“My mom wasn't home to arbitrate, so he forced me to try to strangle him with a phone cord.” — Felicia Day, You're Never Weird on the Internet: A Memoir
Hard work is often the biggest factor in wealth creation. Luck plays a part too. JP Getty’s formula for success implemented both and added some humor: “…rise early, work late, and strike oil.” However a person obtains their wealth, there is one constant: they want it to bring stability to their family. Some parents do not give anything to children at death, perhaps following the wisdom of Plato: “The greatest wealth is to live content with little.” According to Forbes, 19% of Baby Boomers will take Plato’s advice.¹ For the other 81% of Baby Boomers, their assets will be given to their children.
Whether earned through hard work, luck, or both, no reasonable parent wants to see their assets divide a family at their passing. According to Forbes, “Over the next two decades, the United States will experience an unprecedented shift of demographics and finances that will likely be felt by every American. Baby Boomers, the generation of people born between 1944 and 1964, are expected to transfer $30 trillion in wealth to younger generations over the next many years. This jaw-dropping amount has led many journalists and financial experts to refer to the gradual event as the 'great wealth transfer.’” In no prior time in the history of America has such a vast amount of wealth moved through the hands of generations. Why add family strife to such an important event if it can be avoided?
Avoiding family strife is important
Death of a family member is a time of grief. When the deceased family member is a parent, grief can be mixed with sibling strife. Clearly, this is an article in a CPA journal, so we will not explore the psychology of family strife. However, we firmly believe that much of the strife we often see at the death of a parent (and in particular, at the death of a surviving parent) can be mitigated before death. CPAs in private practice have a front-row seat to the arena where death and wealth transfers leads to family dissension. In our practice, what follows are examples where family wealth transfer to children often leads to unnecessary angst.
When ‘equal’ is not equal. More often than not, parents tell their CPA that their children are treated “equally” in their estate plan. Children assume that their parent’s wealth will be shared equally among them. When children discover that their parents’ wealth was, however, not “shared equally,” tensions rise. When is equal-in-concept not equal-in-result? Moreover, while clients often say “equally,” what they really mean is “fairly.”
A. Prior Gifts. If a parent made substantial gifts to one child, did the parent intend for assets passing at death to be reduced by those gifts? For a will or trust to take those prior gifts into effect, the will or trust must state that “advancements” reduce the amount the child receives. This area is perhaps the single-biggest source of disputes we see.
B. Asset Ownership and Beneficiary Designations. Assume mom dies survived by four children. She has $1,000,000 in a trust and a $1,000,000 IRA. It is not difficult to see why a family fight may ensue if the trust assets are divided four ways and the IRA is left to less than four children, or two children receive trust assets and 2 children receive IRA.
C. Joint or POD Accounts. Often, a client’s will or trust will leave assets equally to children. However, a client will often name specific children as payable on death beneficiaries or name them jointly on a bank account. If that was intended, then a client should make that clear. Account designations often have unintended consequences. First, the client may have a lack of understanding about the legal effect of a designation. Second, after being named on the account, the child doesn’t “behave” and “do the right thing” as the parent may have thought.
D. Residue. Most trusts and wills contain language apportioning federal and Oregon estate tax. If a client wants their children to share equally in their assets, a reasonable assumption is that death taxes (and administration expenses for that matter) are to be shared equally. If a client’s will says that estate taxes are to be paid from the “residue” of the estate, a dispute will often ensue if assets are left to children outside the will (i.e., IRA, life insurance, joint assets) but the beneficiaries of the residue bear a disproportionate share of the tax.
Helping Mom and Dad. Assume you are in a client meeting where the client is the surviving spouse. The client informs you that they are going to revise their will to change the percentage allocations going to her children. Her original will allocated her assets equally to her three children. Now, she wants one daughter to get more because the daughter was helping take care of her, and the disproportionate distribution is intended to compensate the daughter for this work. Complicating this situation is the client’s statement to you that she does not want to let her children know of her wishes before she dies. A client can leave their assets as they choose but a simple question such as “You will be gone, so how will this go over with your children?” can prompt the client to take steps to address sibling reactions to their estate plan,² (i.e., having more specific language included in their documents, or even suggesting a parent leave a letter.)
Selection of Fiduciaries. Acting as a fiduciary³ is a serious responsibility. A client should carefully consider their selection of fiduciaries if they are choosing a child. In addition, naming co-fiduciaries (both children) can lead to issues if the children do not agree on important issues or did not get along in the past. Forcing children to act together does not mitigate disagreements; it often increases them.
Possession and the Other 1/10 of the Law. A very common area for sibling disputes to occur is when a parent allows one child (often with a spouse and children) to occupy a dwelling owned by the parent. The client’s will and trust leaves all of their assets (including the house occupied by one of the children) to their children equally. What happens to the occupants if the house must be sold to pay estate tax or for other administrative reasons? Similarly, what happens if the family occupying the dwelling has not paid rent, utilities, or property taxes, thus depleting the parent’s estate? In our firm, a similar situation occurred that extended the probate process for over four years.
Oregon’s Will. We often tell clients that if a person does not have a formal, written will or trust, Oregon has a “will” for you. ORS chapter 112 outlines what happens to a person’s assets if they die without a will or trust and have assets that have no beneficiary designation or are not owned jointly with someone else. We have had several estates where a spouse was in a second marriage, with estranged children from the first marriage and did not have a will. Half of their estate transferred to their spouse and half to their children of the first marriage under ORS 112, whether that was their intent or not. Having a will would have made their intent known and arguments and hard feelings among the spouse and estranged children would not have happened.
Mutiny in the Bounty. Most people leave their assets to "the natural objects of their bounty" — meaning, their closest surviving members. That said, a person can leave their assets to any one or any entity they choose as long as they were not coerced or unduly influenced. If you learn that a client wants to give their assets to persons other than their close surviving family members, encourage your client to document their reasons. In such cases, disinherited family members left out of the will or trust frequently file costly court actions challenging the client’s will or trust.
The Safe Deposit Box. Often, as part of preparing the client’s personal income tax returns, the CPA may become aware of significant assets held in the client’s safe deposit box. We have seen situations where those assets have “disappeared” after death, usually because only one child was able to access the box and an updated inventory was not kept. Children are usually aware of important assets owned by their parents and locked away for safe keeping. In such situations, we recommend that the client take pictures of the contents of the box (or even a home safe) and keep them with their important estate planning documents.
Siblings usually pull together after the death of a parent. Once a surviving parent has passed and is not able to arbitrate, siblings sometimes become litigious or certainly contentious with each other. While it is not possible to eliminate every cause for strife, addressing areas like those above with a client may help preserve the family legacy and family harmony.
About the authors
Jay Richardson, JD, CPA, CMA, CFM, CGMA, PFS, is a partner at Cosgrave Vergeer Kester LLP, Portland. His law practice focuses in the areas of business and transactions, taxation, estate planning, employee benefit plan consulting, and real estate.
Deanna L. Franco, JD, is an attorney with Cosgrave Vergeer Kester LLP, Portland, licensed in both Oregon and Washington. Deanna’s practice focuses on estate and tax planning, probate, and trust administration (including tax compliance), guardianship and conservatorship proceedings.
² A corollary situation can arise when the client does not leave anything extra to their child-caregiver. What happens if the child-caregiver files a claim against the estate for compensation? Under the law, absent a written agreement, care provided by a family member is presumed to be gratuitous.
³ A fiduciary in this article refers to anyone who will be in a fiduciary or similar position to mom or dad: trustee, personal representative, agent under a power of attorney, health care representative, etc.
By Jay Richardson, CPA, and Deanna L. Franco, Cosgrove Vergeer Kester LLP