Financial Advice for Retirement, Social Security, IRAs and Estate Planning

How to Avoid Unexpected Estate Battles

Published on: Mar 01 2008
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Few things amaze estate planners more than the property heirs choose to fight over. The worst disputes often seem to occur over items that most outsiders consider trivial. Furniture, personal mementoes, and the like seem to trigger emotional reactions in heirs.

Sometimes an heir simply is looking for an excuse to vent a long-held grievance; other times there is some memory or other attachment to the item others did not realize. Items that can cause emotions to run high include jewelry, dinnerware, furniture, personal collections, and frequently used items, even if they are essentially worthless and well worn. Sometimes, the relatives really don’t want an item, but none wants any of the others to have it.

An estate plan is not complete until it assesses the likelihood for that kind of reaction among heirs and has a procedure in place to deal with potentially contentious distributions of personal property. It is impractical to list each item in the will and designate who receives it. The will would be unwieldy, assets would be overlooked, and the will would have to be amended each time an item is disposed of or a new one is acquired. Some items cannot be described well enough to be identified by an executor.

Valuable personal items?such as antiques, unique items, or collectibles?should be listed and specifically bestowed in the will. Most other personal property should be included in what is called the residuary estate, which is everything that is not specifically given to someone. There are several ways to efficiently distribute these items while lessening the probability of a will fight or family dispute.

Here are some procedures to consider. The particulars of a family and an estate determine which is the best choice.

  • The most common approach is to let the kids or the executor (usually one of the kids) decide how to divide the residuary estate. The will might direct the executor to divide the residuary in equal shares among the children. Or it might direct the children to agree on a division under the executor’s direction. Ideally, everyone will be a mature adult, and this approach will work. Many families are able to reach an amicable division this way. Too often, however, emotions take over and things get messy. There are instances of the attorney taking possession of one or more items for years until the children could agree.
  • One extreme measure is not to allow the possibility of conflicts to arise. The executor can be directed to sell everything that can be sold and distribute the cash to the heirs. Unsold items would be given to charity. Heirs who want a particular item or items can buy the items at the same. The executor decides on the sale process, and it should be one that does not allow an heir an advantage over others in obtaining an item.
  • Some people label personal items while they are alive. For example, the name of the person who should inherit it is placed on the backs of artwork and on the bottoms of sculptures or furniture. These designations are not legally binding, but usually the executor and heirs respect the designations. Unfortunately, there probably are many items that cannot be labeled in this way, and someone always can claim that a label was switched or is in someone else’s handwriting.
  • A separate letter can be left for the executor. This document would list who should get each of the personal items. In some states this is a legally binding document if referenced in the will. In others it is not.Like the will, the letter has to be revised each time a piece of property is disposed of, lost, or acquired. A risk is that the list gives the IRS a roadmap to valuing the estate and encourages it to put high values on the items named since that indicates they are valuable. It also is unlikely that all items could be named in the letter, so another procedure is needed for items not named in the letter.
  • A procedure can be set up that gives heirs an incentive to agree. The will might say that if the heirs don’t agree on a distribution of the property within a certain time (say, three months), everything that is not settled will be given to charity.
  • When these strategies don’t seem viable, it is time to consider one of several lottery systems.

The most common lottery probably is for the heirs to draw straws or names to determine the selection order. In the first round, the children each choose an item in the order drawn. In the next round, the selection order is reversed. Then they return to the initial order, and so on. If there are only two heirs, they can flip a coin to determine the first round order. The winner of the flip can be given the choice of either going first and picking one item or going second and picking two items.

A difficulty with this approach is that the items might not be of relatively equal value, either monetarily or sentimentally. That might not be important, since each heir might place a different value on each item. The heirs would pick the items that are most valuable to them. The real value might be in the personal meaning or usefulness of the item to the individual. Others believe the executor should assign a value to each item and keep track of the selections. If heirs end up with unequal values, the difference is made up with cash. Another approach is to allow heirs to choose only from items of relatively equal value in each round. That approach, however, is time-consuming and might not be practical with all estates.

Another lottery strategy is to let the heirs decide how to value items. There are a couple of ways to implement this strategy.

In one approach, each heir can assign a number of points to each item. By giving the items points, they are deciding how important each item is to them. After everything is valued this way, in the first round each person gets one item on which he or she placed more points than anyone else did.

The points assigned to the items awarded are not likely to be equal. The person who assigned the most points to the item that he won doesn’t select again. Instead, the others pick one or more items to which they assigned points until the total points of their items equal the total the first person placed on his or her item. For example, the first heir might “win” property to which he assigned 100 points; the second heir might have assigned 70 points to his item. The second heir gets to pick one or more items to which he assigned a total of 30 points.

A variation is to give each heir the same number of points. They use the points to bid for items in the estate. If an item is particularly important to an heir, he might bid all or most of his points to ensure getting it. Under this approach, the heirs might end up with items of unequal economic value. But that should be acceptable because the heirs have determined the personal value of each item. More details on these two approaches are in the book, The Universe and The Teacup by K.C. Cole (Harcourt Brace & Co.; $13.00 paperback).

There are a couple of points to keep in mind whichever strategy is selected. Estate planners say that in-laws should not be invited to participate in or view the selection process. They can make a messy process even messier.

A related issue is taxes. If the estate is subject to estate taxes, it will pay taxes based on the appraised value of each item, and the taxes will reduce the total amount available to heirs. The will can state that each heir’s inheritance is reduced by the amount of taxes due on his or her share of the estate. Or the will can state that the taxes will be paid from the liquid assets of the residuary estate. The heirs who are scheduled to receive those assets effectively are paying everyone’s taxes. The different options and their ramifications should be discussed with an estate planner.

There is no right way to divide the personal property of an estate. The estate owner has to consider which method might work best for his or her family and property. Otherwise, settling the estate might divide the family more than it does the property.

Communication is vital to an effective disposition of personal property and to prevent surprises. The estate owner needs to communicate with potential heirs his or her general thoughts about the property and also needs to learn which items of personal property are of intangible value to each member of the younger generation.

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