The adult children felt threatened, saying “our wealth is being dissipated now by these other kids who have come on the scene,” Castoro says. After a lot of talking, the adult children came to the realization that the wealth isn’t really theirs — it’s their father’s. Now “they’re grateful for what they can get,” she says. But it took “10 family meetings to get there.”

If you’re about to enter a second marriage, a prenuptial agreement can set aside specific assets for your children from a previous marriage and spell out exactly what a second spouse is entitled to when you die. Another option: a marital trust, which can help you provide for your new spouse after your death while also ensuring that your children from a previous marriage receive an inheritance. These trusts come in various flavors, but blended families often use a qualified terminable interest property trust (QTIP), which can provide income to your surviving spouse for her lifetime while preserving the underlying assets for your children from your first marriage.

Be sure that beneficiary designations on all of your retirement accounts, brokerage accounts, annuities and insurance policies are updated to reflect divorce, remarriage and other life events. If you don’t keep designations up-to-date, your ex-spouse can in some cases wind up with a share of your estate — no matter what your will and divorce decree say.

Original Article Published on: November 13, 2015, 12:00:01 AM EDT
By: Eleanor Laise, Associate Editor, Kiplinger’s Retirement Report, Kiplinger

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