Have you followed the recent turmoil surrounding Sumner Redstone, majority owner of Paramount, CBS and Viacom? A few years ago, did you notice the events involving Donald Sterling, once the owner of the NBA’s Los Angeles Clippers?
In each case, family, associates and others argued about whether the principal person was mentally competent to make business and financial decisions. In Redstone’s case, some individuals took different positions at different times in the saga, depending on which position best met their needs at the time.
These are very common problems. The stakes and wealth involved are higher in the cases that make headlines, but similar events regularly play out on smaller scales and have strong impacts on families and businesses. The ingredients that create these embarrassing controversies are an aging person with enough wealth worth fighting over and family, friends and associates who have an interest in it. Sometimes the wealth doesn’t have to be much if someone is trying to settle a grudge or make a point.
You can’t avoid some of the problems of aging, but your estate plan can anticipate them and avoid costs and other problems similar to those of the Redstone and Sterling cases. You need to take several essential steps.
Act early. A key issue in the Redstone and Sterling cases was whether the principal had the mental capacity to take actions. It’s important that an estate plan be created before there are concerns about aging and mental capacity. Of course, when you want to make changes in the future, there always can be new concerns about capacity. But when you establish a plan and regularly review it and make changes as needed, you also establish a baseline that can establish both continuing capacity and that the new actions are consistent with your process and wishes.
The key documents. Of course, your plan needs the right documents. A financial power of attorney (POA) appoints someone to act for you. You can make this power either specific or general. A specific, or limited, POA allows the agent to take only actions you specify, such as paying bills, exercising the voting power of stock and whatever else you list. A general POA allows the person to take any action on your behalf. Most estate planners favor the general POA, because you can’t know which issues will arise when you are incapacitated.
Health care documents also are essential, because someone has to make medical decisions when you aren’t able. The oldest such document is the living will, which states situations in which you do or don’t want care. A more effective document is the medical care POA. This document appoints a person, or several people, to make medical decisions when you aren’t able.
For each document, you can choose to name only one person to act on your behalf, or you can name several people. There are pros and cons to each choice, which we discussed in the past.
When you own a business, there should be a formal succession plan.
You also might have one or more trusts for which you are the trustee. Trusts were central to the controversies in both the Redstone and Sterling cases. Trusts should have provisions that either name successor trustees or define a process by which the successors will be appointed.
Define the problem. This is where many estate plans, including those of Redstone and Sterling, are inadequate. A little more thought and care in drafting the plan could prevent embarrassing and expensive court proceedings.
In most cases, the documents just discussed state what will happen in case of incapacity. The problem is they don’t define incapacity or state who will decide the principal is incapacitated. Instead, the documents leave it up to the principal to declare he is incapacitated, or an interested party has to ask a court to decide.
This gap in the documents makes it possible for someone with a bad motive, or who merely is unhappy with you, to bring everything to court and challenge your actions and plans. The gap also puts family members and associates in the difficult position of asking a court to act when they genuinely believe you’re incapacitated and you won’t accept that. In either case, relationships are permanently harmed, a lot of money is spent and the issues are aired publicly.
There are many potential ways to have incapacity defined or determined. It is usually best to have one or more medical professionals make the determination. Some people let their personal physician make the decision. Others require a second opinion or a determination of at least two doctors out of three. Another option is to have a layperson make the decision jointly with one or two doctors. It is possible to be more specific, such as naming specific doctors or the standard of tests that will be used.
At some point, too much specificity is a problem. For example, naming specific doctors means you have to amend the documents when one of them retires. But most people need more specificity than the standard documents. By stating who will determine incapacity, the transition might be smooth and kept out of the courts.
Even this approach can create problems in relationships. Someone has to trigger the process that asks the doctor or doctors to determine if you are incapacitated. But once the process is begun, medical professionals using accepted standards will make the decision. The process should be able to avoid involving the courts in many cases.
Repair relationships. You have to know your family and business associates to have an effective estate plan. Bad relationships often are the fundamental cause of these disputes. Usually when relationships are healthy, the transitions are much smoother.
In Redstone’s case, it seems almost all of his relationships are bad. He’s been challenged by children, mistresses and business associates.
Try to take an objective look at the people around you. Does your plan meet their expectations, or will someone be surprised and disappointed? Are there rivalries or problems between your children? Does one or more of the children have a serious problem with you? Are business associates expecting more from your plan? One of Redstone’s problems was competition between his daughter and business associates. Often these problems are under control only while you are alive and vibrant.
Do what you can to repair relationships. Work on both relationships you have with others and the relationships between those around you.
If repair doesn’t seem likely, let key people know your intentions. Perhaps the disputes will be aired early, and it will be harder for someone to claim later that you were incapacitated when decisions were made. Of course, if you later make a significant change in your plan as Redstone did, it’s easier for someone to charge you are incapacitated.
Select the right planner. As the Baby Boomers age, more estate planners and financial planners recognize the potential problems of incapacity. They try to prevent problems. Look for a planner who focuses on more than the numbers and strategies. A good planner meets with you regularly and takes the time to ask questions about you and your family. The planner will probe enough to see if your mental capacity is changing over time and won’t be afraid to discuss the difficult topics with you. Many planners also know how to prove capacity and will establish a record, such as a video interview with you, when they worry there might be any questions raised. A planner like this can avoid big problems down the road