Discussing Planning with Family

     Last week I wrote about the increased privacy that clients gain from using trusts in their estate plan. Using Living Trusts, clients who choose to make different distributions to their children can keep the value and terms of those distributions private from other children. While this increased level of privacy can prevent discord in some situations, clients should consider how much information is too little information when discussing estate planning with their children.

     As we have said many times before, estate planning is an ongoing process. After documents are drafted, signed, and the funding process is complete, there is still the implementation of the plan to consider. By discussing their estate plan with beneficiaries, clients can help those beneficiaries understand the reasons for their decisions and ease the beneficiaries into the implementation and administration of the plan. This is not to say that clients need to provide their beneficiaries with the clients complete financial records or inform the beneficiary of the size or terms of their eventual bequest. Instead, clients can use this opportunity to provide the beneficiaries with a general sense of the scope of the client assets and the reasons underlying decisions regarding distribution of those assets.

     For example, for clients with a relatively small estate it is important that all the children understand that their parent does not have significant wealth and that the cost of medical expenses are likely to substantially impact those assets remaining after the parent passes.  While the client may make it clear to children that the intent is to distribute any remaining assets equally to all children, it is important they understand that an equal share may not amount to much. I

     Alternately, for clients with a substantial estate who opt to hold assets in trust for beneficiaries to be distributed over their lifetimes, and perhaps their children's lifetimes, it is important that those beneficiaries understand the reasons their parent has for making this decision. In both of these situations, communication with potential beneficiaries can reduce the chances that a beneficiary will challenge the validity of the parent’s estate plan because they understand that all beneficiaries are being treated equally and that there are long-term fiscal benefits of their parents' plan.

     It may even be more important for the client to discuss estate planning documents with the successor trustee so that that fiduciary understand the reasoning behind the document provisions and can appropriately make decisions with full knowledge. The trustee can also clarify the reasons for the document provisions to the beneficiaries.

     In all cases it is important that children understand who is responsible for administering an estate plan after their parent passes away, what is expected of that person, the location of the parents’ estate plan documents, and information about their parents’ legal and financial advisors. While these discussions are not always easy, they are an important part of the estate planning process that clients should not neglect.

Matt Ferrara

Protecting Wills and Trusts from Beneficiary Contests

One of the primary goals in executing an estate plan is the ability to control the distribution of assets. While many clients decide to divide assets equally among their beneficiaries, others choose to provide for different beneficiaries in different amounts or with different limitations. In some cases, the client has a child who has received large gifts during their lifetime and therefore the client chooses to reduce that child’s share or exclude that child from distributions at their death. In other situations, the client seeks to spread out distributions over the beneficiary’s lifetime due to worries about spendthrift behavior. Sometimes the child has exhibited such bad behavior the client decides to disinherit that child completely.  Occasionally, these clients worry that their family members will argue about assets or trust provisions after their death and want to prevent this type of action. Fortunately, a Settlor can add provisions to a Trust to discourage beneficiary from arguing or starting litigation after the client's death.

Michigan law allows the use of "in terrorem" or "no-contest" clauses to discourage contests of Trusts. No-contest clauses work by providing that any beneficiary who contests the provisions of the trust forfeit any distribution from the trust to which they were otherwise entitled. The goal of a no-contest clause is to deter beneficiaries from engaging in costly litigation against the Trustee or one another by severely penalizing the beneficiary who take such actions. The hope is to minimize litigation, cost and delays in the administration of documents, prevent family discord and damage to long-term relationships, and keep personal family matters private.

While Michigan courts have traditionally enforced contestability clauses, irrespective of good or bad faith shown in the contest, in 2010, Michigan's legislature codified the use of contestability clauses, but limited them in certain situations with the statutory language:

“A provision in a trust that purports to penalize an interested person for contesting the trust or instituting another proceeding relating to the trust shall not be given effect if probable cause exists for instituting a proceeding contesting the trust or another proceeding relating to the trust.”

            This statutory language limits the enforceability of no-contest clauses to times when no probable cause exists for instituting a challenge to the Will or Trust. "Probable cause" exists if there is evidence that would lead a reasonable person, to conclude that there was a substantial likelihood that the challenge would be successful.

Courts now must decide if enforcing a Settlor's intent and desire to reduce frivolous claims by beneficiaries should be superseded by the need to protect beneficiaries from mistakes or wrongdoings by trustees. Due to this standard, probable cause is usually determined on a case-by-case basis, requiring the courts to find substantial basis for a contest. This requirement may still cause a beneficiary challenging a document a high level of discomfort if a court determines that there is no probable cause.

It is possible to draft no-contest to cover a broad spectrum of situations or to apply to specific individuals, such as a difficult child. When including no contest clauses in documents designed to address concerns regarding particular beneficiaries, it may be appropriate to explain the Settlor’s concern about that beneficiary. Such explanations may assist the court in determining that there is no probable cause for any contest. As with other complex estate planning issues, drafting documents to include no-contest clauses only should be done after consultation with and with assistance from experienced professionals.

Alan Ferrara