This article will explore questions that many clients have failed to contemplate or made a decision regarding prior to their initial planning consultation. Often the questions presented below elicit the “I never thought of that” response. Not all of these questions will apply to everyone. Fortunately, the disaster-type scenarios almost never occur. Problems with family relationships and dealing with in-laws almost always do.
As an estate planning attorney part of my job is to present situations that are unpleasant to consider. The purpose of this article is to give you an opportunity to prepare for some of these hard decisions ahead. Each “hard” question will be preceded by a fact pattern that applies.
For all the questions, our hypothetical family will consist of the married clients, Bill and Mary, their two grown and married children, John with wife Susan and Kathy with husband Mark. Bill and Mary have four grandchildren, two for each child. If Bill and Mary were to die today and divide their estate equally between their surviving children, each child would receive $400,000. Both children are capable of managing the money.
WHAT HAPPENS IF THE ENTIRE FAMILY DIES IN A COMMON ACCIDENT
The “I never thought of that” response is usually followed by a discussion that the odds are astronomical that it will never happen. However, to make an estate plan comprehensive, an answer is necessary. Here are some of the answers I have received after thoughtful consideration.
- Parents of Bill and/or Mary if either’s parents are still living
- Brothers and sisters or nieces and nephews of Bill and Mary
- Rely upon the state laws which apply to estates with no named beneficiaries
DO YOU WANT TO INCLUDE SUSAN (JOHN’S WIFE) IF JOHN IS DECEASED
How to treat a son-in-law or daughter-in-law if your child, the spouse is deceased, is often a difficult decision. When a child dies before the parents doing the estate plan, the answer to this question often is dependent upon whether John has surviving children (the planning couple’s grandchildren). Here are some of the commonly used options.
- Susan replaces John in the distribution
- Susan receives nothing and the share is divided equally by John and Susan’s children
- The share is divided in some manner between the surviving spouse and the grandchildren
Even if Susan does not receive John’s share, another decision regarding Susan may be necessary. If John’s children are too young and require a trust, should Susan, Kathy (the child’s aunt), or another party serve as the trustee. If the grandchildren are not old enough to manage their own financial matters, the trustee serves as the gatekeeper for the funds. At a designated age, usually 25 or older, the grandchildren may assume control of their trust.
WHO SHOULD BE IN CHARGE IF BOTH BILL AND MARY ARE INCAPACITATED OR DECEASED AND JOHN AND KATHY DON’T GET ALONG
When adult children get along and are trustful of each other, the planning options are clearer. Presuming that both children are capable of handling financial decisions, making the choice of whether one should be in charge or both should act together should be easy. Since they trust each other, they should be able to work together. In this case often times the child closest geographically to the parents is selected as the primary decision maker. Some families prefer age order or select the person with the most relevant work experience or the one that has exhibited the ability to help in the past. When the two children do not get along, the options are much more difficult. Here are the limited options.
- Select a neutral third party such as a trust company (corporate fiduciary), CPA, or a family friend or relative willing to serve.
- Select the children to serve together. This sounds like a recipe for disaster but I have had very good luck once the feuding children understand they must work together.
- Select the child with the most experience of helping the parents in the past.
CONSIDERING JOHN AND KATHY ARE BOTH VERY RESPONSIBLE WITH FINANCES, SHOULD THEY RECEIVE THEIR INHERITANCES ($400,000 each) OUTRIGHT OR IN TRUST
Most parents with financially competent children believe initially that the inheritance should go outright. In other word, once the estate is settled a check for $400,000 (presuming the estate is liquid) is delivered to each child. The child then has the total discretion to do what he or she wants to do with the money. Once the checks are delivered to each child, the probate or trust administration (depending on the type of planning the couple had) is concluded. The assets belong to the beneficiary. The case is closed.
The outright distribution method is usually the quickest, easiest, and least costly. The problem with this strategy is if the beneficiary is or becomes a party to a lawsuit, bankruptcy, or divorce, the inheritance will be at risk. An experienced estate planning attorney will be able to provide several options that provide asset protection for the inheritance. These options are usually a minimal hinderance on the use and enjoyment of the assets.
These four scenarios are examples of questions the planning individual or couple should consider. An experienced estate planning attorney should make sure these situations are discussed during planning discussions. While this list is not complete, you should be prepared to confront potential situations you would probably prefer to avoid thinking about.