(Lake County News) - Parents typically do not want their surviving children to fight over their inheritances after the parents die. Careful planning may reduce the risk of foreseeable in-family conflicts. Let us discuss.
When real estate is involved, it is quite possible that one or more children may hope to inherit a particular piece of property. Sometimes a family discussion between parents and children about the division of real estate may allow the family to reach an agreement or at least get the children to respect the division. This is not always possible.
With later in life blended families getting family consensus may be more difficult if the couple’s two sets of children were never close to one another.
Some children may expect their biological parent to leave the assets that their parent brought into the second marriage to their own children.
Of course, a stepparent can leave his or her separate property to their own children without any concern over whether their step children (provided they are not also the step parent’s heirs) approve such gifts.
The allocation of different real properties to individual children might involve some equalizing monetary gifts if the parents want to treat all children equally.
Such monetary gifts might be funded through life insurance on the parent’s lives or by the successor trustee borrowing against the real estate.
Such equity borrowing means that the child who inherits the real property will take subject to the loan and will pay-off or refinance the debt upon distribution.
Family businesses also require special consideration because some children are personally involved in the business but other children are not.
Accordingly, consideration may be given to putting the business into a partnership or a corporation. The children who are involved in the business may be given authority over the operations by making them general partners or executive officers in the corporation.
The children who are not involved can be made passive partners or be given ownership interests that do not involve participation in the business operations.
Valuable and/or sentimental heirlooms also require special attention. Consider an historical artifact (e.g., a civil war sword) that has been in the family’s possession for many generations. It has economic and sentimental value that are difficult to offset with anything remotely equivalent.
Despite the parents’ best efforts to harmonize their children to accept their estate planning gifts it may prove impossible to reach full acceptance. If so, the parents will want to protect their estate plan against anticipated future attack.
The type of protection varies depending on the circumstances and the anticipated nature of any future attack. One possible future attack is that the disgruntled child will allege that the parent was coerced into giving the certain assets, or giving a greater inheritance, to one child than another.
The estate planning attorney may work, while the parent is alive, to document that such alleged coercion is (hopefully) unfounded.
A no contest clause can be used to dissuade a disgruntled beneficiary from contesting the trust. Under a no contest clause, if the disgruntled beneficiary contests (disputes) the terms of the trust and loses their lawsuit then they also lose what they would otherwise have inherited as their share of the trust estate.
Thus, a beneficiary must have something significant to inherit under trust for them to think carefully about possibly losing their inheritance.
It is even possible to petition the court to confirm the terms of the trust in order to force any contest to the trust while the parent is still alive and can testify. This approach may make sense in some high value estates.
What estate planning approaches are appropriate in any given family situation depends on the family relationships, the client’s wishes and the assets that are involved.
The foregoing brief discussion is not legal advice. Consult a qualified attorney or financial advisor for guidance.
By Dennis Fordham
December 9, 2023
