ESTATE PLANNING SCENARIO - Planning, Failures and the Consequences that Follow

ESTATE PLANNING SCENARIO - Planning, Failures and the Consequences that Follow
By Alan Orlowsky, Attorney at Law

This is the third series in our Estate Planning Scenarios. Let's talk about an example of Estate Planning in Chicago and some consequences that can happen.

Mary was a physically and mentally failing 88 year old widowed great-grandmother living in the northern suburbs of Chicago.  She was blessed with 6 attentive children and 38 grandchildren and great-grandchildren.....a very large family by today’s standards.  Mary’s plate was full.

Mary’s daughter, Elizabeth, solicited my services to prepare a new will and trust for her mother and to address the $1.5 million estate tax bill that would be due upon her death.  Her estate was valued at approximately $4 million.  The existing will was outdated and the trust was required to avoid probate and pass on the estate to her children. 

Mary was receptive to preparation of the will and trust which was prepared and signed, but when it came to estate tax reduction...we hit a brick wall.  I proposed to Mary that to reduce her estate tax exposure she establish a family gift trust and make annual gifts thereto.  The trust would be structured so that she would be able to use all her family members as donees by invoking the arcane, but often used, Crummy notice provisions allowed by IRS.  At this time the Annual Gift Tax Exclusion was $10,000 per donee.  Accordingly she would be able to make 38 Annual $10,000 gifts to each grandchild and great-grandchild, a $10,000 annual gift to each child and a $10,000 annual gift to each in-law - 6 in all.   As such, for each year she lived she would be able to reduce her estate by $.5 million and save approximately $250,000 in estate tax each year as well.   Furthermore, since it was October, so she could make these annual gifts before the end of the year and again on January 1^st of the following year. So in a span of 3 months we would potentially save $500,000 in tax!  In estate planning parlance...a no brainer!  And if Mary lived a few years the savings would be $1 million.

So what when wrong?  Why did Mary refuse to make the gifts?  Clearly she had sufficient funds that would last the rest of her life; even if her estate was reduced to $2 million.  After all, she didn’t live large.   Unfortunately, Mary, like many elderly folks, was afraid to give up control, was afraid she’d run out of money and afraid her children would fail to come to the rescue if she was in financial difficulty.  Irrational as this seems, it is a common barrier in planning for the elderly.   Fear trumps common sense all the time!

 

So, what can you do to prevent a parent from making an irrational decision like the one Mary made?  I suggest to my clients that they call an informal meeting (well before the parent(s) are 88) where all close family members are present to discuss the issues which concern the parent(s) and the children.  Once the issues are out on the table the foundation for rational conversation can begin.  The issues should be presented in a kind compassionate way to avoid family strife.  There will be disagreements, but it is important that honesty and rational conversation win the day.  Once this is done then it may be possible to create a timetable and framework to move forward with the planning that is needed and to bring in the professionals that will be required.  In some cases we recommend that the help of a family business counselor be present to address the psychological issues that often get in the way.  And in some situations a CPA or attorney should be present.  In any case, there is no one format that fits all families, but two rules always apply: (1) procrastination never facilitates the planning process and (2) once a parent passes there is no estate planning time machine that can help.

Sadly, Mary passed in her 91^st year without making the gifts I recommended.  We prepared the Estate Tax Return and Elizabeth paid $1.5 million to the IRS.  It was a very sobering and disappointing day.

 

If you have questions about this post or about a particular legal situation, please contact Alan Orlowsky by calling 847-325-5559 or contact us here.

Estate Planning Scenario - Planning Failures and the consequences that follow

Estate Planning Scenario - Planning Failures and the Consequences that Follow
By Alan Orlowsky 

Let's Talk about.......An Estate Planning Scenario and how consequences can follow if you fail to plan. If you would like to know more about our Estate Planning Services and how we can help your situation please visit our website for more information.

Scenario:

Modest Estate - Orlowsky & Wilson

Edward died leaving a modest estate of $600,000 to his two adult children; Amy, who lived in Kansas City and Bobby, who lived in Chicago.   Amy was married, fully employed as an attorney and had two young children.  Bobby was single, living alone and fully employed as a research scientist working for a large multinational drug company.  Both children were graduates of Ivy League schools and not short on brains.

Edward had done a little estate planning and entered into a will and trust several years before he passed.  The trust was fully funded, so no probate was necessary.  Bobby as was named executor under the will and trustee under the trust. Upon death the trustee was directed to distribute one-half of the estate outright to each child.  On the surface things could not have been less complicated.  Unfortunately, however, Amy and Bobby were estranged and saw eye to eye on virtually nothing!

Edward's personal property

As soon as Edward was buried the problems began.  Bobby was entrusted with dividing up Edward’s personal property, such as clothing, collectibles and jewelry.  What Bobby didn’t ship to his sister, he kept for himself, threw or gave away.  There were no items of exceptional value. Amy received the shipment, but was certain that she had not received her fair share of such property and immediately filed a law suit against Bobby as trustee, demanding a complete accounting of not only the personal property, but also the liquid assets.  

Bobby hired his own Attorney

Bobby was enraged and  hired his own attorney and responded by delivering a written inventory.  Amy then responded alleging that the written inventory was incomplete and that Bobby had taken certain items for himself that he had failed to report.  Bobby responded by denying the allegations.  By now the first volleys had been fired and the grudge war began in earnest.  Motions were then filed for physical and deposition discovery.  Bobby then delayed and stalled just to enrage his sister.  The strategy worked in concept, but backfired because Amy was now even more determined to punish her brother.  Bobby then fired his attorney and hired me to put an end to the feud.  But by then it was too late because both parties were now determined to punish the other even if it meant spending $600,000 on attorney fees.   As the feuding continued it was clear that a settlement could never be reached.....and it never was.  When the dust finally settled several years after Edward’s death all trust funds had been depleted and there was literally nothing left to battle over!

So, what can be done to prevent feuding children from acting out there petty differences vis-à-vis a parent’s estate?  First of all, if you know that your children do not get along; appoint an outside third party executor and trustee.  Clearly in our scenario, Amy was jealous of Bobby’s appointment as officer of the estate which added fuel to the fire.  Secondly, let your children know specifically what each will receive on death so that there is no suspicion of fraud by the executor or trustee.  Thirdly, where the situation is right, include In terrorem language in your documents which states that if a beneficiary challenges your will and trust he or she is precluded from receiving his or her bequest.  Fourthly, know your children well, so if they harbor ill will toward one another your estate plan can be crafted in such a way that petty bickering and outright feuding are avoided.  Lastly, be aware that although your children might be bright it doesn’t mean they have the common sense to avoid a sibling feud.

 
If you have questions about this post or about a particular legal situation, please contact Alan Orlowsky by calling 847-325-5559 or contact us here.

Estate Planning Senario: PLANNING FAILURES AND THE CONSEQUENCES THAT FOLLOW

ESTATE PLANNING SCENARIO: PLANNING FAILURES AND THE CONSEQUENCES THAT FOLLOW

By: Alan Orlowsky

Let's Talk about....... An Estate Planning scenario that examines the planning failures and the consequences that follow. This is scenario number 1 and will be posting 2 additional scenarios later this week.

Sam and Susan were happily married and living in the western suburbs of Chicago.  This was the second marriage for each of them and they each came to the marriage with two biological teenage children.  All four children lived in the family residence.  Because Sam’s first wife had died in an auto accident, Susan had become the de facto mother to Sam’s children and became a stay at home mom/step-mom.  In all respects the family was your typical blended family and  were doing quite well, including Sam, who had a good job and the salary to go with it.  Unfortunately, Sam became very ill and ultimately medical tests revealed that he had pancreatic cancer and only a short time to live. 

Sam did not have a Will Prepared.

Prior to this time, although aware of his need for an estate plan to protect Susan and the children, Sam had done little or no planning.  As such, he immediately contacted his brother’s attorney to have a will and trust prepared.  But by then the die was cast because Sam had failed to purchase the life insurance the family would require.  Notwithstanding this fatal mistake, Sam established a will and trust whereby Susan would inherit the house and his children the $250,000 he had in an IRA account.  He appointed his brother as trustee of the IRA and all other assets were given to Susan. Unfortunately, along with the assets Susan was to receive, she was responsible for all the liabilities, including a large mortgage on the residence.  It was a disaster...the numbers didn’t work.  Susan realized that she would be forced to get a job and put the house up for sale in a housing market that was in shambles.  If she was lucky a sale would generate sufficient funds to pay off the mortgage.  If a buyer could not be found then Susan would be facing foreclosure!  In either case the children would be uprooted from their home and maybe from their friends as well.

Sam's Brother in Law refused to release funds.

 Sam died within three months of the diagnosis.  Susan was now the sole parent/step-parent to the Sam’s children.  Although the children were not adopted she took on the responsibility for raising them.  She listed the house and got a job, quickly ran out of money.  During this time she requested funds from her brother-in-law, the trustee of the trust which held the IRA.  The funds were needed to help pay for the support of Sam’s children.  He refused to make distribution!  His refusal, although we never will really know, I believe was due to some past perceived slight or disagreement.  In any case, the trustee was in violation of the terms of the trust and had turned against his own sister-in-law!  Ultimately through legal pressure the funds were released, but the damage had been done, not only to the trustee’s nephews, but also to Susan.

The lessons to be learned from this story are typical.  People fail to adequately plan for their families because it is uncomfortable to confront mortality and the difficult decisions and commitments that need to be made when planning for death.  It is much easier to procrastinate.   As with Sam, nobody wants to believe that he or she will suffer a premature death.....but it happens all the time! Susan failed as well.  She never encouraged Sam to prepare for the unthinkable.  Although your chances of living a long life are good, the consequences of dying prematurely are horrendous.....as Susan discovered to her dismay. 

If you have questions about this post or about a particular legal situation related to this scenario please contact Alan Orlowsky by calling 847-325-5559 or visit our website www.orlowskywilson.com