The reality of estate planning practices is that often, for business and other reasons, estate planners must represent clients in creating plans that, at least on the surface, appear destined to result in a challenge. In those cases, planners should take defensive actions to protect their clients postmortem and themselves from malpractice claims. This article provides an overview of strategies to protect a planner and his or her clients and their wishes against those challenges.
Knowing the Family
At initial planning meetings, a planner should discuss the family's dynamics. For example, key questions include:
* Is this a second or later marriage for the parties?
* Who are the former spouses and what are their claims?
* Who are the children and what are their relationships and expectations?
Specifically, the planner and clients should explore the topic of the children and their needs and views. Planners should be frank with their clients as to the children's likely expectations. Children of a prior marriage may expect a substantial percentage of the inheritance. Focusing clients on the viewpoint of these children will allow the drafter to refine the estate plan.
Understanding Existing Obligations
A planner should examine existing obligations under a divorce agreement. Divorce agreements are not always drafted clearly. A planner should not take at face value statements by clients such as, "I've taken care of my obligations," or, "There are no obligations remaining." Sufficient time should be spent examining these agreements. The additional fees involved are far outweighed by the risks of ignoring this area.
This review is important for two reasons. First, the current husband and wife need to ensure liquidity and specifically allocate assets to satisfy those obligations.
Second, the agreements provide estate tax planning opportunities. Specifically, payments to a former spouse required under a divorce agreement constitute deductions for estate tax purposes. Code §§ 2516, 2043(b)(2). Less certain are payments to the children of a prior marriage. Ordinarily, these payments are not deductible because the children are the natural objects of a parent's bounty. Payments to minor children in discharge of support obligations, however, could be deductible under Code § 2053(a)(2). Cf. A.F. Leopold v. United States, 510 F.2d 617 (9th Cir. 1974); Commissioner v. Weiser, 113 F.2d 486 (10th Cir. 1940); Chemical Bank New York Trust Co., Executor v. United States, 249 F. Supp. 461 (S.D.N.Y. 1966).
Counsel should draft estate planning documents properly to provide the best opportunity to claim this deduction. For example, a will could direct the executor "to pay to my (minor) children A, B and C the amount of $_________ in discharge of support obligations that I owe to those children pursuant to Article ___ of the Divorce Agreement."
In most situations, a divorce settlement will mandate the amount of support if the parent dies before the minor reaches maturity. Further, a practitioner should expressly provide whether support provisions are in addition to bequests that the client otherwise makes to these children under the estate plan documents.
Balancing Competing Interests
If there are children from a prior marriage, a parent must make a difficult decision. What portion of the estate should go to that person's current spouse and what portion should go to the children from the prior marriage? Children, who are not typically involved in the planning process, may be unhappy with their share. To protect against a challenge from the children, the client and counsel can structure the estate plan strategically. Different considerations come into play depending on whether the children are minors or adults.
If the children are adults and the parent has a good relationship with them, the parent should consider telling the children what they are to receive under the estate plan. Eliminating surprise may eliminate a will contest. The parent may be reluctant to let children know, for example, that they are going to receive only one-quarter of the estate. Nevertheless, an estate planner should encourage the client to consider notifying the children of that result. The planner and client should discuss the possibility of a premortem family conference of the kind that is discussed later in this article.
If adult children do not have a good relationship with the parent, then the issue becomes more involved. Is the parent going to bequeath anything to those children? It may not be a winning strategy for a parent to leave a minuscule amount, accompanied by a certain level of vicissitude. For example, a bequest of "$10,000 to my daughter Jean, because she neglected me during my life and is otherwise not deserving of any more money" may result in a will or trust challenge. Alternatively, a statement such as, "I have left no property to Jean hereunder" is sufficient for recognition purposes and less inflammatory.
If the client is making a more substantial bequest, then the bequest should be made with no editorializing and accompanied by an in terrorem clause. For example, a bequest of $100,000 to Jean (one of four children) may constitute 10% of the estate. If an in terrorem clause accompanies the bequest, there will be a strong disincentive for Jean to challenge the document to obtain more funds. With a properly drafted in terrorem clause, Jean risks losing her $100,000 bequest and should not institute a challenge to the trust or will. A sample in terrorem for a will is as follows:
In Terrorem. Notwithstanding anything herein to the contrary, if any beneficiary contests the terms of this Will, including, without limitation, filing a contest of admission of this Will to probate under Section 8-1 of the Illinois Probate Act (or successor provision thereto) or filing a petition requiring formal proof of this Will under Section 6-21 of the Illinois Probate Act (or successor provision thereto), that beneficiary shall not be entitled to any property under the terms of this Will, and for all purposes of this Will, that beneficiary shall then be deemed to have predeceased me.
If it is not overreaching, an in terrorem clause is valid in many states. See, e.g., Estate of Wojtalewicz v. Woitel, 418 N.E. 2d 418 (Ill. Ct. App. 1981) (in dicta, upholding the validity of in terrorem clauses in Illinois, but striking down the clause in issue as too broad and void as against public policy). Not all jurisdictions, however, respect in terrorem clauses.
The intended result of an in terrorem clause may not be available for minor children. A minor will be represented by either a guardian or personal fiduciary. The concept of creating a sword and a shield with a bequest and the in terrorem may not act as a disincentive to challenging the will or trust. The personal fiduciary may regard it as his or her obligation to make the challenge. Trusts then become the vehicle of choice.
The question of whether funds end up being used by the guardian, for the guardian's own benefit, or for the children, becomes an issue. If the guardian is the former spouse, that concern can be real. The planner and client should consider leaving the funds to minor children in trust, with tight and specific directions as to the use of the funds.
Estate Tax Burden
A planner and his or her client should clearly understand the burden of estate taxes and set it forth in the document. The planner has various options. Taxes can be allocated against those beneficiaries who caused the tax (i.e., the nonspousal and noncharitable beneficiaries, pro rata or otherwise), or taxes can be allocated pro rata among all beneficiaries.
The word "apportionment" does not exist in a client's vocabulary. Removing the patina from this lin-guistic conundrum, the client has two primary options. First, the spousal amount can be a determined amount, without any burden to pay estate taxes. It can be a specific sum or a specific fraction of the estate. For example, "I give to my husband the sum of $500,000." A planner can explain this to a client as the husband receiving $500,000, regardless of taxes. Similarly, a will can provide for a bequest to my wife "one half of my gross estate." If the gross estate is $3 million, the wife will receive $1.5 million, regardless of taxes.
The other possibility is to indicate that the spousal share should be burdened with taxes. This is more difficult to explain to a client. An interrelated computation is necessary to determine the spousal share in a taxable situation. Ultimately, if a spouse is left a percentage of the estate, the spouse will receive less than a percentage of the gross amount.
For example, a bequest to the spouse of "one-quarter of my gross estate, after sharing in the taxes," means the following with regard to a gross estate of $2 million. The spouse will not end up with $500,000 (one-quarter of $2 million). Instead, the spouse's one-quarter must be calculated net of estate taxes. The spouse will receive $400,352 (using the 1998 credit amount).
The formula for the interrelated computation involves two variables and is as follows:
MD = RT - TR [GE - § 2053 deductions - MD - closest amount over which GE less MD is greater in right hand column] + credits - left hand column tax corresponding to "closest over" right hand column number where MD is the marital deduction, RT is the residuary trust, TR is the tax rate and GE is the gross estate.
In a second marriage situation, there is an incentive to leave funds in trust for the benefit of the surviving spouse. As a planning strategy, this certainly makes sense. The assets can be available for the spouse's benefit. At the spouses's death, the assets can pass to children from the former marriage as well as children from the current marriage. This structure is most often achieved in the QTIP context.
The terms of the trust must provide that the surviving spouse receive all accounting income at least annually (e.g., interest, dividends, rents and royalties). Distribution of principal to the spouse is an option. The standard can be either narrow or broad. A narrow standard, for example, is one related to health, support, maintenance or education. A more expansive standard would include comfort, welfare or best interests.
The expansive standard can be used if the surviving spouse is not the trustee. If the surviving spouse is the trustee, there are tax and non-tax reasons for not using an expansive standard. An expansive standard could create estate tax inclusion for the non-QTIP part when only a partial QTIP election is made. From a non-tax perspective, the surviving spouse could have enough control over a broad standard to terminate the trust by making a distribution to himself or herself. A distribution in this fashion would frustrate the decedent's intent that some corpus pass to the children.
The ability of a third-party trustee to make a principal distribution for the surviving spouse's benefit under a broad standard is a workable strategy. It gives the trustee discretion. Courts give wide latitude to trustees in determining when and whether to make a distribution.
Estate and Gift Tax Techniques
An interesting combination of estate and gift tax savings plus prevention against a will or trust challenge involves the use of sophisticated techniques such as family limited partnerships (FLPs), qualified personal residence trusts (QPRTs), grantor retained annuity trusts (GRATs) and sales to grantor trusts. Lifetime gifting techniques will serve multiple purposes, and planners and their clients should consider them as will or trust contest shields. In an effective and pragmatic way, transfers during life are less likely to be challenged postmortem than are property transfers under the terms of a will or a living trust.
First, if the lifetime transfer technique is effective, the asset will not be in the grantor's estate at death. The testator does not own gifted property at the date of death. It is hard for one challenging a will to bring that property back. The challenger may not even know that the asset exists. For example, assume a sale to a grantor trust of an illiquid asset for a fixed cash amount. If properly structured, and assuming appreciation, the sold asset may be three times more valuable at the date of death than the sale price (conversely, it may be three times less valuable). At the decedent's death, all that is in the estate is the cash or its reinvestment. One challenging the will may not learn of the sale or try to set it aside.
Second, there may be a different challenge to recover an asset given during life than the challenge that forms the basis of a will or trust contest. For instance, a will contest may be successful on grounds of lack of testamentary capacity, improper execution or undue influence. Generally, a gift transfer must be challenged on its facts. The plaintiff must prove the charge of undue influence or lack of competency to make the transfer separately for each transfer (assuming that the transfers are not made on the same date as the execution of the will or the trust).
Third, invalidating gift transfers will often have negative estate tax consequences, yielding less money to the proponents of the challenge. One may be less inclined to try to obtain a dollar if he or she will only receive 45 cents (assuming a 55% marginal estate tax rate).
How to Disinherit Beneficiaries
The road map for disinheriting a beneficiary comes directly out of the "how not to" case law on this topic. For example, disinheriting a spouse in Illinois becomes a delicate proposition in light of spousal renunciation rights. See, e.g., 755 Ill. Comp. Stat. 5/2-8.
Children are easier to disinherit. Even under pretermitted heir statutes, a testator or grantor is generally free to leave, or not leave, any amount of his or her estate to a child. See, e.g., 755 Ill. Comp. Stat., 5/4-10. To avoid a claim of a pretermitted child, the testator should mention all of his or her children by name, as well as their birth dates, the names of their spouses and children and their residences. That shows that the testator knew the natural objects of his or her bounty and was not mistaken about the existence of a child.
The case law is replete with cases standing for the proposition that "less is more" in terms of disinheriting, or perhaps what should be called "de-inheriting" (giving less than what is expected to), a beneficiary.
Assume, for example, a client who does not want to leave any property to her daughter because the daughter has adequate resources elsewhere.The client asks the lawyer to put in the will: "My daughter is to receive only $10,000 because she has adequate funds elsewhere." The will so provides. When the client dies, the daughter challenges the will on the grounds that her own $200,000 does not satisfy "adequate funds elsewhere," that the testator's intent is ambiguous and that the daughter would have received more money had the testator known of her "reduced" resources. The daughter may win on that challenge. This language on resources becomes an unnecessary basis fo the daughter to elevate herself in the litigation. The bequest should have simply said, "I give $10,000 to my daughter." No reason is necessary.
Practitioners should also encourage clients not to punish disinherited heirs by stating the reasons for disinheriting them. Statements such as, "my son Bill is a philanderer," may bring joy to Bill's parents. Those statements may be detrimental to the real beneficiaries, however, if Bill prevails in a defamation action against the decedent's estate. Further, these statements may also evidence some incapacity that allows the claim to survive a summary judgment motion. Another provision to avoid is the nominal bequest. Leaving a minimal bequest to one who is not an heir might give that person standing to bring a contest.
Will and trust challenge cases often have one fact in common. The beneficiaries are surprised and angered over the client's decision. A lawyer should consider the possibility of defusing this anger before the client's death.
The Premortem Conference
One of the often played scenes on television is the reading of the will. Curious and desirous of their expected inheritance, the grieving family members gather around a table with a stately old lawyer, who proceeds to read the will verbatim. Within minutes, the scene evolves into the controversies over the dispositions under the will. The reading of a will is an anachronism. Nevertheless, as with other estate planning practices, it is important to extend that anachronism into a modern, useful equivalent: the premortem estate planning conference.
Most estates are nonconfrontational in their dispositions to family members. Generally, the plan treats children equally, it provides for the surviving spouse, and it contains what practitioners think of as fairly standard provisions in the documents. Nevertheless, even these estates may still be extremely complicated, especially if estate tax savings is an objective. Further, no matter how standard and understandable to the drafter, will or trust provisions often pose mysteries to the client and his or her family. A lawyer can eliminate part of the mystery in discussions with the client. Estate planning documents, however, will remain strange to the family members not participating in the estate planning process.
In all situations, including simple dispositions and those in which the client either establishes complicated tax savings mechanisms or makes disproportionate distributions to family members, the premortem conference provides an effective strategy to achieve many estate planning goals. This type of conference is fraught with uncertainty and can prove to be difficult. Clients do not like to confront their own mortality and are often protective or secretive about their financial affairs. Hidden emotions and rough spots between siblings and between the client and his or her children can surface.
Avoiding a premortem conference solely because of the potential pitfalls will likely defer the inevitable. Hidden tensions that exist between siblings are likely to be a problem postmortem. During a parent's life, children in-evitably tend to respect the parent's dictates and, economically speaking, are subject to the parent's discretion. Most estate plans have enough revocable features in them to allow a parent to change gifts depending on the exhibited attitudes of the children. This retained parental control functions as a motivator to ensure cooperation in premortem conference. After a parent is gone, it is much more difficult to deal with sibling conflicts than during the parent's life.
The goals to be achieved by the premortem estate planning conference include (1) the elimination of anger-producing surprises to the beneficiaries and consequent malpractice and other challenges to the drafting lawyer; (2) an understanding by the family members of what is intended by the estate plan; (3) continuity between the estate planning practitioner and family members in an effort to ensure coordination of objectives after the testator's death; (4) a coordination of the estate planning objectives between both senior and junior family members; (5) an understanding by senior members of what junior family members may really desire; and (6) an increased client awareness and attention to the importance of estate planning and the nuances of the estate planning process.
First among the goals of the planning conference is the elimination of surprise. If the estate plan is nonconfrontational because family members are treated equally or consistently for tax purposes, the conference focuses on three areas: fiduciaries, taxes and trusts.
Beneficiaries, for example, may view a corporate executor as expensive and unnecessary. The parents, however, may desire a corporate fiduciary for a variety of reasons, including protection of the beneficiaries, centralization of management, efficiency and professional investment advice. In the parents' minds, the additional expense of a corporate fiduciary may outweigh the cost. The communication of this reasoning premortem to the ultimate beneficiaries could eliminate potential resentment or misunderstanding in the future.
Trusts are another estate planning mechanism that often surprise beneficiaries. Beneficiaries may be upset hat a trust is being created for their benefit. The trust may last until a certain age or even for a lifetime. Premortem discussion allows the parents to explain the reasons for the trusts, which could include: creditor protection, tax benefits, professional asset management and even protection against a beneficiary's spend-thrift nature.
If the trust concept is not palatable to a potential beneficiary, further explanation of the trust concept should assuage those concerns. For example, the worst result with a trust held until a beneficiary is age 35 is that the trust is unnecessary or superfluous because the concerns the trust creator anticipated did not materialize. The lawyer can demonstrate that there need not be any loss of funds to the beneficiary by having the prop-erty held in the trust. With discretionary distribution authority, the trust can either be terminated or sufficient distributions made to the beneficiary during the trust's existence.
A third subject that is frequently misunderstood is the tax savings feature of an estate plan, in particular, a generation-skipping tax plan for the surviving spouse. Discussing generation-skipping premortem is relevant with children because they may otherwise believe that they should receive their bequests outright. Often, the plan will not be acceptable to a child because of the child's perceived limited financial situation. In that event, the parents may wish to reconsider the propriety of the plan. Other times, the children may not find the plan attractive because of their dislike of trusts or loss of control over their inheritance. In that event, the discussion may focus more on the long-term benefits to the family.
Another confusing aspect of tax planning is the trust for the surviving spouse. Although both spouses may have discussed this topic at an earlier meeting, a premortem estate planning conference often raises unvoiced uncertainties. The children and other family members typically ask how the principal will be distributed to the surviving spouse during the spouse's lifetime. Who makes that decision? What control, legal or practical, does the surviving spouse have? As important, if the children are to be beneficiaries with the spouse of a credit shelter trust, the conference allows for a discussion of the future management of that trust.
Continuity with Family Members
Another goal of the premortem conference is to develop continuity between the estate planner and the older and younger generations. In a family business setting, this is often ensured by a discussion of the disposition of business assets.
The distribution of property really has two elements: first, developing a plan under the estate planning documents to dispose of property; and, second, carrying out this plan. If the estate planner is to continue as the postmortem family advisor, the family as a unit should know and be comfortable with the estate planner. For a third party to step in postmortem to administer assets can be inefficient and can result in some parts of the estate plan not being carried out.
Structure of the Conference
Preparing for the premortem conference is crucial. There should be a thorough understanding between the older generation family members and the estate planner on what will be discussed. If some topics are off limits, such as the size of the estate, everyone should understand this and undertake a clear strategy to avoid those topics. The planner should prepare a written agenda listing the items to be discussed. The clients should review and approve that agenda.
The timing of the conference is essential. For example, conferences may need to be planned six months or a year in advance when all the family members will be in the same city. It may be appropriate for the estate planner to travel to another city.
The parties should consider the time of day of the conference. For ex-ample, a conference held at 1:00 p.m. may run longer and be more open ended. The author's experience indicates that the best time is toward the end of the day, such as at 4:00 p.m. A defined ending time is essential, with an understanding that the family may get together after the meeting without the estate planner for further discussion. Alternatively, there could be a discussion in the morning with the family going out for a meal (food tends to be an incentive for compromise). A Saturday meeting is also possible. The author's experience indicates that families should avoid night meetings. The participants may be mentally fatigued by the day's activity, and open-endedness is a problem.
An estate planner will often meet client reluctance to discuss estate planning aspects with other family members because of privacy concerns (at times extending to the spouse). In that situation, there are two issues. Are the client's concerns well founded? And how should the estate planner approach this?
On the first issue, there may be an inherent inconsistency between a testator's desire to "let sleeping dogs lie" and the ultimate disposition of the testator's property. In an estate plan, except to the extent that the plan is revocable, sleeping dogs will be awakened. It may be better to awaken them gently and purposefully, rather than abruptly at death.
The second concern can be more difficult. Aside from gently encouraging clients to engage in a premortem conference and to discuss the benefits, the estate planner should not pressure the clients. Prior refusals or inertia do not necessarily preclude a conference in the future.
In an estate plan with a disproportionate treatment of beneficiaries, the parties must approach the premortem estate planning conference with even greater care. Depending on the circumstances, perhaps not all family members should attend. The possible reactions of nonattending disgruntled legatees may be an important topic of the conference.
A conference can assist in avoiding malpractice allegations and displeasure in the future. The beneficiaries will learn that the estate plan, which might otherwise seem inexplicable in the future, was in fact thoughtful, uncoerced and desired by their parent. The conference can include a discussion of the different species of property--probate property, joint property, insurance and retirement plan benefits. In today's estate planning environment, property tends to go to various places, woven into one overall estate plan, but not necessarily consistent with the main estate plan documents, the will and trust. The diaspora of assets does not mean an estate planner ignored the wishes of his or her client. It is merely a testament to the complexity of current estate planning vehicles.
Documentation, Implementation,Capacity and Execution
The execution of a will is a significant occasion. Clients, however, may view this process with informality. To counter this informality, counsel should make clients aware beforehand of the mechanics of the execution and the extent of the witnesses' role.
The predominant statutory re-quirement is that the testator declare to the witnesses that the document is his or her will. The more information that the witnesses have about the testator's assets and the reasons for any seemingly bizarre or unequal dispositions, the better. Although clients have a need for privacy, the more that they are willing to discuss their assets and the dispositions of those assets, the greater the value of the attesting witnesses in a contest.
Before the execution, it is helpful for counsel to explain to the attesting witnesses the elements of testamentary capacity. One practitioner suggests asking questions that go directly to those issues, such as: "When, where and to whom were you married?" "What are your children's names?" "In what business are you or were you engaged?" Jeffrey L. Crown, !Battle Stations! Evasive, Defensive and Attack Maneuvers for Will Contests, 23 U. of Miami Philip E. Heckerling Institute on Est. Plan. 600 et seq. (1989).
Having the testator handwrite the date, time and place of execution on the will, rather than having these items typed, could evidence the testator's understanding of the time and place of signing.
A lawyer who anticipates a possible contest must act ethically and thoughtfully during and after the planning and execution of the dispositive instruments. The lawyer will be a central, if not the key witness in a contest. Missing documents may give rise to claims of deliberate destruction of unfavorable evidence. Care should be taken to preserve all documents, including the client's financial and medical information (but not necessarily drafts). Handwritten notes by the client of the client's financial transactions preceding the date of his or her will, with details of transactions, provide excellent evidence that he or she knew the nature and extent of his or her assets. Counsel should review and retain all correspondence between the client and his or her financial institutions, family members and beneficiaries.
Preparation, common sense, intrafamily communication, good judgment and talking through the tough issues are the elements necessary for a practitioner to protect against will or trust challenges. To accomplish these elements, estate planners must be more than just sounding boards for their clients. They need to be strategists as well.