It’s a Clear Schedule, Right?
If you’re like most parents, you’ll probably make gifts or loans to your children. Most parents are also concerned with maintaining equality at the time of their death. As such, it can make good sense to provide for an offset of the shares of each of your children so that after making an adjustment for gifts and loans, each child will still receive an equal share of the estate.
That sounds fine in theory, but in practice, adjustment provisions often result in litigation.
In the case I was involved in, an elderly widow had five children and a substantial estate. Her two eldest children, which were from her first marriage, did well financially. The widow never made any gifts or loans to these children and named them co-trustees of her trust. Call it their reward for responsibility!
Her youngest three children, who were from her second marriage, hadn’t fared as well, and each borrowed funds from their mother in varying amounts. Some of the loans had been documented with promissory notes, and others hadn’t. Some transfers by the widow might also have been considered gifts.
About 30 years before her death, at a time when interest rates were quite high, the widow executed her trust. She included a schedule of gifts and loans. She provided that all loans (but not gifts) would accrue interest at the rate of 10 percent per annum until the date of her death. Upon final distribution, a child’s share would be reduced by the total amount of gifts and loans made to that child, as adjusted by the amount repaid and any accrued interest.
A few years later, the widow executed an amendment to her trust, which made a slight adjustment to the schedule of gifts and loans. No further amendments were made prior to her death several decades later.
Inevitably, the Arguments Begin
After her death, litigation quickly ensued between the children. The older siblings, as co-trustees, contended that the plain meaning of the trust provided for a substantial adjustment of the shares of their younger siblings. Mother’s intent was clear, they argued, and had she wished to reduce the interest, she could have executed an amendment to her trust.
They also claimed that new gifts and loans had been made, which required additional adjustments beyond the terms in the trust. They produced their mother’s written notes, which indicated that repayment had been made on only a portion of some of the notes. The notes seemed to suggest that the widow intended up to the time of her death to give effect to the adjustment provisions under her trust.
All of the younger children objected to the proposal to follow the plain meaning of the trust instrument on various grounds. Some claimed the interest rate was usurious and should be disregarded. Others claimed the statute of limitations had passed or that, in any event, they’d repaid the loans and that their mother had simply not documented such repayments. Still others produced newly executed promissory notes, which they claimed superseded the loans recited in the trust document, at a lower rate of interest.
Finally, there was the argument that reference to repayment opened the door to consider extrinsic evidence in determining the real amounts that were owed.
Few Winners in the End
The result of the litigation was as expected—a Solomonic settlement agreement where some adjustments were made to the shares of the indebted children, but the adjustments were substantially less than those called for under the trust document. There were also the usual broken relationships, an unavoidable consequence of litigation between family members.
Was this fair to the older, more responsible children, who received much less than what the documents expressly provided? Or was it fair to the younger children since, as they argued, their mother shouldn’t have been so cruel in the first place, not to mention the disputes over enforceability and repayment?
Ultimately, I believe that settlement negotiations in this case turned on perceptions of fairness, litigation strategy, budget, and the procedural posture, rather than an objective determination of testamentary intent. Thus, the estate plan failed.
Same Family, Different Dispute
In the same case, the younger children of the widow’s second marriage were Catholic. They strongly believed that their mother, who was also a devout Catholic, should be buried. In fact, they produced evidence that their mother had purchased a burial vault. Their mother’s priest even came forward and shared that the widow had stated that her desire was to be buried.
Unfortunately, the advance health care directive was silent on the widow’s wishes for burial or cremation. It named the older, non-Catholic children as agents. Those children wished for their mother to be cremated.
One of the Catholic children litigated the issue. Of course, in California, the law allows the agent named in the advance health care directive to decide all such issues if the document is silent. Thus, it didn’t matter what evidence was produced, including the priest’s statements or the purchase of the vault.
In our case, once it became clear that the older children’s wishes would be followed regarding cremation, the younger children requested some of the ashes for interment in the mother’s vault. However, the older children refused.
Again, on this point California law is clear—if the document is silent, the agent named in the advance health care directive may decide where to inter, store, or scatter the ashes. The agents in this case had no obligation to comply with this request of the younger children. Tragically, this further divided the children and led to litigation on other issues, dramatically increasing the cost of the administration.
Tips for Getting What You’ve Requested
Keeping these examples in mind, here are five suggestions for creating an estate plan that avoids conflict:
1. Make regular updates to your estate plan. The widow in these cases would have benefited from making more regular updates to her estate plan. With the long lapse of time and the change in interest rates, a dispute was just waiting to happen.
Even though they’re not legally required, regular amendments would have allowed for a cleanup of the gift and loan schedule, as well as a reconfirmation of the intent to charge a high rate of interest.
2. Don’t include provisions that are impractical or impossible. Ask your estate planning lawyer whether the provisions you’d like to include will likely be followed. In other words, the widow’s estate planning attorney should have pointed out that the widow’s children who hadn’t repaid for decades weren’t likely to repay at all. At the same time, the lawyer could have advised not including the provision allowing for a later adjustment of the schedule of gifts and loans.
3. Think outside the box when coming up with solutions. Alternatively, the trust could have provided for specific cash gifts to the widow’s older children prior to an equal distribution of the residue.
The widow in our case probably never thought about making off-the-top cash gifts to her older children. Actually, making such specific cash gifts would have had the same offsetting effect as a schedule of gifts and loans.
At the same time, it would have avoided questions of interpretation. The schedule of gifts and loans was subject to later adjustment, while specific cash gifts to the older children are unchangeable. Had the estate planner proposed specific gifts instead of a schedule of gifts and loans, the widow’s fate might have been avoided.
4. Don’t forget to issue spot. Law school may be decades in the rear view mirror for many lawyers. Nevertheless, you and your estate planning lawyer specifically need to issue spot for classic estate-planning scenarios.
With respect to the health care directive, clearly the estate planner missed a major issue spot in that there was a blended family, with children of two different religious traditions. Be sure you work with estate planners who have experience in the type of family you have—maybe you’ve blended several families; maybe you’ve united several religions, and so on—and who will be more likely to recognize that issues like burial vs. cremation decisions aren’t trivial.
5. Ask your lawyer to share stories to explain what could happen. Sometimes, raw legal advice goes only so far. An excellent tool to better understand whether your plan will work is to hear real-life stories from your estate planning lawyer. What has happened with families who included a schedule of gifts and loans in their estate plan? And what has happened if they’ve created those schedules and failed to update their trust after 20-plus years?
And what was the result when parents didn’t make any choice regarding burial vs. cremation? Has it ended well in the case of blended families that are divided according to religion? Hearing the real-life outcome of these types of questions will help you determine the best choices to make in your own estate plan.