In his lifetime, Kerney Overman Jr. built a thriving construction company, a close-knit family and a charming beach cottage one block off the Atlantic Ocean in North Carolina. But at around age 70, his mind started to slip. Since his wife had already died, he turned to his eldest child, the one he called “Old Faithful,” to help plan for the future.
“If it had to be done, I would do it,” says his daughter, Karen Garrison of Burlington, N.C., who, with an attorney, helped her dad set up a trust to hold the beach cottage and other investment properties.
When Mr. Overman died in 2015, his estate plan enabled all four children to share the cottage and ensured they had the money to maintain it. The investment properties were sold, with the proceeds going into the trust. Rental income—about nine weeks a year—helps cover some of the expenses, and each child pays a nominal fee when staying at the cottage. So far, the plan has worked: All four siblings are still on speaking terms.
As sole trustee, “I decided from the get-go that I wouldn’t do this by myself—everyone was in on the decisions,” says Ms. Garrison, 64, who estimates the cottage’s value at $485,000.
Creating a comprehensive estate plan is about having conversations before parents become ill or die, says Erin Cockman, a financial planner with Pinnacle Wealth Partners in Burlington, N.C., who worked with Ms. Garrison and her father. “People are so private about their money, but families need to be better about having tough conversations.”
Family conversations are so important to the process of creating an estate plan, says financial planner Steven Tenney, that he hosts family forums for his clients and their children when drafting one. “The primary objective is family harmony—it’s not taxes. It’s not always easy to attain and maintain,” says Mr. Tenney, chief executive of Great Diamond Partners in Portland, Maine.
Mr. Tenney frequently works with clients whose cabins have been in the family for generations. “There’s a very strong emotional attachment to those homes and to those towns,” he says. But problems arise when some siblings have moved far from home or when one sibling lacks the financial means to maintain his share of the property.
He worked with a family in which three siblings were beneficiaries of a trust that held a family vacation home on Penobscot Bay. Before the parents died, Mr. Tenney moderated a family forum that detailed the parents’ finances and let the siblings express their opinions about the cabin and property. After the parents died, one sibling bought out the other two—they didn’t live nearby and were in different economic circumstances.
In a separate case, however, there was friction among three siblings over a perceived inequality in the division of assets. In this instance, the client’s daughter, along with her husband and son, had invested a lot of “sweat equity” to maintain a vacation home on Maine’s midcoast. The father believes his daughter and her husband earned the right to be the next owners. Making her the sole beneficiary of the trust that owned the house resulted in animosity with the other children that lasted years.
Animosity also can arise when a parent has a poorly structured estate plan, says Ross W. Stoddard III, a Dallas-area attorney-mediator. If a home and other real property, like land, aren’t transferred to a trust before the death of a final parent, it likely will end up in the probate court system. The estate’s executor or administrator must maintain the property and pay its expenses until the property is either sold or distributed to beneficiaries. When there is conflict among siblings, probate procedures can be lengthy and expensive.
As a mediator, Mr. Stoddard frequently helps siblings resolve their probate disputes. He has seen many siblings contest an estate plan by arguing that when their parents signed the will or trust, they lacked mental capacity or were under undue influence from another person. (Some parents add an in terrorem clause to a will or trust which says that any beneficiary who contests it forfeits their share, he adds.)
When a disputed estate plan goes into mediation, Mr. Stoddard first meets with the siblings and their lawyers as a group. Then each sibling and his or her lawyer is placed in a room, and Mr. Stoddard shuttles proposals back and forth between them. Usually they can tackle the issues in a day. But if there is an impasse, the case could go to court, says Mr. Stoddard. Legal costs in a dispute with multiple appeals can run upward of $100,000, he says. “The more money involved, the greater ability to sustain the fight.”
There’s also a risk that a court will order a “partition by sale” of the property, resulting in it being sold and the proceeds distributed among the siblings. Laws vary widely, Mr. Stoddard notes, but in some states, the property is sold at what’s called a “sheriff’s sale,” a public auction, where it could sell at far below fair market value to an unrelated third party.
To help avoid such a result, 15 states have enacted the Uniform Partition of Heirs Property Act. When applicable, the court gets an appraisal of the home. Then the co-owner(s) who didn’t file the partition petition have the right to buy out the co-owner who did file it. If that doesn’t occur, the court appoints a real-estate agent to list the property, which can result in a sale price that is closer to fair market value.
Regardless of how a home is passed on, the process can take a toll on the whole family. “It’s sad because it could lead to the destruction of relationships that otherwise would have continued,” Mr. Stoddard says. “Now, there’s no more Christmas with the cousins or the nephews.”
Planning ahead for a future without Mom and Dad
- A well-structured estate plan includes a will, a trust detailing the handling of parents’ holdings both while living and after death, and naming of trustee(s) and estate executor(s). It should include instructions for what happens when a parent becomes incapacitated. The plan also accounts for assets that automatically transfer to heirs who are named beneficiaries, such as life insurance. A durable power of attorney, living will with medical directives and a letter of intent—instructions that outline the parent’s wishes—are also commonly part of an estate plan.
- Conduct family forums in which parents and siblings are upfront about their wishes. Hold periodic meetings as circumstances change. “We might have put this plan in place 20 years ago, and a lot can change in that time,” says Steven Tenney, a financial planner in Portland, Maine.
- If a sibling is getting a greater share of a family home, parents can bequeath assets to the other heirs to balance the inheritance. That can be done with a life insurance policy, Mr. Tenney says. Parents, while still living, can also make tax-free annual gifts to disperse assets.
- Putting the home into a trust or limited liability company can make it easier to financially and legally manage the property and keep it out of probate court. But naming only one child as trustee could create friction with his or her siblings.
- For siblings who have inherited a home that sits on a large amount of land, donating some of the acreage to a conservation easement could yield tax advantages that would help keep the home in the family.
- Often, a sibling who lives close to the family home will buy out the portion held by siblings who live farther away, says Ross W. Stoddard III, a Dallas-area mediator. Siblings could also agree to jointly own a house, and rent it out, either to one of the siblings, or to a third party.
- To cover the costs of property maintenance, one sibling can pay the expenses and accept a promissory note from the others that promises to pay a specified amount over time, Mr. Stoddard adds.
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