Lawyers must anticipate problems that could crop up with inheritance, distribution of property and taxes Premium content from Sacramento Business Journal by Robert Celaschi, Correspondent
Date: Friday, September 14, 2012, 3:00am PDT
When estate-planning attorney Trudy Nearn sees that a client's holdings include a Lake Tahoe cabin, she mutters, "Oh, no." From experience at her firm, Generations, she knows how the children often approach such an inheritance.
"There will be one who says, 'I can't pay my share of the expenses,' one who says, 'I can pay my share, but I am never going to use the house,' one who lets their kids trash it all the time, and one who wants to keep it in the family forever," Nearn said. "It always causes problems."
It's tough enough for some people to think about death and what will happen to their belongings afterward. It can get even dicier when parents consider how money, sentiment and unresolved tensions might come into play. Estate planning attorneys are the ones who try to sort it all out before a problem arises. "I try to remind people that we are doing that person's estate plan, not the children's estate plan," Nearn said. "So it's about what my client wants, not what the child wants."
Anticipating issues is where attorneys earn their fees. If the parents have a child with special needs, for example, an estate-planning attorney can provide an inheritance in a way that won't jeopardize the child's public benefits. Some people buy extra life insurance to cover taxes, but life insurance benefits themselves are subject to estate tax.
Some people use joint tenancy to transfer ownership of their holdings to a close relative to sidestep probate. But it opens up risks from creditors of the recipient, said Sacramento estate planning attorney John Goralka. The transfer itself is subject to gift tax.
California law assumes that when someone remarries, the new spouse is intended to inherit everything, even if an earlier trust document says something else. An estate planning attorney would point out the need for an update.
Even a good estate plan needs to be reviewed periodically to make sure it stays good.
Picking the right trustee can make a big difference in avoiding hassles later on. "You want someone that you trust. It doesn't have to be a financial genius. You want to trust that they will do the right thing, and you have to trust that they will do something," Goralka said. All they really need to know is how to find experts to help them.
It could be a family member, or a professional trustee. The latter costs money, but that might make sense on a large enough estate. Making a bad choice could mean appointing a trustee who won't feel bound by the trust.
"The client dies, and the trustee sometimes just starts doing what they think (the trust) should say," Nearn said.
Like accountants who provide estate planning, attorneys in the field say one new factor driving extra business from wealthy families this year is the pending expiration of estate-tax rules in December.
"You can get an awfully lot done on a short time frame, but the sooner you act the better because you want time to think about what you want to do," Goralka said.
The more complex the plan, however, the longer it takes to hammer out. For something like a family limited partnership including real estate, there's not much time left. If there are any loans on the real estate, lenders have to approve the change in ownership, Nearn said. Then the property has to be appraised, and a valuation discount appraiser to evaluate the partnership interest.
"One thing that is outside of my control is how busy the real estate appraisers get between now and the end of the year," Nearn said.
Duking it Out
Estate documents and trusts prepared by an attorney have about a 95 percent chance of holding up, said attorney Etan Rosen of Beyer Pongratz & Rosen. Those done by people on their own, even with the help of online tools, have only about a 30 percent chance of working.
That's when Rosen gets involved. He's the firm's litigation attorney. Business is exploding, he said.
Trust or estate documents made close to the person's death often get called into question by siblings, caregivers or new spouses. State law prohibits leaving estates to caregivers, with some exceptions, but people try. "What happens with old people, their family doesn't come and see them, and somebody else is taking care of them and putting a lot of junk in their heads," he said.
Some people name co-trustees, a sure recipe for disagreements. "What is really causing these problems to happen are blended families," he said. "If you've got a father and mother and two kids, and they leave each half, there will never be trust litigation."
But divorces and remarriages introduce more complex family dynamics. Some people just don't like the new arrangements. As long as the parents are alive, the kids often manage to keep things from boiling over.
"A lot of the problems that we see in trust litigation have been brewing for 50 or 60 years," Rosen said. "The kids don't get along, and the only thing that kept them going was that Mom was going to kill them. They all suffered with each other and didn't do anything that would tick off mom.
"Then the glue is gone and these people let loose and it becomes vicious." Probate courts often recommend mediation to settle disputes. A court trial can drag out for a year or more. Most trusts allow the trustee to use the trust fund to defend the trust, Rosen pointed out. So the longer the fight, the less money there is to fight over.
"What I tell people to do is give with a warm hand rather than a cold hand," he said. "If you are able to distribute the majority of your money while you are still alive, you really should, while there is nothing to fight over."