If your estate plan only saves your family from a hefty tax bill, then — surprise — it’s still not doing enough.
That’s because while planning techniques may do an adequate job of covering possible tax problems, they likely do nothing to address family dynamics that will long outlive you and your savings, said Marve Ann Alaimo, a partner at Porter Wright in Naples, Florida.
Alaimo led a panel titled “Mom Liked You Best: Common Reasons Why Estate Plans Fail” at the American Institute of CPAs’ Engage conference in Las Vegas.
“Even those families that look like they’re perfect — perfection doesn’t exist,” Alaimo said. “Sometimes there are things we don’t express to each other. Sometimes among siblings, those resentments stay hidden until the parents pass.”
In one case, a $1 million estate was whittled down to $400,000 over 10 years thanks to litigation between family members.
Here are some ways your estate plan can drive a wedge between your family members, and how you can head off trouble.
Blended families — those with children from prior marriages — already require special attention during the estate-planning process to ensure that the assets go to the right heirs and that nobody is accidentally disinherited.
Things are a little more complicated for fractured families — when children and parents are estranged.
“Even if the estrangements are long-standing, sometimes there’s an expectation that a child will inherit from those estranged parents,” said Alaimo.
Families may be less than upfront when addressing these issues in their estate plans, coming up with structures that heighten the conflict between beneficiaries.
For instance, trusts in which a surviving spouse will receive income but the kids are beneficiaries of the remaining principal will create friction over investment selections, said Alaimo.
Similarly, well-meaning parents who pick out a favorite child as trustee are giving their other children a slap in the face from beyond the grave.
“Fiduciary selection is one of the biggest problems we have that lead to litigation,” said Alaimo. “For the selection of trustees, people pick family members and often don’t have a good basis for it.”
“It might be helpful that that child knows something about money management, but if that child is narcissistic or self-aggrandizing, then they’re not the best person to name as trustee,” she said.
Face family conflict early in the planning process and be sure that your heirs have some expectation about what they’re likely to receive. It could keep your family members and your estate out of court.
Plan family meetings, even if you aren’t ultrawealthy: Families of modest means should take the time to discuss difficult issues with a counselor and work together to improve communication skills. Get everyone involved in planning a common charitable goal.
“Family meetings are best for clients with fewer assets,” said Alaimo. “They’re the ones who are most litigious and will spend most of the inheritance on lawyers.”
- Align the interests of your beneficiaries: An income beneficiary wants more payments. A principal beneficiary wants to preserve the corpus of the trust. For instance, a unitrust — in which the income beneficiary gets a set percentage of the trust assets’ fair market value — may help to put both parties on the same page when it comes to investing.
Find independent trustees: A bank, a lawyer or an accountant acting as a fiduciary brings a third party into the mix and helps keep family members out of court.
“People don’t like to hear ‘independent trustee’ or ‘corporate trustee,’ but the fees you pay them are probably a lot less than the litigation fees you’ll pay if your son has to defend himself from scrutiny by the other children,” said Alaimo.
- Be transparent: You don’t have to tell your beneficiaries all of the granular details, but do keep them posted on the general structure of the plan while you’re alive. “The estate plan conveys more than just wealth,” said Alaimo. “It conveys a sense of whether you are loved, valued and respected.”