Prozac And Estate Planning For Families

By Keith Schiller, Esq.
Schofield & Schiller
Walnut Creek, CA

SIBLING RIVALRIES, multi-marriage families, and even mental illness can turn estate planning and administration into a legal, taxation and emotional minefield. Estate planners have motivational tools and mood-changing remedies to enable family members to retain control of their affairs, carry on the family business, reduce the likelihood for litigation and enable clients to achieve the satisfaction that the estate and business succession plans can be successfully implemented.

Scene: Widow is in her accountant's office with George, one of three children from a long-term marriage. George wants to be updated on the estate administration for his recently deceased father and objects to what he considers preferential treatment for his sister who recently received a modest gift from mom and soon will receive another gift as part of a logical package. George is unpersuaded by the mother's explanation and the sense of fairness. He becomes more hostile in tone, and continues to press mom long after the meeting. He sneers at a reference to King Lear's, "How much sharper than a serpent's tooth it is to have a thankless child."

This picture is not pretty; and, regrettably is too common even with one- marriage families. When multiple marriages enter the picture, the financial competition between competing interests with fewer connections and even more potential hidden agendas becomes greater.

Clients have the right, of course, to plan their affairs in a manner in which they desire. And, if Dr. Laura Schlesinger is kept in mind, the client has the choice, as well, as to how he or she will react to the concerns, demands, pressure or badgering of others. Dr. Laura might remind the client that just because George is an adult with children of his own, it does not mean that he is not still a child emotionally.

Estate planning and family dynamics are integrally connected. While the accumulation and preservation of wealth and tax avoidance receive the bulk of attention, the human issues remain the most critical for better or worse. According to Dr. John Stark, Clinical Psychologist with the Performance Enhancement Group, "Nineteen percent of the population has a definable mental illness."¹ While estate planning and administration disputes are not limited by any means to emotional or personality limitations, the extent of dysfunction is noteworthy.

Besides the emotional state, practitioners may encounter family members who simply do not like one another, or hold jealousies or otherwise pursue conflicting purposes. The Bible, Shakespeare and even children's literature are replete with such examples. After all, doesn't Cinderella tell the story of conflict and jealousy within a multi-marriage family? Family discord and outright warfare (usually in the courts) accelerate when power and fortunes are at stake.²

What then are the practitioner's estate planning equivalents to Prozac³ as we attempt to weave planning and administration through the minefield on competing interests, family dynamics and just plain unhappiness, depression and discontent? Let us take stock of our estate planning remedies:

1. Limited Powers of Appointment. If the client has potential concern about the manner in which the children or other beneficiaries will interact with the surviving spouse, a limited power of appointment could be given to the surviving spouse. This power enables the surviving spouse to change beneficiaries or alter the manner and conditions upon which distribution will be made to a beneficiary. It could be called the "Thanksgiving Dinner Power" because the children cannot take your client for granted (and will attend Thanksgiving Dinner).

   Powers of appointment are not simply tools of persuasion, but enable the surviving spouse to change distribution within the family as circumstances and tax laws change. For example, it may later be viewed best for a totally competent and loving child to receive property in trust rather than outright for reason of creditor protection, tax savings or asset protection in a divorce even if the present inclination is to leave distribution outright. Limited powers of appointment (i.e., powers that are not exercisable in favor of the power holder, the creditors of the power holder, the estate of the power holder or the creditors of the estate of the power holder) are not subject to estate tax on the death of the power holder except in the QTIP context.⁴

   The limited power of appointment can be broadly granted (such as to include more than just the issue of the testator or grantor - such as other family members or charities); or, it can be limited to only certain people or issues. If a power of redirection is felt too broad and the testator/grantor prefers fixed shares, the power holder may be given the right to change the terms and conditions upon which those shares are received. This could certainly have an effect on the economic value of the bequest or gift but it also allows for flexibility for the positive reasons discussed above.

   Limited powers, as with any power, can be used well or abused. After all, that is the nature of power. The risk may exist that a parent would toss away a lifetime of good relations with a child or grandchild because of perceived slight in later years. However, most clients will find powers of appointment a valuable tool for tax and non-tax reasons. In the scene pictured at the top of this article, it was a valuable tool for the parent to ward off demands and pressure.

2. Address the Issue. If the family does not get along, face the facts. A power vacuum arises upon the death of one or both parents. Sibling rivalries become even more intense. The parents should be encouraged to face realities and not simply hope that "things will work out." In this regard, consider the following hot points and remedies:

   • Business succession planning if there is a closely-held business and any of the children or their spouses or children are involved in the business;

   • Whether or not family limited partnerships are appropriate and what terms for buy-out and options are advisable;

   • Selection of the executor, trustee or other fiduciaries (including whether or not an independent fiduciary would be beneficial;

   • Special instructions as to whether or not certain assets (such as real property, illiquid investments or other joint endeavors) should be sold to avoid continued entanglements among family members;

   • Specific or directed gifts of particular assets to avoid co-ownership; and,

   • Procedural fall backs (such as determination by an independent fiduciary or mediation) if the beneficiaries are unable to reach agreement on a particular point that is left otherwise to agreement among beneficiaries.

   While many families want to avoid the cost of an independent, professional fiduciary, the expense may be a great investment in peace for a given family. Clients may be concerned, as well, with the performance or responsiveness of the fiduciary. An attractive provision for many clients with such concerns is a power authorizing the children (or other identified competing factions) acting unanimously to have the authority to remove one independent fiduciary and replace it with another (which may or may not be limited to a bank.)⁵

3. Forget About "Equality." "Fairness" is an achievable goal. Equality is an illusion that will leave the dreamer unfulfilled and frustrated. Even in the most loving, functional and embracing family, all is not equal. In fact, the ability of people to adjust to inequalities evidences good health and a sense of humor.

   Financially, it is impossible to divide an estate (unless it is only made up of cash and marketable securities) precisely equal. (Even then, one child might be reminded of an extra gift that another child received, or that one child stayed to work in the parent's store or got drafted while the other child went to college on a parental scholarship.) Valuation issues are matters of judgment. Discounts and "special" value or meaning contribute to a particular asset or article of property having greater meaning to one child than another.

   Yes, children may argue about what is fair, or who got the bigger cookie. However, the parents can rest content that they pursued a realistic goal and instilled a greater value than "zero sum."

   The family-owned business creates even greater potential for inequality. After all, minority stock may never receive a dividend, yet carry value; majority stock carries the premium of control; and, the children may have different agendas for the future of the business.

   Fairness gives the client a true sense of accomplishment and contentment for the future of the family. The fairness concept is best started by the parents, of course, when the children are young. Accountants and estate planners working with the client can reinforce the fairness principle. If the parents embrace fairness in estate planning, they can explain that philosophy, as well, to the children and its distinction from equality. Basically, the parents are saying, "We love all of you equally, and we are treating you fairly in how we plan and distribute our financial assistance, gifts and estate." The parents can then carry out that plan through gifts, special bequests, the recognition of the differences among the children, delegation of duties, life insurance, or other strategies.

   If the client's situation includes a large bulk of the estate with assets subject to valuation discounts that logically will go to only one child, yet they want the other children to receive benefit of the discounts (which may be perceived as more valuation theory and tax savings than a true economic reduction in value), there could be a special allocation or gift to the other children based on a formula to make up the difference.

   Example: Child 1 is bequeathed the stock in the family business, valued at minority and lack of control discounts of 50 percent, yet Child 1 ends up as the sole shareholder after the death of both parents. If the estate is allocated equally among the two children based on estate tax or distribution values, Child 1 may receive much more than one-third of the real economic value of the estate as a result of the discounts. The parents could have a make-up gift in a fixed amount; or one based on a formula such as the amount of discount less an assumed capital gains tax rate to consider the lower basis in the stock. Of course, no formula will be perfect because the tax law is not just in its treatment of built-in capital gains tax in the valuation of stock.⁶

   Practitioners may receive expressions of joy and see relief on the faces of clients when they emphasize the word "fairness" as the goal as distinguished from equality.

4. Business Succession Planning. According to the Wall Street Journal, 70 percent of the closely-held businesses end in liquidation on the death or incapacity of the principal owner. Overwhelmingly, the reason is not taxes but personality.⁷ The hurdle in this case is the retention of control by the principal business owner... the harboring of power, lack of formal business planning structure and concern with the abilities of other key players or family members in the business. Unless the client is satisfied with the likely prospect of having the retirement date and date of death the same, or knowing the "good will" or "going concern" value of the business will be digested by business competitors at liquidation sale, the client would be best served to undertake a business succession plan.

   Family dynamics, agendas and feelings of key players and downright fear should all be aired. Family and business counselors are specially trained to assist the family through the business succession process. The buy-sell agreements, employment contracts, life insurance trusts and other planning documents that bind and implement the plan are the products of the strategic business succession plan. Most succession agreements are the result of the pre-legal process. Accountants and attorneys, working as a team, play an important role in identifying legal, tax and accounting issues. Successful counselors may move the client from inaction and liquidation to a sustained and successful business legacy.

5. No Contest Clauses. The no-contest clause can provide a great deterrent to Will or trust disputes. If a contest seems especially likely, the client should consider making a gift sufficient to dissuade a contest under the theory that some money paid to the likely combatant is better than lengthy delay and added legal fees. Also, the attorney for the potential combatant runs the risk that his/her client will lose their bequest if the contest is unsuccessful and then turn on the attorney who "recommended" the contest.

   The no-contest clause could make reference to other documents or agreements, such as Wills or Trusts, property agreements, buy/ sell, or other agreements or beneficiary designations as attacks on those documents amounting to a contest as well. The recent decision in Genger v. Delsol, applied a no-contest clause in a living trust to a widow's challenge to a redemption agreement that was an important instrument in carrying out the estate plan even though the trust's no-contest clause did not reference the agreement.⁸ This case reveals the expansive application that may be given to no-contest clauses.

6. Procedures for Signing Wills and Trusts. Depending on whether or not the mental Capacity of the client to make estate planning documents is at issue, consider obtaining an opinion from a doctor qualified on the effects of Alzheimer's disease, Parkinson's disease, stroke or other conditions that may affect motor or mental function.⁹ The use of video, when the trust or Will is signed, can be debated as a pro or con because even very competent people may not do well on video.

7. Orders of Instruction and Accounting. If a parent is concerned with treatment of a child or claims that the surviving parent is not competent after the death of the first spouse, the parent/trustee could petition the court for prior approval of sensitive transactions before undertaking them or submit accountings to the court after the fact. Court approved accountings can be of benefit as well to the CPA to protect the CPA's client (and the CPA) from later challenges in the handling of particular matters or advice.

   In this way, the child is forced to raise objects in the light of day, while the widow(er) is living and able to assess how to respond to the child. The court order approving a transaction clears the table of that issue; and, a court accounting confirms that action by the trustee, and, indirectly the ability and competency of the trustee/parent to handle matters. The worse the family dynamics are, the greater the benefit of a court order and an accounting.

8. $5,000/five percent Withdrawal Powers. The surviving parent may also be given a so-called 5/5 power to withdraw up to the greater of $5000 or five percent of the trust each year as a non-cumulative right. Such a power is not a general power of appointment and will only cause the value of the unexercised portion to be included in the taxable estate of the parent (except in the QTIP context).¹⁰ For example, if a $1,000,000 credit shelter trust contains an unexercised 5/5 power, $50,000 of value from that trust will be estate tax included in the estate of the beneficiary. However, this potential for estate tax can be minimized if the beneficiary has only a window period during any given year (such as the month of January) in which to exercise the withdrawal power. In that setting, the beneficiary would have to die during January to trigger estate tax inclusion within the 5/5 ceiling.

9. Other Special Benefits for the Beneficiary. Depending upon the approach of the testator/grantor, the surviving spouse or other beneficiary could be designated sole executor and trustee (to provide added power over the administration of the estate and trust); the right to receive principal for need (health, education, support and maintenance); and other expressions of primary intention to benefit the income beneficiary.

The members of the estate planning team have many remedies to assist families through the stress of death and loss and additional strains of coping with a power vacuum in a "room" full of money and history. While worthy of an entire separate discussion, the estate planner needs to be an empathetic listener to the client and beneficiaries so that what is said and the tone in which it is said are understood and feelings acknowledged. As estate practitioners, however, we are called upon to prepare or review documents, often written in legalese, that implement the plan.

Before the children of your clients lay the winter of their discontent on your desk, encourage your clients to address the business, estate and family dynamic issues with a realistic "fairness" perspective. Consider the many remedies and sanctions to minimize, ward off or possibly heal these problems in the estate planning context. And, remember the many important tools that a surviving spouse can be granted, when appropriate, to provide greater control and help foster self respect in the later years.

End Notes

1. Dr. Stark, who is performance consultant for the University of Nebraska Athletic Department, with the Performance Enhancement Group of Omaha, Nebraska, cites the Diagnostic and Statistical Manual 4th Edition (American Psychiatric Association) for the source of this statement.

2. Vanity Fair includes almost monthly articles on the estate battles and controversies among America's wealthiest families (Cooke, Duke, Harriman, Lesher and Haft among others.) However, the royalty of England top all contenders in mortal family combat where as many as seven monarchs were deposed or killed by relatives or their allies, not to mention the two nephews that Richard UI targeted for early demise in the Tower of London.

3. Prozac is the registered trademark drug distributed by Dista Products Co., a division of Eli Lilly Industries, Inc., and a subsidiary of Eli Lilly and Company.

4. Internal Revenue Code Sec. 2041.

5. See, Internal Revenue Code Sec. 674(c) for income tax reference to Independent fiduciary although the context in this article is broader than that definition.

6. See Estate of Gray v. Comr. T.C. Memo. 1997-67; Eisenberg v. Comr. 74 T.C.M. 1046 (1997) rev 98-2 U.S.T.C. 60,332 (2nd Cir. 1998); contrast Davis v. Comr. 110 T.C. 35 (1998).

7. Fortunately, taxes are not the principal problem to this issue for most businesses because Congress, through Internal Revenue Code Sec. 2033A, showed its unwillingness to do anything meaningful about the tax consideration.

8. (1997) 56 Cal. App. 4th 1410, 66 Cal. Rpt. 2d 527.

9. See, Patrick Fitzsimmons, M.D., Dementia and Decision-Making Capacity in Old. erAdults Parts 1 and II, California Trusts and Estates Quarterly, Vol. 3, No. 4 (Winter, 1997) and Vol. 4, No. 1 (Spring, 1998).

10. Internal Revenue Code Sec. 2041(b)(2).

  Keith Schiller, November 1998. All rights reserved.