And nothing brings those feelings to the surface like the death of a wealthy parent and the ensuing breakup of the estate. Consider a Maryland family, who we'll call the Worthingtons. They had four children. In the family's early years, the father made less money, so the two oldest kids were forced to live very humbly. By the time the second two children were born, the father was making a lot of money as a well-respected lawyer in Washington, D.C. The younger children grew up on an estate, with a large house, horseback riding lessons, membership at a country club and private school. The older children went to public school and attended state colleges, if they went at all. The only son, who lived on the parents' estate and became a bricklayer-despite his father's protests-was aggrieved because when the father died, he left a will that divided his money evenly between the four children rather than giving him and his older sister a larger chunk to compensate for the frugality they were forced to endure.
"The son felt like, as parents, they had failed him. He felt like he should have gotten more," says Paula Langguth Ryan, a mediator based in Odenton, Md., who specializes in estate and inheritance conflicts.
Ryan notes that arguments about money are usually less about money and more about love. The boy was a source of disappointment to his father, which the son undoubtedly felt.
The death of a parent often shifts the family dynamic, making issues arise that appear to be based on current events but in fact are perceived slights that occurred years ago and are now playing out as the parents' estate is doled out.
"The children can be 60 or 70 years old, and they're talking about events that happened when they were 15," says Michael Dribin, a trusts and estate attorney in Miami. "There's this deep-seated animosity that is just beneath the surface between these siblings that just stays beneath the surface as long as one or both parents are alive. But once both are gone, it's like that glue evaporates."
Dribin says he doesn't know which troubles him more: the fact that fights arise or that siblings will go to war over things like jewelry or artwork. While occasionally siblings will reconcile, most of the time they do not, he says.
"They'll destroy family relationships forever and have no realistic prospect of reconciliation, over the most trivial stuff," Dribin says.
Some parents don't want to treat the children equally. Sometimes it's about disproportionate need, says Cicily Maton, founder of Aequus Wealth Management in Chicago. Say that one child went to work on Wall Street and did extraordinarily well while another became a teacher and doesn't have enough money to pay for his child's college.
The parents may decide to leave more money to the child who has less. But the one who has more money doesn't always understand that. He'll equate money with an expression of love, thinking the parents preferred the poorer sibling, Maton says.
"The Smothers Brothers' little dialogue about how mom loved you best is played out about 50% of the time in settling estate plans," she says.
Disparate treatment looks particularly suspicious if the parents change their will shortly before they die, after one child has moved in with them to take care of them. That child may live closer or is unmarried or unemployed and thus able to drop everything to help the parents, but the siblings may not see it that way when that child is left a bigger share of the estate.
"It does almost always cause a division in feelings about the one who supported the ailing parents," Maton says.
Dribin says he sees a lot of these cases: caregiver siblings who abandon their own family to move in temporarily with the parents. They drive them to their doctors, do their food shopping and negotiate with home healthcare workers. They're so attentive, the parents sometimes change their will as a show of gratitude. The question that nags the siblings, though, is did something improper happen that led to that sibling getting more? It doesn't help if that sibling was struggling financially, Dribin says.
"There are people who have reasons to want to treat their children unequally, and that's certainly their right, but the children being treated unequally will not necessarily appreciate that," Dribin says.
Failing to appreciate it is putting it mildly. They'll likely sue over it, in an attempt to set aside the will, claiming their siblings exerted undue influence over their parents. Either that or they'll have to prove their parents lacked mental capacity when they made out their wills. Those are basically the only two grounds under which someone can sue if they're unhappy with their share of the pot.
"It's not easy to determine what was in mom's or dad's mind, or how much they were being unduly influenced. And mom and dad are no longer around to say whether they were unduly influenced," Dribin says. "I have learned over time not to jump to the conclusion that the child who was there and got the lion's share did anything improper. Very often, when you investigate the facts, there was no one else to step in."
Sometimes the parents aren't even sick when one child moves back home, and his siblings fear he or she is siphoning funds out of the estate before the parents are even dead. One financial planner says he knew a woman in her 80s whose son moved back into the house and one of the first things he did was throw out the caretaker, because he saw the expense eroding his mother's estate and thus his inheritance. His siblings caught wind of it, threw the brother out and got the caretaker back.
In some instances, one child has borrowed money from his parents, for, say, a business venture, and the other siblings see that as reducing the size of the estate and thus their inheritance. Some clients take such loans into account when doing their estate plans, but it's the exception and not the rule, estate attorneys say.
John O'Grady, an estate attorney in San Francisco, says in his 25 years of practice, he's probably seen 100 cases in which a child moves back home to take care of the parents, and he still isn't clear whether their intentions are selfless or selfish. They wind up with complete access to the parents, in some instances gaining access to all the money and accounts. The parents may even give them a credit card or other gifts, and the ability to sign checks.
"It happens routinely. And then mom and dad die, and the other siblings find out about all these gifts, and they get really angry, because they feel like the caregiver kid took advantage," O'Grady says.
The two most contentious issues that come up in the estate process are how to handle the family home and the family business. Real estate is problematic because other assets, like stock, can be liquidated, so those wanting cash can simply sell. But when children with vastly different financial situations must decide what to do with a shared piece of property, those income disparities will weigh on that decision. A child earning a substantial income, for instance, might want to keep the parents' beach home in Nantucket, while the child with less money may not be able to afford the taxes and upkeep and will want to sell it. It doesn't help when the real estate is the family home, and the parents have a directive that says, "Whatever you do, don't sell the family home."
"That's probably the worst thing they can suggest," says John Hillis, president of Hillis Financial in San Jose, Calif.
One solution, advisors say, is for the parents to put money into a trust that would cover the taxes and maintenance costs for, say, five years, so the children can assess whether they really want to keep the property.
Of course that presumes no one is living on it. Sometimes, one child will move into the parents' estate and live there rent free. He'll refuse to move out when his siblings want to sell the property, yet he won't have the money to buy them out.
Ryan, the mediator, is working with a family of four children in Texas in just that situation. One of the two sons had an estate on the Gulf of Mexico that was destroyed by a hurricane, so he moved in with his mother-the father had already died-while his own home was being rebuilt. The mother recently died, and his siblings now want to sell the parents' $4 million estate in Houston, but the son refuses to leave. His brother and sisters don't want to throw him out because they're afraid of him, Ryan says.
"There's a lot of alcoholism and sexual abuse in this family. There's a lot of anger and hurt feelings and not being able to confront issues because there's so much fear of the brother's anger," Ryan says. "It's never about money. It's always about some underlying issue that they're upset about. This happens a lot with wealthy families. They see the money as a weapon to be used against each other."
But while divvying up the family home is nettlesome, dividing the family business is a minefield. Nearly every advisor interviewed for this story had a client involved in a family-business-related drama that wound up in court. Even parents who plan ahead can't always save the children from themselves. One father made sure his daughters could monetize their shares but gave his son-the only child who actually worked for the company-ultimate veto power over whether the business should be sold. In the end, the daughters were so persistent and menacing, the son sold the business just to stop them from badgering him.
The worst case involved a man who was so daunted by the prospect of having to work directly with his two brothers in the family business that, rather than negotiate with them through a trustee, he began to abuse drugs and alcohol. He was the only one of three sons to work for the family business, and his brothers had concerns about his compensation and how he was running it. Until then, his brothers' interests in the firm were held in a trust, but the trust was slated to expire, giving the brothers more direct control over the company. The brother who worked there wound up killing himself in front of his son.
"Some of that was obviously caused by the drug and alcohol abuse, and the irrational behavior that goes with it. But it was also the reality that he was going to have to deal with this antagonistic relationship," says Simon Singer, a financial planner in Los Angeles.
Valuing one's interest in the business is also a sticky point. In one family, two sons owned a business, but only one worked there, and the one who didn't was always envious of the perks his brother received. There were rides in the company's private plane, access to apartments in Manhattan and Naples, Italy. The problem was, because it was a privately held company, it was hard for either brother to sell the stock. To resolve the issue, their lawyers created a limited marketplace for the stock, and every year, a valuation of the business was done so a price per share could be established. That enabled anyone, whether it was the brothers or their children, to sell their stock back to the company in order to cash out. There were certain rules, such as limitations on how much stock could be sold at once, and the fact that once the stock was sold, it couldn't be bought back.
"You're taking something that is generally indivisible, such as shares in a private company, and making it so that anyone can monetize their stock," says Michael Golden, a partner at the Atlanta-based law firm Arnall Golden Gregory, which specializes in business succession planning.
Interestingly, as soon as everyone was able to sell their shares, the squabbling stopped, Golden says. Knowing they had the ability to sell their shares, they realized they didn't really want to.
Golden's partner, J. Grant Wilmer Jr., who works in the firm's private wealth group, knows of two brothers who inherited a business from their father and got along very well for much of their work life-until it was time for their own children to run the business. One brother made his son president of the company, a position for which the other brother said the son was not qualified. Instead, that brother wanted his son-in-law to be president, claiming the son-in-law was far more suited to the position.
The situation became so acrimonious they decided one or the other should leave. They entered into a so-called "buy-sell agreement," in which the party wanting to either buy or sell gets to pick the price of the shares to be sold. The other party then has the option to buy or sell. It's supposed to keep people honest, because the person valuing the price of the shares can wind up either as buyer or seller.
"The interesting thing was, these were two brothers who had been in business together for many years, and at the end of the sale, not only couldn't they be in the same conference room with each other, they couldn't be on the same floor. We didn't want them to run into each other in the bathroom," Golden says.
It didn't help that the brother who bought the other out had to take on a private equity partner in order to afford it. After a few years, the company was unable to reach certain benchmarks promised to the private equity partner, so the partner stepped in and kicked management out. In the end, the company went bankrupt.
"The family that sold out is probably rich today, and the family that bought the others' interest is probably working for someone else," Golden says.
Dividing the family business is always more contentious when some children work for the company and some do not. Dribin recalls one family that owned a business with more than $100 million in revenues, where five children worked for the business and five did not. The father bequeathed the business to the five who worked there, and to the others, he gave other assets that he viewed as equal in value. But the children who received those assets thought they were getting the short end of the stick. As often happens in these situations, litigation ensued.
"These were people of wealth who had the ability to pay lawyers lots of money, and it got very nasty-to the point where if all ten children were in a conference room together, five would sit on one side of the table and five would sit on the other, and they would not acknowledge each other's presence," Dribin says.
Eventually, it was settled, but those issues could largely have been minimized by more specific guidelines for determining value. An estate plan could include a mechanism where, say, each party hires his own appraiser, and those appraisers hire a third. The value of the company is then determined by an amalgamation of all three appraisers' assessments.
But even when the value of an interest in a company is determined, there's still the matter of coming up with the cash to buy it. That could be resolved if part of the estate plan involves an insurance policy, the proceeds of which would be used for a buyout, says Douglas Goldstein, an investment advisor with clients in the U.S. and Israel.
In the end, estate professionals say one of the best things parents can do to try to avoid these conflicts is to communicate their estate plans with their children before they die, and to have clear, current documents that spell out how they want their money parceled out.
O'Grady says families will sometimes come to him, and while the parents are in his office, their middle-aged children will stand out in the hallway. Every half hour or so, they will come into the office, but every meeting always turns into a big argument.
"And those are some of the healthiest situations," O'Grady says. "Everyone has a voice. Everyone knows what the plan is. And in the end, they participated in that plan, whether or not mom and dad did it their way."
In most families, you talk to the parents, and they'll say they communicated their plans, and then you talk to the children, and they say their parents mentioned a plan but never showed it to them, and they have no idea what's going to happen when their parents die.
O'Grady knows. It's going to end in tears.
Preventing Estate Litigation By James R. Robinson
Perhaps no civil litigation apart from divorce can cause more emotional damage than a family dispute over an estate or trust. Such disputes typically involve sibling rivalries and other deep-seated family conflicts, with issues involving great wealth thrown into the mix.
Consider just a few of the high-profile trust and estate disputes over the past decade:
In 2002, Liesel Pritzker brought suit against her father and 11 cousins, alleging they had "looted" $1 billion from trusts established for her and her brother. The suit settled four years later and resulted in the dispersion of an estimated $15 billion in concentrated family wealth.
Albert Hill III, great-grandson of H.L. Hunt, brought suit against his uncle, Tom Hunt, in his capacity as trustee of the trust for Hill's benefit. The suit, which settled in May 2010, alleged that the trustee and others (including Hill's father, Albert Hill Jr.) misled the beneficiaries about the value of the trust assets and engaged in various acts of self-dealing.
Apart from these prominent family feuds, several challenges to trustees' management of investments, particularly concentrated stock positions, have caught the attention of, and caused alarm in, the fiduciary services world.
It all points to the fact that trust administration can be the source of significant conflict, particularly in the family context. The principal causes of discord are lack of trust and communication between trustees and beneficiaries, and a divergence of interest and opinion among the generations. In the corporate context, financial issues, particularly diversification of investments, predominate.
Many difficulties could be avoided by two things: first, more careful document drafting that considers the likelihood of changing circumstances and makes the trust settlor's intent clear, and second, more communication by the trustee with the beneficiaries. Communication is also vital when there are either multiple trustees or, as in the case of a corporate trustee, multiple people assigned to different administration functions.
Aside from family strife, what follows are some of the other common causes of conflict in the area of trusts and estates:
Management – A lack of management or oversight of investments can be a significant source of controversy and liability. Many investment issues can be addressed at the outset through careful drafting, but trust investments still typically require active management by the trustee.
One particular investment issue that has surfaced in recent cases is that of a corporate trustee that holds either its own stock or stock in a company with which it has a significant banking relationship. When that stock declines in value, or does not perform to expectations, or the trustee otherwise retains more than might be considered prudent under modern investment principles, it could expose trustees to allegations of conflict of interest.
Distributions – As most trustees are painfully aware, distributions are often a continual source of discontent. Even in a mandatory income trust, what constitutes "income" of the trust can be a difficult issue to resolve, and different sets of beneficiaries may be unhappy regardless of what decision the trustee makes. This can be exacerbated when distributions of either income or principal are subject to a standard, such as "support and health," and the trustee cannot get enough information from the beneficiary to make a sound decision.
Communication – Lack of communication between fiduciaries and their beneficiaries can contribute greatly to a climate of mistrust and suspicion. Although a fiduciary may be restricted in what it can disclose, an uncommunicative fiduciary generally exposes itself to charges that it has breached its duty of disclosure. This may lead to an investigation of what other misconduct it may have sought to conceal by its silence.
Avoiding Controversy
Many issues can be avoided by making sure estate plan documents are carefully drafted. Consider, for example, the seemingly contradictory language in the will at issue in a famous legal case known as the Matter of Dumont, which centered on a trust created after the death of Charles Dumont in 1956. After noting that the bulk of his estate would likely consist of one stock-Eastman Kodak Company-the will stated that the stock could not be disposed of "for the purpose of diversification."
Yet later on, the will also stated that the stock could be sold for other "compelling" reasons.
The corporate trustee presided over the trust as the Kodak stock it held plummeted in value. When it was sued as a result, the trustee argued that it was permitted to hold the Kodak stock based on the will's first paragraph mention of diversification. However, the trial court held that the first paragraph, particularly in light of the second, did not excuse the trustee from its duty to manage the trust investments prudently, and that a precipitous decline in value constituted a "compelling reason" for selling.
Much of the blame, however, should be laid at the feet of the drafter of the Dumont will, who was unclear about the authority of the trustee to manage the investments of the trust and, more importantly, unclear about the testator's intent. For example, what did the trust's creator consider a "compelling reason"? For that matter, what fiduciary sells an asset "for the purpose of diversification of investment"? Diversification is not an end in itself, but a means for an investor to mitigate risk in a portfolio.
Of course, the drafter cannot anticipate every eventuality. Circumstances are likely to change in ways that are difficult, if not impossible, to foresee, particularly with long-term trusts. However, that is precisely the point: The drafter should draft precisely, but flexibly, for the certainty of an uncertain future. This can be accomplished by:
Avoiding vague phrases such as "for purposes of diversification of investment," employing instead an authorization for the trustee to retain assets as long as the trustee determines that doing so is in the best interests of the beneficiaries and consistent with the trustee's duty to manage the investments prudently.
Clearly stating under what circumstances the trustee is authorized to retain or sell the trust's business interests. If the settlor or testator has a particularly strong desire that a business remain owned by the family or otherwise closely held, make that clear-as well as the circumstances under which the trustee can disregard those wishes for the sake of the trust.
Incorporating broad powers and specifying in detail what information may or must be provided to which beneficiaries, under what circumstances and how often.
Addressing potential conflicts of interest-for example, a trustee owning its own stock. One possible solution would be for an independent trustee to approve such holdings.
Precisely stating examples of what qualifies for distribution under a given standard.
When controversy is foreseeable, many attorneys suggest the use of an "in terrorem" or "no contest" clause in a will or trust. These clauses typically revoke or cancel a disposition to any beneficiary who brings an action to contest a will or trust or otherwise interfere with its execution. These provisions are enforceable in nearly all states, although courts, being understandably cautious about eliminating the rights of beneficiaries, will often construe their application quite narrowly. Moreover, clients may want to think twice about making terms of the trust too oppressive, as this will likely exacerbate tension between the beneficiaries and the fiduciaries.
A more positive method of discouraging lawsuits against fiduciaries is to include a higher-or perhaps one could say lower-standard of liability. Most states permit a settlor or testator to exonerate a fiduciary for anything except intentional misconduct or bad faith. More typically, a will or trust may hold an executor or trustee liable only for those types of conduct, along with gross negligence. The estate or trust may indemnify the fiduciary and provide for payment of the fiduciary's legal fees-contingent upon repayment if the fiduciary is ultimately held to be liable under the relevant standard of conduct. Provisions such as these discourage lawsuits because they are designed to make suits against the trustee much more difficult to win. Of course, it should be noted that meritorious suits with valid claims might be stymied under such a provision.
Finally, the drafter should strongly consider using language regarding the trust creator's intent beyond the strictly legal. This can be an excellent opportunity for them to explain, in plain language, what they intend, and perhaps what they hope their values and legacy are understood to be. This can be of help, not only to the trustee in carrying out the terms of the trust, but also to the beneficiaries in understanding the reasons behind the decisions made.James R. Robinson is a partner with the law firm of Schiff Hardin LLP in Atlanta, focusing on the wealth transfer and business succession planning needs of families and closely held businesses.
