Archive for July, 2009
ESTATE PLANNING HORROR STORIES FROM THE REAL WORLD (#2)
Recipe for Disaster
This week’s story involves a gentleman in his 50’s who recently died of cancer. He left behind a 16 year old son and a wife, who he married 9 months before his death. This man was injured in a serious accident many years ago which was someone else’s fault. As a result, he received a settlement in the form of an annuity which made monthly payments to him for life, with payments guaranteed to be made for at least 20 years, even if he didn’t live that long. The lawyer who obtained the personal injury settlement prepared a basic Will, which was signed in 1995. It named the man’s brother as personal representative of the estate. Unfortunately, the Will never was updated, even after this gentleman remarried 9 months ago.
The man’s life insurance proceeds and his entire estate were left to his 16 year old son. (Who, by the way, was in jail at the time of his father’s death!) In the state of Florida, a minor cannot legally hold title to property. When a minor receives an inheritance, it is absolutely necessary that a court supervised guardianship be established to hold any money or property until the minor reaches the age of 18. The Will did not direct who should serve as guardian of the minor child. This creates a possible conflict between the man’s brother, who he wanted to handle his estate, and his previous wife, who he divorced some years ago, but who is the child’s biological mother. This likely will result in a contested guardianship proceeding that will drain away a good portion of the 16 year old son’s inheritance.
Additionally, in Florida, because the current spouse was not provided for in the Will, she is known as a “pretermitted spouse”. When a person marries after making a Will and the new spouse survives that person, the surviving spouse (even if they have been married only 9 months) is entitled to receive a share in the estate equal in value to what she would have received if there had been no Will at all, unless provision has been made for, or waived by, the spouse in a prenuptial or postnuptial agreement; or unless the spouse was provided for in the Will. In our case, none of the above applied. So, by operation of Florida law, our 9 month spouse is entitled to one-half of the entire estate!
This gentleman also owned a home in which he and his wife resided prior to his death. The home likely will be considered to be “homestead” property under Florida law. By virtue of the operation of homestead law, the 9 month spouse will be entitled to a life estate, meaning that she will have the right to live in the house for the rest of her life, and the son will have a remainder interest, meaning that he will receive the property only after the surviving spouse dies.
As you can see, even though the person had a “legal” Will, the estate is a mess. The wishes he set forth in that Will, that his son receive his entire estate, are not going to be carried out. This scenario illustrates the need for continued updating of your estate plan, so that it stays current with your life changes. It is very important to maintain an ongoing relationship with an estate planning attorney who would have provided counseling on many issues, such as the need for a prenuptial or postnuptial agreement before he married, to limit his new wife’s claim on an inheritance he wished to leave for his son; updating the Will to mention the current spouse; or on the preparation of a trust to hold the assets of the minor child, which would have included the naming of a trustee of the father’s choice, and instructions to keep the money in a lifetime protective trust for the child (who was known to have behavioral problems) or to at least delay distribution of the proceeds for some years beyond his 18th birthday. The homestead property also could have been addressed by either a prenuptial or postnuptial agreement.
These are just a few of the issues that could have been handled in a different manner by counseling and updating with an estate planning attorney at the Cramer Law Center. Now, the son won’t receive all of the inheritance his father intended. What is left will be available for the son to spend without any restrictions when he turns 18, whether or not he still is in jail. So we can see having a “legal” Will was not enough to allow our gentleman to pass on his assets as he intended and, indeed, has turned out instead to be a recipe for disaster.
ESTATE PLANNING NIGHTMARES OF THE RICH AND FAMOUS
Redskins Owner Leaves $1.3 Billion Estate in Disarray: Complete with a Widow’s Claim, a Son’s Unfulfilled Dreams, 7 Years of Litigation, and $64 Million in Professional Fees.
Jack Kent Cooke started business as a high school drop-out selling encyclopedias door-to-door, and grew until he owned a collection of media companies, sports teams, and real estate valued at $1.3 billion. Most know him as the former owner of the Washington Redskins football team. Although a successful and sophisticated businessman, his estate planning failed miserably. Although Cooke passed away over 10 years ago, the lessons are still relevant today.
Though most of us don’t have $1.3 billion, this is a great case study on how estate planning that is not well designed and customized according to a client’s wishes can result in devastating financial and emotional costs after their death. This is not an issue of net worth, as much as it is a counseling and planning quality issue.
Cooke had a will that was amended eight times. It left seven executors, most former employees. When presented with the will, most of them had never seen the will or knew of its instructions.
Cooke’s wife, whom he divorced once and then remarried signed a prenuptial agreement upon her remarriage to Cooke, waiving her claim to his estate. A fight ensued nevertheless, which ended in a $10 million settlement to Mrs. Cooke to end the expensive litigation ($6.8 million in legal bills).
Another problem was the disagreement among executors over the Jack Kent Cooke Foundation. An executor, Stuart Haney worked with Cooke to create the Jack Kent Cooke Foundation to help underprivileged students. Due to a large estate tax bill, the only way the foundation could be funded was to sell assets of the estate. Cooke’s son had worked in management of the Redskins for most of his life, shared his father’s passion for football, and dreamed of someday owning the Redskins. John Kent Cooke was adamant that the Redskins franchise not pass from family control.
John Kent Cooke (also an executor) suggested that one of his father’s other investments, the Chrysler building in New York City, could be liquidated to pay taxes. However, the building was losing $1.5 million a month and its market value didn’t come close to the loans against it. The executors, therefore, with the exception of Cooke, Jr., chose to auction the Redskins team. The team went to Daniel Snyder for a bid of $800 million.
The next fight was how much the executors should be paid for their work because the will didn’t specify a fee. The case was decided in favor of the state’s statutory 5% fee, which equaled approximately $37.6 million. In the end, Cooke, Jr. never received the Redskins, which he dreamed about and worked towards his entire life. The executors were divided and bitter, yet they still had to work together as they were all named on the board of directors for the Foundation. Eventually, $64 million was spent on professional fees.
Choosing an Effective Estate Planning Attorney
The key to the success of a client’s estate plan is to find those attorneys who are values-based, relationship-driven, client-centered, and counseling-oriented.
An effective attorney will have an orientation toward relationship building and counseling rather than document preparation. The first thing he or she will offer is the ability, through counseling, to draw out the client’s hopes, dreams, fears, and aspirations for himself and his loved ones. The attorney will carry on a sensitive dialogue that will enable the client to make clear his or her wishes to maintain control over his or her affairs, to be cared for properly in the event of a disability, and to provide meaningfully for loved ones after he or she is gone.
An effective attorney will inquire about the complexities of the family relationships through multiple marriages, special health needs of a grandchild, a son-in-law who is not to be trusted, the spendthrift daughter. On a more positive note, the right kind of attorney will ask about the client’s wishes to fund the education of children and grandchildren for several generations and philanthropic goals that provide the client with feelings of significance that surpass his success.
In-depth counseling forms the strong foundation on which a long-term relationship is built. The effective attorney will involve other advisors in this process to the degree that the client is comfortable with that arrangement. When a client shares what is really important to him or her now and after death, he develops a strong bond with his professional advisors.
Another trait of an effective attorney is a true commitment to the team approach in estate planning. A good estate-planning attorney recognizes that every member of the planning team (including the investment advisor, the insurance professional, and the CPA) is vital to the success of the plan.
Legal documents are not enough. Even documents that have been drafted from in-depth counseling and are custom-designed to meet the unique needs of the client are not enough. Documents standing alone are like a car without gasoline; the documents’ instructions only apply to assets that are properly owned.
For example, a will only controls those things owned in the individual’s name – not jointly. The trust only controls those things owned by the trustee of the trust. An irrevocable life insurance trust works only if it is properly funded with a suitable insurance policy. Advanced entities require careful balancing of assets for maximum effectiveness. Accurate valuation of the client’s business interests is imperative. New planning tools often require additional accounting and tax advice.
The effective attorney will be focused on a long-term (even multi-generational) relationship with the client and his family. The attorney will not have a transactional approach to the estate plan, but rather a process approach. The estate plan is never really done until the client has passed away and every instruction for every beneficiary of every subsequent generation has been carried out. Those who speak of the plan or the client in the past tense may have a shortsighted perspective.
The client-centered estate planning attorney wants to ensure that everything possible is done to make sure that the estate plan is carried to fruition and that the client’s expectations are met.
There is nothing as constant as change. The client’s personal, family, and financial situations change all the time. Kids get married and have children; there are divorces and remarriages; and investment values go up or down.
In addition, laws (both tax and non-tax) change constantly. We have an estate tax. Then the estate tax is abolished. Oops, the estate tax is back. Assets in retirement accounts and trusts generally are protected from creditors and predators. Some protected assets may not be protected in certain circumstances.
The other thing that should be constantly changing is the growth and education of the attorney and every advisor working with that client. New estate planning strategies should be developed, new tools should be discovered, and there should be increasingly better ways to express legal and planning concepts.
The effective estate planning attorney has systems in place to ensure he stays in touch with the client, that the planning team knows of changes, and that there are methods to adjust the plan in light of those changes.
The effective attorney will also be aware that for a plan to work well, the people who will help in the future need to know what’s going on. If the children will someday serve as trustees and personal representatives, the estate planning attorney might educate those children on what to do. An ongoing relationship with the client and client’s family will help to ensure the success of the estate plan. Jeffrey A. Cramer of the Cramer Law Center strives to be an effective estate planning attorney.