Experienced Estate Planning professionals know the assets most likely to cause problems with heirs are those estate owners treat routinely. Often, it is the commonplace assets the owner does not give much thought to that stir up emotions among at least some of the heirs. It is not a problem only of the rich. Sometimes it seems the less valuable the estate or property, the more likely it is to trigger problems.
Fortunately, estate owners can avoid these problems. You simply have to realize that issues could arise over certain property and know the different ways of diffusing conflicts. The history of conflicts over these items is clear proof that estate planning is required no matter the value of the estate. Modest estates have triggered some serious conflicts.
A prime source of conflict is the family homestead. It can cause many headaches, as can a second home or vacation home. Even trailers and mobile homes have led to family disputes.
Family residences have two characteristics that pose problems. The real estate often is a meaningful part of the estate’s value, regardless of the size of the estate. A single asset with a high value always poses estate planning issues. In addition, at least some family members are likely to have emotions about the property, and these emotions can lead to conflict.
The estate owner needs to assess whether any family members might be emotional about the real estate. Keep in mind the emotions might not be about the home itself. The home might be a means to play out lifelong rivalries and disagreements, especially those that are kept under the surface by the parents’ presence.
There are strategies to incorporate into your estate planning strategy to avoid conflicts over family residences, and some of these can be implemented during your lifetime so the issue is settled. Consider the following actions.
? Sell the home while you are alive.
? Provide in your will that it shall be sold and the cash distributed. This avoids leaving decisions to the heirs and hoping they work things out. The risk of this strategy is the home might have to be sold in a bad housing market.
? Let the executor decide how to handle the home. In this case, it is best to name as executor someone who is not a beneficiary under the will. This might be more expensive than naming a family member as executor. Give an adult child this position only if you are confident that he or she can be fair and impartial and the decision will be respected by the others.
? If you want the property to stay in the family and be shared, which is likely with a vacation home or retreat, put in your will the rules governing use and expense-sharing. Discuss and consider implementing the rules now.
? Set up an impartial process for valuing the property. You will want to do this whether one child will have ownership and use of the property or if all of them will share the property. One child might prefer money to use of the property or to buy out the others. Setting up a valuation process can convince heirs they were treated fairly and makes it easier for them to change the ownership.
? Transfer the property to a trust. The trust agreement will have rules governing use, sharing, and sale of the property. You can do this now or in the will.
No matter which strategy you use, if family members will be sharing the property, set up a procedure for buyouts. The needs, interests, and finances of the children could change, and one or more of them might prefer cash at some point. Since the other siblings might want to keep the property, they should have the right to buy out the other’s interest. The key here is having an objective person or formula determine the value of the property.
One popular valuation strategy is to let the buyers set the first price. The sellers have the option of accepting the offer or buying the others out at that price. If the buyers set a low ball price, the sellers can buy them out at that price then turn around and sell the property at a profit.
None of these strategies addresses estate tax reduction. If estate taxes on the home are an issue, one strategy we have discussed in past visits is to sell or give the property to the children, and then lease it back from them. Another strategy is to transfer the property to a qualified personal residence trust that allows you to live in the home and act as owner for a period of years. Then, your children become the owners. Either strategy when done right saves significant estate and gift taxes. They are especially appropriate for second homes.
When a family home does not cause problems, personal items might. For the same reason, even worn or essentially worthless items can be the source of disputes. An estate planning strategy must anticipate this possibility and provide for the disposition of personal items.
It is not practical to list in the will each personal item and how it should be distributed. Instead, they are part of the residuary estate and distributed in a broader-brush strategy. Here are some strategies to consider.
? If you are confident there won’t be problems, have the executor decide how to distribute the items or let the children agree how to divide them among themselves. You can provide a fallback provision that if the heirs do not agree within a certain time (say, three months), all of the items are donated to a charity or sold.
? Avoid disputes over personal property by directing the executor to sell all personal items that can be sold and distribute the cash proceeds. Any items that cannot be sold are donated to charity. The heirs can buy any items they want, and the process must be open and fair. The executor sets the sale process and prices.
? Over time, label each item with the name of the person who should inherit it. You can put labels on the backs of artwork and on the bottoms of sculptures, for example. These designations are not legally binding. But usually the executor and heirs respect them. Unfortunately, there probably are many items that cannot be labeled in this way and labels can be switched or challenged. So you won’t be able to identify everything this way.
When there is the potential for numerous conflicts, a lottery system is a good option. Here is one lottery system to consider.
Have the heirs draw straws or names to determine the selection order. In the first round, the children each choose one item in that order. 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 for the first selection. The winner of the flip has a choice of either going first and picking one item or going second and picking two items.
Some advisers believe the heirs decide the value of items with their selections. Others believe the items should be valued in some way, and the heirs should end up with items of close to the same monetary value. The executor could 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. Or in each round only items of relatively equal value could be selected. These valuation methods, however, are time-consuming and might not be practical for all estates.
There are other lottery systems, which we have discussed in past visits and are in the web site archive. They can get complicated, but a lottery can convince everyone the process is fair and equitable.
When heirs are selecting assets or trying to agree on a division, estate planning professionals generally say in-laws should not be invited to participate in or view the process. They make a messy process even messier.
Another issue with these assets might be taxes. The estate will pay taxes based on the appraised value of each item, and the taxes will reduce the total amount available to the heirs. You can decide that each heir’s inheritance is reduced by the amount of taxes due on his or her share of the estate. Or you can decide that the taxes will be paid with the liquid assets of residuary estate. The heirs who are scheduled to receive the residuary estate will receive what is left after taxes. If taxes are an issue with your estate, discuss with your estate planning advisor how taxes should be apportioned.
There is no right way to handle the home and personal property of an estate. You need to consider each of the options and decide which might work for your family. Otherwise, settling your estate might divide family more than it does your property.
RW July 2009.