11 Aug 2012

Can You Litigation-Proof Your Estate Plan?

As Benjamin Franklin, one of our country’s founding fathers, wisely stated, “[n]othing is certain except death and taxes.”  Except as noted by Mr. Franklin, there are no guarantees in our lives, especially when it comes to the issue of whether you can make your estate plan “litigation proof.”  In the area of trusts and estates litigation, the variable factors that cannot be controlled by properly drafted estate planning documents are the actions that will be taken by a person’s family members after he or she has passed away. It is important to remember that “[w]here there’s a will, there’s a way . . . and relatives to fight over it.” Anonymous. If you have litigious family members, you cannot prevent them from filing a lawsuit.  However, there are steps that you may take during your lifetime in an attempt to avoid or minimize future litigation following your death.

After the death of a loved one, family members must deal with emotional grief over this loss in addition to the financial issues associated with estate administration. During this sensitive time, family members’ feelings may be hurt if they discover for the first time that have been disinherited or that they will receive less than other family members. The term “disgruntled family members” often translates into the term “petitioners” who will be filing a petition with the probate court in an attempt to make a post death change of the estate plan.  Here are some steps to take to avoid or lessen potential litigation over estate planning documents:

1.         Avoid Surprises.  Avoid surprises at all costs if possible.  A family member who is genuinely surprised to find out for the first time following the death of a loved one that he or she has been disinherited or that he or she will be receiving less than expected may cause extreme hurt feelings (in addition to the grief for the loss of the loved one).  These hurt feelings may trigger a family member’s need to rectify the perceived injustice by challenging the estate plan in court.

            In order to prevent this post death surprise, it is important to explain to your family members during your lifetime how your estate plan is structured and the reasons why its provisions may not be what they expected. For example, if a married couple has three children and their estate plan provides that after both of them are deceased their assets will be distributed 60% to one child and 20% to each of the other children, then the estate plan, on its face, appears inequitable among the three children.  But, there may be many valid reasons for the disparate treatment, such as: (a) one child provided more assistance to the parents during their lifetime than the other children; or (b) one child needed the funds more than the other children; or, (c) two of the children were given large lifetime gifts and the 60% gift to the third child in the estate plan is a way to equalize the lifetime gifts so that all children essentially received equal assets from their parents. It is best to tell the children up front so that they have time to adjust to this estate plan and to give them an opportunity to ask their parents questions about it while they are alive.

2.         Provide Incentive Not to Contest. California law allows you to include “no contest” and “disinheritance” provisions in your Will and trust in order to discourage beneficiaries from contesting the terms of your estate plan.  These provisions state that if a person contests the estate plan, he or she will be disinherited and will not receive anything from the estate plan. However, keep in mind that these provisions are only effective for beneficiaries named in the estate plan (i.e., persons who will receive gifts in the estate plan who may lose them if they contest the provisions of the estate plan).  If your estate plan has already disinherited a family member, then the no contest and disinheritance provisions in the estate plan will not serve to discourage litigation by the disinherited person because he or she has nothing to lose by contesting the estate plan.  Accordingly, it is a good idea to include a large enough financial gift for the disfavored person in the estate plan so that he or she will have to consider whether it is worth it to forfeit his or her beneficial interest in the estate plan by contesting the estate plan. Some people may not want to leave a gift in their estate plan to a disfavored family member because they perceive it as a way of bribing this person from contesting their estate plan. However, given the time, effort and cost associated with trusts and estates litigation, it may be a much cheaper alternative.

3.         Document Your Reasons Why Your Assets May Not Be Distributed In the Manner That Family Members Expect Them to Be Distributed.  If your estate plan is structured in a way that will surprise one or more family members, it is a good idea to document your reasons for setting it up in this manner. This documentation provides evidence of your intent and allows your family members to understand the reasons behind your estate plan.  Also, this documentation may be submitted as proof of your intent in court (after your death) that the estate plan was properly prepared in accordance with your wishes and that it should not be changed by the court.

4.         Do Not Allow Distributions to Be Made Before the Allowable Contest Period Expires.  Under California law, when a person dies, there is statutory period that allows a named beneficiary or an heir of the deceased person to contest the deceased person’s Will and trust (the “contest period”).  The contest period for a Will is determined by the rules governing the probate of a Will through the probate court.  The contest period for a trust is 120 days after the Trustee of the trust sends out the statutory notice to the beneficiaries and heirs, which may be extended by an additional 60 days if the beneficiary or heir requests a copy of the trust during the 120 day period.  It is prudent for the Executor of the Will or the Trustee of the trust not to make any distributions of the deceased person’s assets during the contest period for many reasons.  But, one important reason not to do so is to avoid giving assets to a possible contestant to fund the cost of contesting the Will or the trust.  You do not want to make it easy for another person to change your estate plan.

5.         Make Lifetime Irrevocable Gifts.  One way to avoid a post-death litigation is to make lifetime gifts.  If you believe that making gifts to family members following your death in your Will or trust will cause family members to hold involuntary family reunions in the local probate court, you may want to make the planned gifts during your lifetime to avoid these problems.

Dealing with the death of a loved one is hard enough without the burden and hard feelings generated by trusts and estate litigation.  In order to minimize or avoid this happening with your estate plan, it is important to take precautionary steps with the guidance of your estate planning attorney during your lifetime.

If you would like to discuss this or other trusts and estates issues, please contact the attorneys at Drucker Law Offices, 468 North Camden Drive, 2nd Floor, Beverly Hills, CA 90210, 310.285.5375 Tel, 310.444.9754 Fax, www.druckerlaw.com

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