Making a Will Your Children Can Live With
By Stan Hinden
It happens all the time. Parents leave their worldly goods to their children in equal shares, thinking that their gesture of fairness will ensure a climate of family harmony after they're gone.
But all too often it doesn't work out that way. Gathering in the lawyer's office after the funeral, several children complain that their parents did not treat them equally in money matters while they were alive. One word leads to another and soon anger and resentment shatter the family's harmony.
"When it comes to money, family loyalty goes out the window," said Jeffrey L. Condon, a Santa Monica, Calif., lawyer, talking about the conflicts that can arise after parents die. The children are not just the parents' children anymore, Condon said, "they're people dividing money."
Family strife arises out of many inheritance scenarios. Second marriages, especially those involving widows and widowers with grown children, can be disasters waiting to happen. All too often, inheritances wind up in the wrong hands because of poor planning, failure to use the right legal tools or just plain greed.
Lawyers who specialize in wills, trusts and estate planning, including Rhonda J. Macdonald of Vienna, say there are many ways to create inheritance problems. But there are also ways to prevent them.
Here are a few examples:
EQUALIZING YOUR GIFTS
After the parents' death, the discrepancy in education spending caused a rift among the siblings. The brother and sister of the doctor felt he should give them part of his inheritance to equalize what their parents had spent on all three. The doctor disagreed. He no longer speaks to his siblings.
What the parents should have done, Condon said, was to equalize their spending on their children during their lifetime. Parents who occasionally help a child financially tend to forget about unequal treatment, Condon said. "But rest assured, your children haven't forgotten. And they're keeping score."
Condon and his lawyer father, Gerald M. Condon, collected similar estate-planning stories for their recent book, "Beyond the Grave: The Right Way and the Wrong Way of Leaving Money to Your Children (and Others)." (Harper Business. Paperback. $14).
"By leaving a smaller share to your successful child, you are punishing his or her success. And by leaving a greater share to your poorer child, you're rewarding his or her lack of success," Macdonald tells the clients. That argument seems to work, Macdonald said, and few of her clients wind up leaving unequal shares for economic reasons.
That means that if the second husband dies before Mom, all of their joint assets will automatically become Mom's property. It will then be up to Mom, in her will, to decide what his children and her children will get.
Even if Mom leaves most of her second husband's assets to his children, they will have to wait until she dies to get their inheritance. That could take a long time, and his kids are likely to make a considerable fuss over the delay.
The easiest way to avoid these conflicts, Macdonald said, is for the couple to keep their assets in their own names. That allows them to leave their individual money and property to their own children through their wills. If they've already put their assets in both names, they can go back and re-title them.
If Mom will need income to live after her second husband dies, he can set up a trust for her that contains his assets, Macdonald said. It is called a "QTIP" trust, or "Qualified Terminable Interest Property" trust.
This device allows the surviving spouse to receive income from the second husband's assets after his death. It can also guarantee that the principal of the trust ultimately will be inherited by the second husband's children.
However, in some cases, that may not be the complete story. In Virginia, Maryland and the District of Columbia, Mom can claim one-third of her second husband's assets if he omits her from his will or leaves her less than one-third, even if the assets are held in his own name. This privilege can be waived with a premarital agreement.
WATCH OUT FOR THOSE IN-LAWS
But they worry about what will happen if their son dies before his wife, who would then get her husband's inheritance. They don't know if the wife would pass the inheritance along to the grandchildren. In fact, if the wife remarries, the inheritance could be passed along to her second husband and members of his family.
One way for Mom and Dad to protect their grandchildren's inheritance, according to Macdonald, is to create a generation-skipping trust that will ensure that the couple's money goes to their grandchildren at a specified age.
Their son would become the trustee of the trust after the deaths of both Mom and Dad. He would get the annual income generated by the trust, or a percentage of the value of the trust each year. The son could use as much of the principal of the trust as necessary to pay expenses for health, education and support for himself and his children.
A generation-skipping trust can have tax advantages. A grandparent can put in up to $1 million for the grandchildren, who will not have to pay taxes on that money when they receive it.
However, the $1 million will be counted as part of the grandparent's estate when he or she dies. Taxes would be paid on the total value of the estate, less the individual estate tax exemption. That exemption, currently $650,000 per person, will rise in stages until it reaches $1 million in 2006.
WHEN CHILDREN OWE MONEY TO THEIR PARENTS
On top of the confusion, Macdonald said, some of the children are likely to demand that their siblings repay their loans, so that the total inheritance is not reduced by the debts.
Macdonald said she tries to head off these problems by asking clients, when they come in to write their wills, to give her the specific details of any loans to children so she can include the information in the wills. That way, she said, when the parents die, the terms of the loans will be on record.
NAMING THE EXECUTORS AND TRUSTEES
But how many children in a family should be given this task? Answer: all of them. In Macdonald's experience, none of the offspring are going to be happy if they are left out, no matter where they are. They will want to be part of any decision affecting their inheritance, be it by phone, fax or e-mail.
This is particularly true, Macdonald said, because executors and trustees are allowed to charge a fee for the work involved in settling their parents' estate. When there is more than one executor or trustee, the fee is shared.
GETTING THE BUSINESS
That may make the other children in a family unhappy, even though they chose to work in other fields. These kids might also sue on the grounds that they are getting a smaller inheritance than their siblings.
If the parents think such a lawsuit is likely, Macdonald said, they can head it off by inserting a "no contest" clause in their wills. Under that clause, if the children sue, they lose the inheritance they were slated to get. "If they sue, they get nothing," Macdonald said.
Jeffrey and Gerald Condon caution parents that if they omit a child from their will, one of two things is likely to happen: The child will either sue or become a burden to his or her siblings. Although such lawsuits generally fail, they can be costly to the other children. In fact, the Condons noted, the other children may find it cheaper to settle than pay the legal costs involved.
Instead of cutting an offspring out of their will, the Condons advise, parents should put the child's share of the estate in a trust. The parents can then specify when and how their estranged son or daughter will get any money or income from the trust.
The Condons also recommend that if parents omit a child from their wills, they should write a letter telling the child what they're doing. The letter may encourage the child to renew his or her ties with the family. At least, they say, it will give the child fair warning of what is going to happen.
TALKING IT OUT
In the inheritance business, the best surprise is no surprise.
"The Complete Idiot's Guide to Wills and Estates." By Stephen M. Maple. Alpha Books. Paperback. $16.95.
"Generations: Planning Your Legacy. Practical Answers From America's Foremost Estate Planning Attorneys." By Robert A. Esperti and Renno L. Peterson with Edward L. Weidenfeld. Esperti Peterson Institute. Hardback. $49.95.
"Understanding Living Trusts: How You Can Avoid Probate, Save Taxes and Enjoy Peace of Mind." By Vickie and Jim Schumacher. Schumacher Publishing. Paperback. $24.95.
Publications: "Wills & Living Trusts." Published by the American Association of Retired Persons. For a free copy, send a postcard to AARP Fulfillment EEO1349, 601 E St. NW, Washington, DC 20049. Request publication D14535.
Web Sites: Nolo Press: www.nolo.com (Under Legal Encyclopedia, click on Wills and Estate Planning.)
National Association of Financial and Estate Planning: www.nafep.com (Click on General Estate Planning Concerns.)
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