Retirement

A Litle Extra Planning Can Avoid “Heir Wars”

The legacy of late California Senator Dianne Feinstein was tarnished by a series of lawsuits filed before her death. The suits revealed rifts in the family and shortcomings in the estate plans of Feinstein and her late husband.

Feinstein’s late husband Richard Blum, a wealthy investor, passed away in February 2022. Both Blum and Feinstein were in second marriages, and each had children from their previous marriages.

After Blum’s death, the senator suffered several health setbacks before passing away in September 2023.

Beginning a few months after Blum passed away, Feinstein’s daughter filed a couple of lawsuits in her role as agent under Feinstein’s power of attorney.

The suits had different complaints and involved different trusts. The details and any resolution aren’t important here.

The suits are another example of what sometimes are called “heir wars.” Children and sometimes other relatives battle over an estate. The battles usually begin after one of the principals passes but also can begin when one of the principals seems to have cognitive problems.

Heirs wars are more likely in blended families with children from previous marriages. But they can occur in any family that has different personalities with varying interests, and ambitions.

Parents often are unaware of pending heir wars, because the extent of conflicts, grievances, and grudges is suppressed until at least one spouse has died. Only then does the lid come off and reveal the depth of differences.

Most heir wars are avoidable when the parents take the right actions in their estate planning.

A family doesn’t have to be wealthy for heir wars to erupt. Most estate planning attorneys have stories of years-long disputes over property or issues that seem minor and of little value to outsiders. Emotions and personalities are greater factors than wealth.

The key action is for the parents to consider and anticipate the possible conflicts. There are several angles to consider.

It’s important to acknowledge personality differences or conflicts between family members and any others who might consider themselves potential beneficiaries. Differences that appear minor when both spouses are alive often are amplified after one or both spouses die.

Parents also have to avoid creating conflicts with the details of the estate plan, such as the terms of the division of the estate.

In the Blum-Feinstein case, several of the trusts had built-in conflicts. After Blum died, Feinstein benefitted from the trust assets. Anything distributed from the trusts was either spent for her or became part of her estate. Her estate would go to the children from her first marriage.

But assets that remained in the trusts after Feinstein died would go to the children from Blum’s first marriage.

Under these terms, Feinstein and her children benefitted if money was distributed from the trusts, but Blum’s children benefitted to the extent assets stayed in the trusts.

Many estate plans have similar conflicts among trust beneficiaries that need to be identified and corrected.

Another frequent conflict occurs in estates with property that is hard to value or has sentimental value.

When the property is divided, the heirs disagree about the value of the items and believe one heir is receiving more value than another. Or an item might have significant sentimental value to at least one heir, leading to a dispute over who should receive it.

Estate planners have a lot of tools to deal with these situations and reduce the conflicts, or at least reduce the potential for the conflicts to become full-blown heir wars.

The first and most important tool is communication. This is where many estate owners fall short.

The heirs should be told how the estate is to be distributed and what the parents’ wishes are. That reduces the potential for disputes, because everyone knows the expectations.

Communication also reduces the potential for heirs to be disappointed or surprised by the plan. Most estate disputes occur when heirs are surprised by part of the plan.

Explaining the plan ahead of time also gives beneficiaries the opportunity to comment on it and explain their expectations or conflicts the parents might not have considered.

When hard-to-value or sentimental assets are involved, it’s important to let the heirs know in advance the plan to distribute them. Again, this is an opportunity for the heirs to make their thoughts and expectations known so differences and conflicts can be ironed out and incorporated into the plan.

When communication doesn’t appear to solve the potential conflicts, there are other options.

One way to reduce conflicts is to direct the estate or trust to sell most of the assets, especially the intangible assets, and distribute cash. Some estate owners decide to liquidate such assets during their lifetimes or pre-arrange sales or gifts that will occur automatically after their deaths.

When assets are in trusts, estate owners and their planners should consider different scenarios when deciding the terms of the trusts.

For example, many trusts now authorize the trustee to hold a diversified portfolio and invest for long-term returns, known as a total return trust. The lifetime beneficiary receives distributions up to a certain dollar amount, a percentage of the trust value, or whatever’s needed to meet his or her needs as determined by the trustee.

There’s no need to classify money in the trust as either income or principal when deciding what is distributed. That eliminates a frequent source of conflicts.

The worst mistake estate owners make is to say, “They’ll work it out.” A variation is, “It won’t be my problem.” Those sentiments often lead to tarnished legacies and wasted assets.

Not taking steps to minimize potential conflicts can split a family and enrich lawyers instead of heirs.

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