If an estate is not planned properly, families can break up over inheritance disputes or lose the money in heavy estate taxes that could have been avoided.
I recently interviewed Jeff Condon, estate attorney and author of Beyond the Grave: The Right Way and the Wrong Way of Leaving Money to Your Children, one of the best-selling books about estate planning, on The Goldstein on Gelt Show.
To find out what Jeff Condon advised, read the transcript of our interview below. To listen to the interview, click here.
Doug: Jeff, what is the wrong way to leave money to your kids?
Jeff: Wow, Doug. What a loaded question. What is the wrong way to leave money and property to your children and other heirs? Let me put it this way. If you have an inheritance plan that treats your children unfairly, you have created a wrong inheritance plan. And that may sound easy to stay away from because if you have three kids, and you say, "Okay, Jeff. I have three kids. I'm going to leave everything to them equally, one third each, what's the problem?"
The problem is that you can inadvertently still treat your children unfairly even though you may feel that you have treated them mathematically equal. For example, if you have three children and you only appoint one of them to carry out the inheritance instructions after you're gone, you have treated your children unfairly.
Doug: No kidding.
Jeff: Because in their minds, to the children who have not been included they will think, "Gee, mom and dad didn't love me as much. They didn't trust me as much, or they didn't think I was smart enough to do the job." So unless you had a compelling reason to not appoint all of your children as your after-death agents to carry out your inheritance plan, name all your kids.
Doug: Okay, let's talk about that a little bit, because I do have a good reason not to do that. I'm talking about me personally, but in general in my day job, Jeff, I'm a financial advisor. I sit in Israel and I work with people mostly who live here but they have U.S. brokerage and IRA accounts and assets in the United States.
I found, when unfortunately clients die, that it's easier to deal with just one executor rather than three. When things are easy, it's easier for the financial firms to deal with it and therefore the orders get carried out quicker. Does this create a real problem?
Jeff: It really depends on your school of thought. Because, Doug, the vein that you have talked about is that of efficiency. It's, "too many cooks spoil the broth." It's easier to deal with one. It's easier to get signatures of one of the after-death agents than to get all of them. So I absolutely see that point.
But what people often fail to remember is that when they die, their children are no longer their children. They are just people dividing money. And when that happens, family loyalty goes out the window and it's a whole new ballgame. Never more does this arise than in this power arena. It's not an unequal sharing of money. It's an unequal sharing of power. If that power is not shared equally, I promise you, you will have likely destroyed the relationship between your kids.
I say efficiency is great, but at the cost of family cohesiveness and togetherness. It may be an extra hassle to get signatures from everybody, but that can be alleviated by modern technology, by fax, by email, or what have you. It may take a little bit more time, and it may require some more effort but ultimately, in my view at least, that effort is worth it in order to keep the family together and preserve family harmony.
Doug: This is very interesting. I'm very happy we're having this discussion because oftentimes I tell people, your lawyer's going to tell you what to do and I do not give legal advice because I'm a financial advisor.
But I'll even bring my office manager into the meeting because she's the one who actually handles the affairs after a client dies, and I'll say, "Tell me what you think." And we'll tell you what actually has to be done, what the work is that the financial institution has to do after someone dies, because the lawyers are the ones who do it before you die and make the plan.
It's just interesting in our discussion to see that there really are different ways of looking at it. One of them is what's most convenient. and one of them is maybe, what's the most legally correct way to do it. Jeff, tell me, what's the problem if one kid has more power, if he divides the money equally?
Jeff: When you name that one child as the after-death agent, in the United States that person is called the "successor trustee"; the one who is charged with carrying out the instructions.
When you give that child, one out of three, or even two out of three, or two out of four, you are giving those children a lot of power because they have the power to decide what attorneys are going to be used, what accountants will be used, when the distribution of the inheritance takes place, and what each share of the inheritance will be.
If you have three kids, the successor trustee has the power to determine what each of their shares will be. That successor trustee can say, "Okay, as long as it's roughly equal, I will take the real property and you two can have the stocks." It's all equal, but those other kids may not like that. They may want an equity position in the real estate. And that power child has the power to decide what assets will be sold to pay the estate tax or what administration expenses are necessary or not necessary.
I could go on, but the fact is there's a lot of decision-making authority that is in the hands of the few, and if the others are not happy with those decisions I promise you that they will put pressure on that child to the extent of even filing a lawsuit against their power sibling to prevent him or her from making various decisions.
Doug: Wow, I haven't seen that yet, certainly not in my own practice, but I have heard about that. We're talking with attorney Jeff Condon, who wrote the book Beyond The Grave: The Right And Wrong Way Of Leaving Money To Your Children. Jeff, that's one very interesting fact that was a different way of looking at it from how I've always looked at it regarding who to set up as the executor or the successor trustee in your estate. Now Jeff, let's switch gears a little bit. One of the issues about which a lot of people say, "Thank God I don't have to worry about this anymore," is estate tax for people who aren't worth $5 or $10 million as a couple. But are there tax issues that people do need to worry about in setting up their estates?
Jeff: Absolutely, Doug. This is something I deal with in my practice on a daily basis. I don't want to get too technical, but it's likely that a lot of people who are listening now have a living trust. And in this living trust, with married couples, a married couples living trust, there will be a provision in there which says that when the first spouse dies, the trust estate, the assets in the trust bucket, will split into two separate sub-trusts.
One of the sub-trusts is owned by the surviving spouse. That half goes into the surviving spouse's trust. The other half goes into the B trust, or a bypass trust, or an exemption trust. Whatever it's called, the purpose is the same. The purpose of that B trust is to preserve the estate tax exemption amount of the first spouse to die. Why is that good? So that when the last spouse dies, the assets in that B trust will not be counted in that surviving spouse's taxable estate.
The result is that there will be no estate tax when the surviving spouse dies. Now that's a good thing, and that's just fine. However, the laws in the United States have changed and you don't need to do that trust split anymore. You don't have to do it. Why? Because the rule is that everybody has an exemption amount of 5.45 million. So if the surviving spouse alone has an estate of less than 5.45 million, we don't need to preserve dad's exemption amount with the B trust.
And that's great, and that makes life a lot easier because these B trusts sometimes are a pain to set up and to maintain for the rest of the surviving spouse's life. It's a pain. But here's the deal. If these trusts still say that you have to set up a B trust, then they still have to set up a B trust even if they don't need one.
Doug: So what you're saying is that people who did this a while ago, when it was a popular way of setting it up, actually have to revisit their trust and perhaps rewrite it?
Jeff: Absolutely. They have to visit their estate-planning attorney. Husbands and wives who are listening to this, who have a living trust, a joint living trust, have to see their lawyers soon so they can say, "Instead of making this trust split mandatory, we want to make it optional. Because laws change, maybe we'll go back to an exemption amount that's super low, like a million dollars, as it was a number of years ago."
We should at least have the option. The surviving spouse should at least have the option of splitting the trust estate into the survivor's trust and the exemption trust. But if it's mandatory, then they say, "Mr. Condon, do we still have to do this?" The surviving spouse, after the first spouse dies, asks this and I say, "Yeah, kind of." "But we don't have to do it." "I know." "But we still have to do it." "Right." Because that's what the trust says.
I have actually had to go to court after the death of a first spouse to get the judge to sign an order amending the trust in order to show that the surviving spouse does not have to do the mandatory trust split. And that cost a lot of money.
Doug: It would have been much easier if they just dealt with it while everyone was still alive and straightened up the trust and the document. A living trust like you're describing is a great document for a lot of people, but I think it's important that everyone from time to time and according to what you're saying now, Jeff, people have to take the time and review it because things do change and they really have to make sure they're up to date.
One of the things, Jeff, unfortunately is that we are up to the end of our time here. But I know that there's a lot more information that you have to share with people about handling their estates. Tell me in the last few seconds, what's the best way for people to learn about what you do and to keep track of what you're doing?
Jeff: Well, Doug, thank you so much for this opportunity. I have written two books on estate planning and inheritance planning. One of them is the best-selling inheritance planning book in American publishing history. As you mentioned in the beginning, Doug, it's called Beyond The Grave. The subtitle is The Right Way And The Wrong Way Of Leaving Money To Your Children And Others. I am proud that the Wall Street Journal called it the best estate planning book in America at one point.
The other book, which came out in January of 2016, so it's still relatively new, is called The Living Trust Advisor - Everything You And Your Financial Planner Need To Know About Your Living Trust. People can look up both those books on Amazon of course, and on any other book selling website.
My personal website is condonandcondon.net. And if people want, they can ask me questions. I do not charge to answer brief questions over the phone or by email, and I invite people to take the opportunity to talk to a lawyer for free. There's no catch. I know it's hard to believe, but there's no catch.
Doug: Alright. I really appreciate that. Jeff Condon, thanks for taking the time. We'll put links to all of that at the show notes of today's show at GoldsteinonGelt.com. Thanks again.