March 2012 issue
Estate and inheritance issues can turn even the closest of siblings into mortal enemies.
By CAREN CHESLER
And nothing brings those feelings to the surface like the death of a wealthy parent and the ensuing breakup of the estate. Consider a Maryland family, who we’ll call the Worthingtons. They had four children. In the family’s early years, the father made less money, so the two oldest kids were forced to live very humbly. By the time the second two children were born, the father was making a lot of money as a well-respected lawyer in Washington, D.C. The younger children grew up on an estate, with a large house, horseback riding lessons, membership at a country club and private school. The older children went to public school and attended state colleges, if they went at all. The only son, who lived on the parents’ estate and became a bricklayer—despite his father’s protests—was aggrieved because when the father died, he left a will that divided his money evenly between the four children rather than giving him and his older sister a larger chunk to compensate for the frugality they were forced to endure.
“The son felt like, as parents, they had failed him. He felt like he should have gotten more,” says Paula Langguth Ryan, a mediator based in Odenton, Md., who specializes in estate and inheritance conflicts.
Ryan notes that arguments about money are usually less about money and more about love. The boy was a source of disappointment to his father, which the son undoubtedly felt.
The death of a parent often shifts the family dynamic, making issues arise that appear to be based on current events but in fact are perceived slights that occurred years ago and are now playing out as the parents’ estate is doled out.
“The children can be 60 or 70 years old, and they’re talking about events that happened when they were 15,” says Michael Dribin, a trusts and estate attorney in Miami. “There’s this deep-seated animosity that is just beneath the surface between these siblings that just stays beneath the surface as long as one or both parents are alive. But once both are gone, it’s like that glue evaporates.”
Dribin says he doesn’t know which troubles him more: the fact that fights arise or that siblings will go to war over things like jewelry or artwork. While occasionally siblings will reconcile, most of the time they do not, he says.
“They’ll destroy family relationships forever and have no realistic prospect of reconciliation, over the most trivial stuff,” Dribin says.
Some parents don’t want to treat the children equally. Sometimes it’s about disproportionate need, says Cicily Maton, founder of Aequus Wealth Management in Chicago. Say that one child went to work on Wall Street and did extraordinarily well while another became a teacher and doesn’t have enough money to pay for his child’s college.
The parents may decide to leave more money to the child who has less. But the one who has more money doesn’t always understand that. He’ll equate money with an expression of love, thinking the parents preferred the poorer sibling, Maton says.
“The Smothers Brothers’ little dialogue about how mom loved you best is played out about 50% of the time in settling estate plans,” she says.
Disparate treatment looks particularly suspicious if the parents change their will shortly before they die, after one child has moved in with them to take care of them. That child may live closer or is unmarried or unemployed and thus able to drop everything to help the parents, but the siblings may not see it that way when that child is left a bigger share of the estate.
“It does almost always cause a division in feelings about the one who supported the ailing parents,” Maton says.
Dribin says he sees a lot of these cases: caregiver siblings who abandon their own family to move in temporarily with the parents. They drive them to their doctors, do their food shopping and negotiate with home healthcare workers. They’re so attentive, the parents sometimes change their will as a show of gratitude. The question that nags the siblings, though, is did something improper happen that led to that sibling getting more? It doesn’t help if that sibling was struggling financially, Dribin says.
“There are people who have reasons to want to treat their children unequally, and that’s certainly their right, but the children being treated unequally will not necessarily appreciate that,” Dribin says.
Failing to appreciate it is putting it mildly. They’ll likely sue over it, in an attempt to set aside the will, claiming their siblings exerted undue influence over their parents. Either that or they’ll have to prove their parents lacked mental capacity when they made out their wills. Those are basically the only two grounds under which someone can sue if they’re unhappy with their share of the pot.
“It’s not easy to determine what was in mom’s or dad’s mind, or how much they were being unduly influenced. And mom and dad are no longer around to say whether they were unduly influenced,” Dribin says. “I have learned over time not to jump to the conclusion that the child who was there and got the lion’s share did anything improper. Very often, when you investigate the facts, there was no one else to step in.”
Sometimes the parents aren’t even sick when one child moves back home, and his siblings fear he or she is siphoning funds out of the estate before the parents are even dead. One financial planner says he knew a woman in her 80s whose son moved back into the house and one of the first things he did was throw out the caretaker, because he saw the expense eroding his mother’s estate and thus his inheritance. His siblings caught wind of it, threw the brother out and got the caretaker back.
In some instances, one child has borrowed money from his parents, for, say, a business venture, and the other siblings see that as reducing the size of the estate and thus their inheritance. Some clients take such loans into account when doing their estate plans, but it’s the exception and not the rule, estate attorneys say.
John O’Grady, an estate attorney in San Francisco, says in his 25 years of practice, he’s probably seen 100 cases in which a child moves back home to take care of the parents, and he still isn’t clear whether their intentions are selfless or selfish. They wind up with complete access to the parents, in some instances gaining access to all the money and accounts. The parents may even give them a credit card or other gifts, and the ability to sign checks.
“It happens routinely. And then mom and dad die, and the other siblings find out about all these gifts, and they get really angry, because they feel like the caregiver kid took advantage,” O’Grady says.
The two most contentious issues that come up in the estate process are how to handle the family home and the family business. Real estate is problematic because other assets, like stock, can be liquidated, so those wanting cash can simply sell. But when children with vastly different financial situations must decide what to do with a shared piece of property, those income disparities will weigh on that decision. A child earning a substantial income, for instance, might want to keep the parents’ beach home in Nantucket, while the child with less money may not be able to afford the taxes and upkeep and will want to sell it. It doesn’t help when the real estate is the family home, and the parents have a directive that says, “Whatever you do, don’t sell the family home.”
“That’s probably the worst thing they can suggest,” says John Hillis, president of Hillis Financial in San Jose, Calif.
One solution, advisors say, is for the parents to put money into a trust that would cover the taxes and maintenance costs for, say, five years, so the children can assess whether they really want to keep the property.
Of course that presumes no one is living on it. Sometimes, one child will move into the parents’ estate and live there rent free. He’ll refuse to move out when his siblings want to sell the property, yet he won’t have the money to buy them out.
Ryan, the mediator, is working with a family of four children in Texas in just that situation. One of the two sons had an estate on the Gulf of Mexico that was destroyed by a hurricane, so he moved in with his mother—the father had already died—while his own home was being rebuilt. The mother recently died, and his siblings now want to sell the parents’ $4 million estate in Houston, but the son refuses to leave. His brother and sisters don’t want to throw him out because they’re afraid of him, Ryan says.
“There’s a lot of alcoholism and sexual abuse in this family. There’s a lot of anger and hurt feelings and not being able to confront issues because there’s so much fear of the brother’s anger,” Ryan says. “It’s never about money. It’s always about some underlying issue that they’re upset about. This happens a lot with wealthy families. They see the money as a weapon to be used against each other.”
But while divvying up the family home is nettlesome, dividing the family business is a minefield. Nearly every advisor interviewed for this story had a client involved in a family-business-related drama that wound up in court. Even parents who plan ahead can’t always save the children from themselves. One father made sure his daughters could monetize their shares but gave his son—the only child who actually worked for the company—ultimate veto power over whether the business should be sold. In the end, the daughters were so persistent and menacing, the son sold the business just to stop them from badgering him.
The worst case involved a man who was so daunted by the prospect of having to work directly with his two brothers in the family business that, rather than negotiate with them through a trustee, he began to abuse drugs and alcohol. He was the only one of three sons to work for the family business, and his brothers had concerns about his compensation and how he was running it. Until then, his brothers’ interests in the firm were held in a trust, but the trust was slated to expire, giving the brothers more direct control over the company. The brother who worked there wound up killing himself in front of his son.
“Some of that was obviously caused by the drug and alcohol abuse, and the irrational behavior that goes with it. But it was also the reality that he was going to have to deal with this antagonistic relationship,” says Simon Singer, a financial planner in Los Angeles.
Valuing one’s interest in the business is also a sticky point. In one family, two sons owned a business, but only one worked there, and the one who didn’t was always envious of the perks his brother received. There were rides in the company’s private plane, access to apartments in Manhattan and Naples, Italy. The problem was, because it was a privately held company, it was hard for either brother to sell the stock. To resolve the issue, their lawyers created a limited marketplace for the stock, and every year, a valuation of the business was done so a price per share could be established. That enabled anyone, whether it was the brothers or their children, to sell their stock back to the company in order to cash out. There were certain rules, such as limitations on how much stock could be sold at once, and the fact that once the stock was sold, it couldn’t be bought back.
“You’re taking something that is generally indivisible, such as shares in a private company, and making it so that anyone can monetize their stock,” says Michael Golden, a partner at the Atlanta-based law firm Arnall Golden Gregory, which specializes in business succession planning.
Interestingly, as soon as everyone was able to sell their shares, the squabbling stopped, Golden says. Knowing they had the ability to sell their shares, they realized they didn’t really want to.
Golden’s partner, J. Grant Wilmer Jr., who works in the firm’s private wealth group, knows of two brothers who inherited a business from their father and got along very well for much of their work life—until it was time for their own children to run the business. One brother made his son president of the company, a position for which the other brother said the son was not qualified. Instead, that brother wanted his son-in-law to be president, claiming the son-in-law was far more suited to the position.
The situation became so acrimonious they decided one or the other should leave. They entered into a so-called “buy-sell agreement,” in which the party wanting to either buy or sell gets to pick the price of the shares to be sold. The other party then has the option to buy or sell. It’s supposed to keep people honest, because the person valuing the price of the shares can wind up either as buyer or seller.
“The interesting thing was, these were two brothers who had been in business together for many years, and at the end of the sale, not only couldn’t they be in the same conference room with each other, they couldn’t be on the same floor. We didn’t want them to run into each other in the bathroom,” Golden says.
It didn’t help that the brother who bought the other out had to take on a private equity partner in order to afford it. After a few years, the company was unable to reach certain benchmarks promised to the private equity partner, so the partner stepped in and kicked management out. In the end, the company went bankrupt.
“The family that sold out is probably rich today, and the family that bought the others’ interest is probably working for someone else,” Golden says.
Dividing the family business is always more contentious when some children work for the company and some do not. Dribin recalls one family that owned a business with more than $100 million in revenues, where five children worked for the business and five did not. The father bequeathed the business to the five who worked there, and to the others, he gave other assets that he viewed as equal in value. But the children who received those assets thought they were getting the short end of the stick. As often happens in these situations, litigation ensued.
“These were people of wealth who had the ability to pay lawyers lots of money, and it got very nasty—to the point where if all ten children were in a conference room together, five would sit on one side of the table and five would sit on the other, and they would not acknowledge each other’s presence,” Dribin says.
Eventually, it was settled, but those issues could largely have been minimized by more specific guidelines for determining value. An estate plan could include a mechanism where, say, each party hires his own appraiser, and those appraisers hire a third. The value of the company is then determined by an amalgamation of all three appraisers’ assessments.
But even when the value of an interest in a company is determined, there’s still the matter of coming up with the cash to buy it. That could be resolved if part of the estate plan involves an insurance policy, the proceeds of which would be used for a buyout, says Douglas Goldstein, an investment advisor with clients in the U.S. and Israel.
In the end, estate professionals say one of the best things parents can do to try to avoid these conflicts is to communicate their estate plans with their children before they die, and to have clear, current documents that spell out how they want their money parceled out.
O’Grady says families will sometimes come to him, and while the parents are in his office, their middle-aged children will stand out in the hallway. Every half hour or so, they will come into the office, but every meeting always turns into a big argument.
“And those are some of the healthiest situations,” O’Grady says. “Everyone has a voice. Everyone knows what the plan is. And in the end, they participated in that plan, whether or not mom and dad did it their way.”
In most families, you talk to the parents, and they’ll say they communicated their plans, and then you talk to the children, and they say their parents mentioned a plan but never showed it to them, and they have no idea what’s going to happen when their parents die.
O’Grady knows. It’s going to end in tears..
Copyright © 2012 Charter Financial Publishing Network Inc. All rights reserved.