Here's a scary question:
Does your estate plan actually protect your estate?
You spent all that time and money to make sure that your estate will be protected from taxes, from probate, and from creditors — but you may have forgotten one major thing:
You forgot to protect your estate from your heirs.
The sad truth is that children and other heirs often fight over the estate of a deceased loved one, even if the decedent left a valid estate plan. And fighting often means lawsuits.
Heirs can contest an estate plan for a number of reasons: jealousy, greed, sibling rivalries or disagreements. Regardless of why a lawsuit is filed, it means trouble for everyone involved:
- Your estate could spend months or even years tied up in court battles.
- Your hard-earned money could be drained by attorney's fees.
- Your assets, debts, and "dirty laundry" could be made public, available for anyone to see.
- Worst of all, your children may do irreparable harm to their relationships with one another.
Is there any way to avoid having your heirs fight over your estate? Is there any way you can avoid these harmful lawsuits?
And in this blog post, we're going to cover 16 ways you can lawsuit-proof your estate — or at least reduce the risk that your heirs will fight over it. Scroll down to read the full post, or click the links below to take you directly to a particular section:
- #1. Treat the kids equally
- #2. Create a Trust instead of a Will
- #3. Write an estate planning letter of instruction
- #4. Review your estate plan with your family
- #5. Decide who gets what
- #6. Include a "no contest" clause
- #7. Specifically provide for any disinheritance
- #8. Keep track of loans and advances
- #9. Transfer a business with a contract
- #10. Check ownership of what you leave
- #11. Appoint co-executors or a corporate executor
- #12. Establish mental competency
- #13. Update your estate plan regularly
- #14. Consider a prenuptial agreement
- #15. Pre-plan your funeral
- #16. Don't make a "Do It Yourself" estate plan
Don't have time to read the whole article? Click the button below to download our cheat sheet summarizing 16 ways you can lawsuit-proof your estate plan:
#1. Treat your kids equally.
Imagine how one child would feel if you leave him or her less than one of your other kids. Even if there is a perfectly good reason you left them less, would they feel slighted?
More often than not, an heir fights over an estate plan because they feel that they are not getting their fair share of the estate.
So, how can you avoid this result?
Leave the same amount to each of your children (or each of your grandchildren or siblings or any other class of relative).
Suppose you have two kids, John and Jane. When you die, you can leave each of them one-half of your estate. Everything would be split evenly, right down the middle.
But suppose you want to leave part of your estate to grandchildren? To keep things even, you can simply take that money out of the share you would otherwise leave their parent.
For example, if you want to leave each of John's two kids, Adam and Amy, one-eighth of your estate, you could leave Jane one-half, John one-fourth, Adam one-fourth, and Amy one-fourth.
When you are trying to treat your kids equally, your main objective should be to ensure each "side" of the family gets the same amount.
#2. Create a Trust instead of a Will.
If you want to avoid having your estate tied up in court, here's a great strategy:
Don't create an estate plan that will end up in court.
But surely it can't be that simple, can it?
Actually, it can.
There are many differences between a will and a trust, but perhaps the most important is that a trust does not need to go through the court process of probate after your death.
A will, on the other hand, must generally ALWAYS go through probate.
Think of all the problems that can arise when your estate is subject to probate:
- Who's in charge? Do your kids fight over who should be "in charge"? One common ways to contest a probate is fighting over who should be appointed executor of the estate.
- Second guessing. Do your kids ever second guess one another? They will have plenty of opportunities to fight over whether expenses should be made, whether assets should be sold, and dozens of other decisions during probate.
- Sharing. Have your kids had problems sharing with each other? Whether you have a will or not, your heirs must figure out a way to divide your estate. If anyone feels like he is not getting exactly what he wants, that heir could make things very difficult for the others.
To borrow a business term, the "barrier to entry" for contesting an estate is a lot lower when your estate is already being overseen by the court through probate.
By creating and properly funding a trust, you can avoid probate and thereby reduce the risk that one of your children will feel the need to turn to court in the first place.
#3. Write an estate planning letter of instruction.
After you execute your estate plan, things can change. And changing circumstances may prompt an heir to contest your estate plan after your death on the grounds that it is not actually "what you would have wanted."
There is, however, a simple way to avoid that possibility:
Write an estate planning letter of instruction.
An estate planning letter of instruction is primarily meant to give your representatives all the information they need to properly administer your estate. It can cover topics such as:
- Where is the key to your safe-deposit box?
- What are the passwords to your computer and your online accounts?
- What subscriptions (cable, newspaper, lawn service) need to be canceled?
- How can your representatives contact your family to let them know of your death?
- How would you like your personal effects to be divided among your family?
However, you can also use a letter of instruction to avoid potential disputes by explaining why you made the estate planning decisions you did.
You can explain why you want your family to "pull the plug" if you fall into a coma. This could reduce the chance a relative will contest your representative's decision to take you off life support and keep your life from being artificially prolonged.
If you are not leaving your children equal amounts, you can explain why in a letter of instruction. This could reduce the chance one of your kids will feel like the others are "cheating" him or her.
#4. Review your estate plan with your family.
Leaving a letter of instruction is a great way to prevent disputes over your estate plan.
But you don't need to wait until you die to explain your estate planning decisions to your family.
That is why we recommend having an estate planning "fire drill" where you go over your estate plan with your family members and other representatives.
Think of a "fire drill" as though you have died and want to walk your family through the process of what they must do to set your affairs in order.
Not only can this make the administration of your estate easier on grief-stricken loves ones, it can also head off any arguments or disagreements over your estate after your death.
#5. Decide who gets what.
Your last will and testament may say that you want to divide your estate equally between your two children.
That works great if your estate is entirely cash, but how should your kids divide personal, sentimental items such as family heirlooms?
One way to avoid this problem is to give away those items during your lifetime. (Note that, depending on the value of these gifts, you may need to file a gift tax return.)
However, what if one of your children claims you gave him a gift but your other children don't believe him?
For this reason, we recommend drawing up a "bill of sale" to document each gift. A written document is more compelling than one of your kids simply saying, "Trust me, Dad gave it to me."
You can also provide for the division of your personal effects in a letter of instruction. For example: "Timmy gets the grand piano" or "Melody gets the entry hall chandelier" or "Sam gets my record collection."
Describe these gifts as specifically as possible. For instance, rather than saying "I want Hannah to have my artwork," state "I want Hannah to have the Renoir paintings titled [include the titles of the works]." This reduces the possibility of any confusion.
IMPORTANT NOTE: If you leave a list dividing your personal property, be sure to refer to that list in your will or trust. Like an estate planning letter of instruction, simply writing a list of who you want to have your property is not a legally enforceable document.
#6. Include a "no contest" clause.
A "no contest" clause, also known as an in terrorem clause, is a provision in a will or trust stating that if any beneficiary contests the validity of the will or trust, he or she forfeits her interest in the estate.
These clauses are generally valid, and can be a great way to discourage lawsuits over your estate.
However, beneficiaries can usually still contest the administration of your estate without triggering the in terrorem clause.
For example, let's say your executor, John Smith, is mismanaging the funds of your estate. Your beneficiaries could possibly contest his administration without worrying about losing their inheritance.
Before drafting a "no contest" clause, and certainly before contesting the validity of an estate plan, you should speak with an attorney about your state's laws regarding "no contest" clauses.
#7. Specifically provide for any disinheritance.
Some people think they can disinherit a child simply by leaving him or her out of their will.
But it's not quite that simple.
First and foremost, there are some relatives you cannot disinherit. Barring a valid prenuptial agreement, you cannot disinherit your spouse. Likewise, you cannot disinherit minor children.
To effectively disinherit an adult child or other relative, you should specifically list them in your will or trust. You should then specifically state that you are making no provision for that relative.
This might seem harsh or even unnecessary. After all, if you don't mention a child in your will, they shouldn't be entitled to anything right?
However, most states have laws requiring you to specifically state whether you are disinheriting a child. Otherwise, they can claim an entitlement to your estate under law.
By specifically mentioning you are disinheriting a child or other relative, you can make clear to the probate court that you intended to leave them out of your will, as opposed to simply forgetting to include them.
But be careful: Although you should state when you are disinheriting a child, you should avoid giving a reason for the disinheritance, especially one a court may find is against public policy.
#8. Keep track of loans and advances.
Suppose your trust provides that each of your children will receive $200,000 at your death. But what if right before your death, you buy a $150,000 house for one of your kids.
Is that a loan? Is it an "advance" of their inheritance? Or is it just a gift?
How would your other children or beneficiaries see it?
You can avoid disputes over matters like this by keeping a written log of whether such gifts are "loans" and whether they are to be forgiven or repaid after your death, whether they are "advances" on that child's inheritance, or whether they are something else entirely.
By clearly stating whether a gift constitutes an advance on a beneficiary's share of the estate, you can preempt arguments that that beneficiary should get less than the others.
#9. Transfer a business with a contract.
Do you have a family business with multiple children or relatives involved? If so, the ownership of that business could be a point of contention in your estate plan.
Suppose you want to leave the business to your son Mark, even though your daughter Alicia has helped out with the business for years. Alicia may feel cheated and claim that Mark took advantage of you or unduly influenced you to change your estate plan.
For that reason, you may want to consider entering into a contract selling the family business to your son during your lifetime, rather than including the business as a gift in your trust or will.
Not only can this avoid later disputes by establishing expectations before your death, but a contract is often more difficult to challenge than a provision in a will or trust.
#10. Check ownership of what you leave.
It sounds silly, but people sometimes try to leave their kids something they don't own. Consider these three scenarios:
- Family business. Suppose, for example, that your car is owned by your family business. If you are not the sole manager and member of that business, you may not have the authority to dispose of the car through estate plan documents.
- Joint ownership. Let's say you own a house in joint tenancy with your brother, but your trust says you want your son to have it after you die. Upon your death, the surviving joint tenant — not your son — would get your interest in the property.
- Beneficiary designation. Your trust may provide that you want your daughter to have the proceeds from your 401(k). But if you have your son named as the beneficiary on the 401(k) documents, he — not your daughter — would have the right to those proceeds.
Therefore, it is very important that you check to see (1) how your assets are owned (joint tenancy, sole ownership, corporate ownership, lease) and (2) whether any beneficiaries are named.
If you don't check the ownership of what you leave behind, some of your family members could end up being left out or feeling jealous — feelings that commonly leads to lawsuits.
#11. Appoint co-executors or a corporate executor.
Most people appoint a spouse, adult child, or parent to be the executor of their estate.
HOWEVER, if you anticipate family fighting or if you do not trust the financial competency of those individuals, there are two other options you should consider:
- Appoint co-executors or successor co-trustees
- Find a corporate executor or successor trustee
Co-executors or co-trustees. This is a great strategy when you have multiple children or, if you and your spouse don't have children, your in-laws don't get along.
Putting one child in charge of your estate may make the others feel left out or jealous. It can also lead to fighting and the abuse of power or (more likely) the perception of abuse.
Even if you don't have kids but have a joint trust with your spouse, appointing a single trustee may cause problems. Suppose you and your spouse appoint your brother as successor trustee. Is there a chance your in-laws could be upset or suspicious?
There is a simple way to avoid some of these problems: Appoint multiple children — or one of your parents and one of your spouse's parents — to serve as co-executors or co-trustees.
Corporate executor or corporate trustee. Many banks and trust companies offer to serve as executor or trustee of estates (hence, the name "trust company").
If you are not confident in your relatives — or if, for instance, you are concerned your children won't get along — it may be a good idea to appoint a corporate entity to manage your estate.
The main downside to a corporate executor or trustee is the cost. But depending on the size of your estate or the relationships in your family, that cost may be worth it.
#12. Establish mental competency.
There are many ways you can challenge an estate plan.
However, one of the most common allegations is that the testator (the person who created the estate plan) lacked the mental capacity or competency to sign those documents.
But what is "competency"?
When it comes to signing a will, a testator must have "testamentary capacity". To have testamentary capacity in Oklahoma, a person must generally understand:
- The quality and quantity of his or her property (sometimes called their "bounty");
- The natural objects of his or her bounty (i.e., who should logically inherit their property); and
- The legal effect of signing the document.
If a testator does not understand any of those things, he or she lacks testamentary capacity and his or her estate plan (if signed at that time) may be invalid.
An easy way to avoid a claim of incompetency (or lack of testamentary capacity) is to have your mental state evaluated immediately before signing estate planning documents.
Although a treating physician may be able to offer a good mental evaluation, you may also want to consider being examined by a geriatric psychiatrist to leave no doubt that you are competent to sign your estate planning documents.
#13. Update your estate plan regularly.
I'm going to say something that might shock you:
Your goals, desires, or circumstances may change over time.
Are you sufficiently shocked? Probably not, because change is a part of life. You get married or have kids or grandkids, earn money or lose money, find a new passion, etc.
That's why regularly reviewing your estate plan — and making any desired changes — is perhaps the best way to avoid lawsuits.
Here's a scenario to illustrate why it is important to update your estate plan:
Suppose you have a trust. When you create the trust one of your children is a billionaire, while your other child has only a dollar to his name. For that reason, your trust states that you want to leave your rich son $1 and give the rest of your estate to your poor son.
This seems perfectly fair and reasonable at the time you sign the trust.
But what if your billionaire son suddenly loses all of his money in a bad investment, and your poor son wins the lottery?
Unless you change your trust before you die, the now-rich son will get even more money, while the now-poor son will have no claim to an inheritance he desperately needs.
Does that seem fair? I don't think so, and your now-poor son will probably feel the same way. And he may decide he has nothing to lose by contesting your estate plan in court.
#14. Consider a prenuptial agreement.
Second or later marriages can provide the greatest risk for conflicts over your estate.
But those conflicts can be avoided by signing a valid prenuptial agreement.
A prenuptial agreement is a document that lays out the rights of a couple in the event of divorce or the death of one of the spouses.
It often includes provisions about one spouse giving up inheritance rights over the other spouse's property, inheritance rights of children from a previous marriage, rights to a business or professional practice, division of property and debts, and other financial aspects of marriage.
However, as the name suggests, a prenuptial agreement is signed before marriage.
Many couples think of "prenuptial agreement" as a bad word, but in reality it is simply a tool that can minimize arguments by clearly defining the rights and obligations of your family in the event of your death.
#15. Pre-plan your funeral.
Funerals are emotional events for family members. They can also be a prime opportunity for family fights.
Who will get to decide on your funeral arrangements? If you are cremated, who will get to keep your ashes?
These questions are particularly important if you are on a second or later marriage. Fights because spouses and children can quickly evolve into expensive lawsuits.
Consider recently deceased television personality Anthony Bourdain. Even though he and his wife were separated, his wife has the right to plan his funeral (and may even inherit from his estate).
Is that the result you would want?
With a proper estate plan or pre-planned funeral arrangements, Anthony Bourdain could have avoided many potential problems with his estate.
#16. Don't make a "Do It Yourself" estate plan.
Many people love the idea of Do-It-Yourself, or DIY, estate plans because it means they (1) don't have to spend as much money and (2) don't have to talk to a lawyer.
But as you have already seen in this post, estate planning can be a very complicated endeavor.
And as with anything complicated, there are ways it can go horribly wrong. Forbes dedicated an entire article to estate planning horror stories from people who had a DIY estate plan.
For example, you may just want a simple will and think you can write it yourself. But your state may have special language that you should include or laws that make other estate planning documents more appropriate or advantageous in your situation.
Additionally, if you don't follow the required formalities exactly as provided by the law, your DIY estate plan may not work the way you want — or it may not work at all.
We have had clients come to us after making their own estate plan and ask us to fix mistakes they made. The potential for causing even bigger problems is why AARP has listed "Do-It-Yourself" estate planning as the "#1 Costly Estate Planning Blunder."
Don't leave something as important as your estate plan up to chance. Work with an experienced estate planning attorney to get it right the first time.
How can I avoid a costly probate battle?
While there are a number of ways you can reduce the likelihood of your heirs fighting over your estate, not all of these options may be desirable or even beneficial for you. And of course, none of these methods can guarantee your estate will not be disputed.
You should consider each of these lawsuit-proofing methods within the broader context of your estate plan. And as always, you should seek the professional advice of an experienced estate planning attorney.
For more information on how you can avoid a costly probate battle by lawsuit-proofing your estate, contact the Oklahoma City estate planning attorneys at Postic & Bates for a free, no-obligation consultation.
David M. Postic is an associate attorney at Postic & Bates, P.C. His practice includes estate planning, probate, real estate, adoption, business law, and litigation.
You can email David through our Contact Us page or by calling our office at (405) 691-5080.
[As with all our posts, the contents of this article do not constitute legal advice and are subject to our site-wide disclaimer.]