CHAPTER 25
A Random Sampling of Cautionary Tales from the Inheritance Arena OR READ ABOUT, AND LEARN FROM, MY PREVIOUS MISTAKES AND THE MISTAKES OF MY CLIENTS
Legal knowledge about Living Trusts is not enough to prevent problems from occurring in the inheritance arena. Like the medical doctor who gains experience on the ills and bodies of patients, so it is with the Living Trust attorney who gains wisdom, understanding, and sensitivity to forecasting potential problems by seeing what happens when money and property pass from a deceased person to a spouse, children, grandchildren, and others.
The stories in this chapter are true. Each story is representative of things gone wrong because of the failure to foresee consequences in the process of money and property going from the dead to the living. They are incidents from which I gained experience to better advise clients on the right way of transferring money and property after death.
With these stories, you will gain invaluable information and insight about your own Living Trust or other inheritance plan that comes only from being there when assets go from the dead to the living.
With these stories, you will see that unintended consequences are common in the inheritance arena.
With these stories, you will benefit from my many years of observing the hurt that occurs when a mistake is made in the Living Trust or the inheritance arena.
Cautionary Tale 1: The Last One on the Scene Gets the Money
Lesson to be learned: If one of your children becomes your caretaker when you are elderly, that child may end up with a greater share of the Living Trust assets.
Mr. Washington’s older daughter called me from Idaho, complaining that she had not been able to contact her father since her sister moved into his house to take care of him.
“I send him birthday cards, Christmas cards. No reply. When I call him, my sister always answers and says he isn’t able to come to the phone. It’s like she’s afraid to let me contact him.”
I recall saying, “That doesn’t sound good. It’s always the same. One of the children gets into control and ends up with the money.” It is a scenario I had seen numerous times:
• A surviving parent becomes elderly and needs care.
• Some children are unable or unwilling to care for that parent, leaving a vacuum that is filled by a willing child, or imposed on that child because all of his siblings opted out of the burden.
Pretty soon, the child left holding the bag realizes that caring for the parent on a daily basis presents a significant imposition on his lifestyle, while the other siblings go on with their normal lives.
Eventually, the caretaker child thinks about being compensated for his services.
Mr. Washington was ultimately persuaded to see me about his Living Trust. The moment I saw him in his wheelchair being pushed into my office by his caretaker daughter, I just knew what Mr. Washington was going to say to me, and he did not let me down: “Mr. Condon, I want an amendment to my Living Trust that leaves 80 percent to my daughter who lives with me. She deserves it for taking care of me. The other 20 percent can go my daughter who lives in Idaho.”
You should have seen his daughter’s face when I told Mr. Washington that I would not draft that amendment. With her mouth agape and complexion turning beet red, I said, “Mr. Washington, there is no way I am going to do that amendment. I’ve been through this too many times. When you die and your Idaho daughter finds out you left her only 20 percent, I’m the one she’s going to scream at.”
“What are you talking about?” Mr. Washington asked.
“I’m talking about why you are here. Who came up with the 80/20 split in the first place? You? I don’t think so. It was your caretaker daughter, wasn’t it?”
The caretaker daughter was silent. So was Mr. Washington. I took from their silence that I had hit the nail on the head. Since I was on a roll, I kept going.
“Listen, Mr. Washington. Take my advice. Leave your trust the way it is with all of your assets going to your two daughters equally. Just pay your caretaker daughter an agreed-upon rate per hour of service. Pay it as you go along. That’s what your daughter would want if she had a job working for someone else. Instead, she’s working for you, so you might as well pay her. Thanks for coming.”
I did not have such a warm bedside manner, I admit. But sometimes I have to be abrupt in order to get my point across, especially to folks who come in thinking “A” and never before even considered “B.”
When Mr. Washington and his caretaker daughter left my office (which was about five minutes after they arrived), I thought they would take my advice of pay-as-you-go-along. Until I received a call from the Idaho daughter, complaining that she still had no access to her father. During that call, I asked her whether she had ever heard from her sister or father about that payment plan.
The Idaho daughter responded that she did not know what I was talking about, which, to me, meant that the caretaker daughter had found another way to get paid. I instructed the Idaho daughter to check out title to her father’s house and bank accounts. Why? Because I’d bet that the caretaker daughter convinced her father to put her name on those assets as a co-owner.
A few days later, the Idaho daughter called me back to tell me I had guessed correctly. The jaded attorney was right, but only because he had become so cynical through being a percipient witness to similar scenarios in the past. But the result is that when Mr. Washington dies, his caretaker daughter will own 100 percent of those assets, cutting out the Idaho daughter entirely.
So, what could the Idaho daughter do to remedy this situation, to remove her sister’s name from those assets and transfer them back to her father’s Living Trust? We discussed litigation to establish a conservatorship over her father. As conservator, she would have the power to cancel the joint ownership of her father and sister and return the assets to the Living Trust. However, to get to that point, the Idaho sister would have to prove that her father was influenced by his caretaker daughter into putting her name on title to his house and accounts and that he was unable to resist that influence. But the Idaho daughter was not desirous of spending her own money for what would be a never-ending pursuit involving a lot of expensive medical experts and testimony.
Finally, I said to the Idaho daughter, “If you don’t want to sue, then there is only one solution. Get back into your father’s life. You be the one to get his groceries, take him to the doctor, drive him everywhere, clean up after him, suffer through chemotherapy with him, get his medicine, and do all the other things your sister is doing for him, including watching him die. Can you leave your life in Idaho and do that?”
There was a long silence on the phone. I asked again, “Can you?”
The Idaho daughter timidly replied, “Thanks for your time.” Then she hung up the phone.
Post-Cautionary Tale Comment: Whenever I get a call from one sibling saying that another sibling has taken over the surviving dependent parent, I automatically assume that the type of financial elder abuse described in this Cautionary Tale is taking place.
You should recognize that the child who takes care of you in your elder dependent years deserves, and is entitled to, compensation for services rendered and should be paid as you go along. In your Living Trust, you should have a specific provision that states that if you become incapacitated, your lifetime agent shall pay a salary to a caretaker child in an amount commensurate with the market rate for such services. This arrangement is preferable to your caretaker child simply helping himself to your assets because he thinks he deserves it.
The best advice I can give to you to prevent such a takeover by one of your children is to not allow this situation to arise. Tell your children to stay connected. Tell them they cannot expect to receive a full share of the inheritance if the caregiving burden is shifted to, or assumed by, one of your children.
Cautionary Tale 2: A New Marriage Requires a New Living Trust
Lesson to be learned: If you are on your second spouse, your failure to update your Living Trust can give your second spouse inheritance rights to your Living Trust assets if you die first.
Mr. Gibson was about 85, but he didn’t know his exact age. Born in Poland, he left to escape military conscription. He came to America, got married, and had a son named Sam. I met Mr. Gibson when I set up a Living Trust for him and his wife that said, in essence, that Sam would get all the Living Trust assets when his last parent died. Mrs. Gibson died a few years later, and Mr. Gibson moved into an assisted-living facility so he wouldn’t be a burden to his son and his wife.
That sounds fairly conventional, doesn’t it? But what is also somewhat typical for widowers is going a second time around. After only 10 days at the assisted-living facility, Mr. Gibson met a lady, somehow managed to travel to Las Vegas on a casino junket, and married her! No one knew of this plan. Who knows if even Mr. Gibson knew?
One thing was certain, though. As soon as Sam found out that he had a stepmother, he called my office to see me. When we met, he asked me, “Did my dad consult you before he got married?” I said, “Are you kidding? I only heard about it when you told me. But your dad should have talked to me before taking that plunge to do a prenuptial agreement.”
I also told Sam that his dad had to amend his Living Trust to make sure that his new wife would not end up with up to one-half of the Living Trust assets if he died before she did. Why? Because under California law, his new wife would be entitled to one-half unless he signed an amendment specifically excluding her as a beneficiary. When I told Sam that he could lose a good part of his inheritance, he almost went catatonic.
After that meeting, Sam went to his father and told him to see me. Mr. Gibson declined, supposedly saying, “Why? I’ve already spent a lot of money with Condon for my Living Trust leaving everything to you. Why spend more?”
Sam would not let it rest. He had me send a letter to his father that said, in essence: “Mr. Gibson, if you don’t sign an amendment to your Living Trust excluding your new wife, she will end up with half of your estate. I’m sure you are fond of your new wife, but you have known her for only a few weeks. Would you rather your assets go to your lifelong son, or to an almost virtual stranger?”
Two weeks later, not having heard from Mr. Gibson, I called him at the assisted-living facility. Expecting to speak with a mentally addled, hard-of-hearing dependent adult, I shouted a monosyllabic recitation of the issue at hand into the telephone. I felt like an idiot when Mr. Gibson said in a clear-as-a-bell voice, “Mr. Condon, why the hell are you screaming? Do you think I’m a doddering old codger? I understood everything you said!”
Mr. Gibson said he would think about changing his Living Trust. I asked, “What is there to think about?” Then he and I had a brief exchange of words I have never been able to put out of mind:
Mr. Gibson: Yeah. I’ll get back to you. It’s time for lunch.
Me: Fine. Don’t die in the meantime.
Why have those words resonated with me to this day? Because Mr. Gibson died the next day! He wasn’t supposed to die until after I got him to sign an amendment cutting out his new wife. But he did.
Mr. Gibson’s new wife hired an attorney who claimed one-half of his estate, and that’s what she got. It was a big price for Sam to pay for his father’s penuriousness.
Post-Cautionary Tale Comment: The force of circumstances or neglect may result in the failure to execute a prenuptial agreement or Living Trust amendment before or immediately after a new marriage. As a result, it is very common to rely on a previously established Living Trust to direct the flow of the inheritance. But, as seen with this Cautionary Tale, the effect is the unintended consequence of giving the new spouse certain inheritance rights in a Living Trust.
You can leave your new spouse whatever you like, even all of your Living Trust assets if that is your desire. It’s your money and property, and you can leave it as you please. However, if you are on your second time around and it is not your intention to bestow a significant portion of your Living Trust assets to your new spouse, you must hightail it over to your lawyer’s office for a very simple amendment that limits your new spouse’s interest to those assets.
Cautionary Tale 3: Sometimes Having Too Much Money Can Be a Curse
Lesson to be learned: If you have been blessed with a fortune, you have to give some thought to whether the inheritance of that fortune will turn your children away from living a productive life.
Mr. Kendall was one of the nicest men I ever had the pleasure to meet. He was married, with two elementary school children, a beautiful home, and no debts; he had never been arrested for anything, and was active in local community affairs. That sounds like the life I want.
So what was the problem? Mr. Kendall was in his mid-40s and had never held a steady job in his whole life. He was a trust-fund baby. His grandparents, now deceased, established the trust in the late 1920s for the benefit of their children, grandchildren, and great-grandchildren. After his grandparents’ deaths, the after-death agent (one of those stuffy East Coast banks that have been around since the beginning of time) started to send him $25,000 monthly, which would continue for the rest of his life.
Again, what a life! Can you imagine an existence where the only productive thing you have to do is wait by your mailbox once a month for the postal carrier to deliver your $25,000 monthly allowance?
When Mr. Kendall dies, the trust says his children will receive the entire principal of an estate worth approximately $25 million. They will receive it outright, as in “Here you go. Enjoy!”
The prospect of big and easy money deterred Mr. Kendall from any productive life. With the constant knowledge that he never had to worry, he barely finished high school, started college to follow his buddies but soon dropped out, and never had any really steady or gainful employment. Still, Mr. Kendall had enough self-awareness to know how easy access to funds ruined him. As he said to me, “I never really had the motivation to do anything productive. My parents gave up on expecting me to find a job. I guess they felt since I was never a problem to them, they’d just let me slide along; and here I am. But, Mr. Condon, even though it’s too late for me, I don’t want this happening to my children.”
I’m sure that if his grandparents had been aware of the harm their trust could do to their grandson, they would never have signed the document that provided the impetus for his trust-fund-baby lifestyle. But, at least he was smart enough to know the downside of idleness and did not want to inflict that lifestyle on his own children.
And that’s why he came to see me. He wanted to find a way to divert the trust money away from his children so they could lead more conventional lives.
I read the trust document. It allowed Mr. Kendall to divert the trust assets to a charitable, educational, or religious organization of his choice if he had no children. Of course, he had two children, so that alternative was a nonstarter. I had to find another way to rearrange the trust to accomplish Mr. Kendall’s goal. So, I told him, “Hey! That’s what judges are for. Let’s go to court and see if we can get a judge to change the terms of the trust. Maybe we can keep the money from going to your children outright when you die.”
One court petition and $10,000 in attorneys’ fees later, there we were in the probate division of the Los Angeles Superior Court to ask the judge to allow Mr. Kendall to “bust the trust”—meaning that the terms of a trust, even if they are irrevocable, can be changed if the proponent of those changes can convince a judge that the changes are in the beneficiaries’ best interests. The parties were Mr. Kendall, the bank, Mr. Kendall’s parents, and Mr. Kendall’s children. All were represented by attorneys, each charging at least $350 an hour. I put Mr. Kendall on the stand, and the following exchange took place:
Me: Mr. Kendall, are you a bum?
Mr. Kendall: Heck, yeah!
Probate Judge: I want to see all the lawyers in my chambers right now!
In chambers, the judge said, “In all my 25 years as a trial judge, I’ve never heard a lawyer ask his own client if he was a bum! And your client even seemed happy to say yes. What is going on here?” I explained how Mr. Kendall’s inheritance led him by the nose to an unproductive life, and that he wanted to prevent his children from suffering the same fate by changing the trust so they would not have total access to their wealth on their father’s death. The lawyer for Mr. Kendall’s parents nodded his head in agreement. The lawyer for the bank said he did not care what the judge did.
All eyes then turned toward the lawyer for Mr. Kendall’s children, who was appointed by the court to represent their interests. The judge asked, “Well, what is the position of the remaindermen?” (The remaindermen are the beneficiaries who receive the principal after the death of the income beneficiaries.) The lawyer said, “Just like I said in my opposition, Judge. We don’t know anything. The children may turn out to be potheads, or they may use the funds to jump-start a company to create cold fusion in a kitchen sink. How can we be so presumptive as to automatically assume that great wealth will bring about wasted lives?”
The judge said, “We can’t. Mr. Condon, what were you thinking in bringing this matter to court? Were you hurting for fees?”
I do not bring specious actions, and I do not churn clients for fees. I truly believed in the concept of Mr. Kendall’s vision, so I took his case. Nonetheless, the judge chided me for taking on a cause that, according to him, I should have known would go nowhere. Then he went back on the bench and dismissed the petition. The trust remains as is. When Mr. Kendall dies, his children will receive great wealth without any controls.
Post-Cautionary Tale Comment: An unintended consequence of a trust for a child or grandchild is the diminishment, or removal, of the motivation for higher education or gainful employment. Why work when you can surf, play tennis, or engage in whatever other activity floats your boat?
So, the question becomes: how much inheritance is too much inheritance? One famous investor stated that he would leave his children enough so they will not go hungry, but not so much that they will feel they never have to work. That is a worthy ideal, but where does the rest of the money go? To a charity, perhaps?
Sarcastically speaking, yeah, right! Many of my moneyed clients tell me they wish they had the courage to minimize the amount of wealth to a child or grandchild, but they did not spend 50 or 60 years of their lives accumulating wealth just to see it removed from the family bloodline. However, there are solutions that can be incorporated into the trust that are designed to prevent a significant inheritance from undermining the desire to lead a productive life. I discuss these solutions, sometimes called incentive trusts, in Chapter 19.
Cautionary Tale 4: Keep Your Opinions to Yourself If You Want to Inherit from Your Gay Relative
Lesson to be learned: If you object to your family member’s gay or lesbian lifestyle, you may find yourself cut out of the Living Trust.
I practice in Santa Monica, which is miles and worlds away from West Hollywood and Silverlake, two areas of Los Angeles County that have a significant gay population. Nevertheless, I seem to have attracted as clients a bevy of upscale and financially successful gay couples from those cities. Why? Because of this one exchange with my first gay clients many years ago:
Gay Couple: Mr. Condon, do you get any gay couples in your office for Living Trusts?
Me: No. I must admit, you are my first.
Gay Couple: Are you bothered by the fact that we are a gay couple?
Me: No. I say, live and let live—just as long as you don’t smoke.
That one line sent them into hysterics. They became my clients and told their many friends in the gay community about the funny and nonjudgmental lawyer in Santa Monica.
Among those new clients were Robert and Tom.
Robert was a very successful real estate investor who, except for Tom, had no family—no children, parents, siblings, uncles, aunts, cousins . . . no one. Tom, by contrast, had two brothers and five nieces and nephews, all raised as Mormons in Salt Lake City.
When they first conferred with me about Living Trusts, Robert’s net worth was about $10 million, with no one to leave it to except Tom, his longtime partner. Tom, in turn, wanted a Living Trust leaving his assets, which were nowhere near Robert’s level, to Robert. All this was fine.
The discussion then turned to the backup beneficiaries. If Tom died first, Robert’s assets would have to go to someone other than Tom, and vice versa.
In Tom’s Living Trust, Tom could name his family as his backups if Robert died first—an easy choice.
But in Robert’s Living Trust, who would Robert name as backups if Tom died before him? Since Robert was 10 years older than Tom, the naming of backups in Robert’s Living Trust became a most compelling matter. I suggested charities as the backups, but that did not fly with Robert. Finally, Robert said he had a friendly relationship with Tom’s siblings and their children, and he would name them as the backups.
Robert died about five years later, survived by Tom, who inherited Robert’s assets. I attended Robert’s funeral and was struck by the amazing turnout—which did not include any members of Tom’s family.
A few years later, I had the occasion to run into Tom, who was now the owner of Robert’s lifetime of accumulations. He seemed to be taking Robert’s death pretty hard. Trying to make some attempt at conversation, I said to Tom that I could not help but be surprised that none of his family had attended Robert’s funeral. For an estate planning attorney jaded from years of clients’ deaths, that constitutes small talk.
With this one random statement, Tom seemed to change before my eyes, from depressed to livid. He then said, “Nope. None showed up. I was surprised, too. About nine months ago, I went home for a change of scenery and to visit my family. Do you know what they told me? They said they did not attend the funeral because they did not want to give their fellow Mormons the impression that they approved of gay couples or the gay lifestyle. Can you imagine that? They never told me anything like that before.”
Tom added that running into me reminded him that he wanted to change his Living Trust to cut out his relatives, based solely on that slight. “Screw the whole bunch of them, Jeff. How fast can you change my Living Trust to leave everything to those charities you mentioned when Robert and I were first in your office?”
Years later, Tom died. After his funeral, which his relatives did attend, his brother called me, saying that he assumed he was named as a beneficiary in Tom’s Living Trust and asking me how long it would take for him to receive his share. That’s when I told him, “You got cut out after Robert’s funeral. Your big no-show and your inability to keep your Mormon opinion to yourselves cost you and your family about $30 million in real estate.”
Post-Cautionary Tale Comment: What comment can I make about this story other than the obvious? In terms of the size of the loss, the failure to tolerate an alternative lifestyle may have been the biggest mistake I have ever encountered in my practice.
Cautionary Tale 5: Don’t Let the Law Write Your Inheritance Instructions
Lesson to be learned: Failing to execute a Living Trust, for whatever reason, may result in your money and property passing to persons you least intended.
After my first book, Beyond the Grave, was released in 1996, my father and co-author, Gerald, received a phone call from evangelist Pat Robertson to invite him to discuss family inheritance planning on his national cable show, The 700 Club. What a rush of excitement this call incited! My father and I practiced law together for 15 years, and the only time he yelled for me to run to his office was to take Pat Robertson’s call on speakerphone.
Gerald told Mr. Robertson he would be delighted to travel to his studio in Virginia Beach and appear on the show. And in the interest of full disclosure, my father informed Mr. Robertson that he was Jewish and did not subscribe to any of Mr. Robertson’s politics or religious beliefs. To his credit, Mr. Robertson did not hesitate in repeating his desire to have my father on his show.
After his 700 Club appearance, Gerald returned to his office, where he received a call from a high school buddy who called himself the “Captain.” I asked my father, “Why the ‘Captain’?” He replied, “I think that it had something to do with his dad owning a fishing boat in the old Santa Monica Harbor.”
The Captain and Gerald had last seen each other 20 years before when they ran into each other while surfing at Malibu’s Surfrider Beach. Naturally, they did some catching up. While Gerald talked about his conventional societal roles as husband, father, and lawyer, the Captain talked about surfing. No marriage. No children. No steady or real employment. Just surfing.
The Captain’s beach lifestyle kind of rankled my father, and he did not hesitate to tell this to the Captain. Gerald said, “Captain, you get up every morning and only have to worry about whether you are going to surf, swim, jog, or play tennis, while I have to put on the lawyer suit and go to an office and make enough money to support a wife, children, mortgage, office staff, overhead, and all that.” To that the Captain replied, “That was a choice you made, Jerry.”
Fast-forward 20 years with the Captain and my father on the phone. The Captain said, “Jerry, I just saw you on Pat Robertson’s show. I didn’t know you converted.” My father and I laughed many times about that comment. Since the Captain had seen Gerald on that show discussing inheritance planning, my father mentioned that now would be as good a time as any to talk about doing a Living Trust for the Captain.
The Captain had a small house that he had bought in the early 1950s now worth at least $750,000, as well as stock and bank accounts of a few hundred thousand. He still had no wife or children. He was older, but he was still living the beach lifestyle.
My father reminded the Captain that if he did not choose who would get his house and money, it might go to the state of California. Why? Because if anyone dies without an inheritance plan, the law steps in to impose its own inheritance plan. And the law states that if a person dies without a testamentary document and with no blood relatives, all of that person’s assets will escheat to the state.
The Captain said he did have relatives, two brothers living “somewhere back East” whom he had not seen for a long time. He also had a longtime girlfriend. Gerald told the Captain that if he did not have a will or Living Trust that named his girlfriend as a beneficiary, she would not receive one penny. The Captain responded, “Jerry, let’s go surfing. It will be like old times. We can talk about that inheritance stuff then.”
A week later, they were perched on boards at Surfrider, waiting for the next swell—just like the old days, except now they were kind of old. During a lull in the action, the Captain said, “Jerry, I hope to die on a day that’s rainy and cloudy. I don’t want to die when the sun is shining and the surf’s up.” Except for that comment, there was no other talk about death, dying, or inheritance planning. Who wants to talk about business at the beach?
The Captain did die on a bright, sunny day. It was a heart attack that hospitalized him, and eventually killed him. There was a surfer’s burial. His body was cremated and buried at sea, surrounded by his surfing buddies in a small flotilla of surfboards.
About a week following the burial, the Captain’s girlfriend visited Gerald, asking about his will. She had scoured the house looking for anything having the appearance of a testamentary document and found nothing. She came to my father assuming he had made a will and left it with us. But he hadn’t. Even though Gerald had nagged him on and off for about a year, the Captain never got serious about doing one. It was always talk of “We’ll get around to it.”
The girlfriend had no standing as an heir. Unless she did something, she would get nothing. But what could she do? My father recommended she consider suing the Captain’s estate by claiming that he promised to compensate her in a will for caretaking services; but it was just an idea. Gerald could not see suing his old surfing buddy, the Captain, even though the defendant would have only been his estate.
With no will or Living Trust, the law of the state dictated the recipients of the Captain’s money and property, who were the Captain’s brothers. My father hired an Internet investigator to locate the Captain’s brothers. He found them. While figuratively holding his nose, my father called them with the news of their brother’s death. Not only was this the first time they learned of their brother’s death, but they also told my father that they had assumed he had died many years before.
Gerald also informed the brothers that the Captain’s estate was worth about $1 million and, as the Captain’s longtime friend, he would be honored to handle the estate administration for less than full charge.
My father never heard back from the brothers, other than receiving a letter from the brothers’ new attorney saying that he had been retained by the brothers to probate the Captain’s estate. The letter also requested that Gerald hand over any relevant files he had in his office. My father had no such files, because the Captain had resisted all entreaties to establish a will or Living Trust.
That was it. Near-strangers who had not seen or heard from their brother in over 50 years received the Captain’s estate. I am certain they were the last persons the Captain would have wanted to receive his money and property. His girlfriend of over 20 years got nothing. And my father did not even get back the $100 he had paid to the Internet investigator.
Post-Cautionary Tale Comment: A piece of scratch paper could have prevented this disaster. In most states, a handwritten statement of testamentary wishes on any paper is sufficient to constitute a valid will. It does not have to be witnessed or notarized. It only has to be entirely in the handwriting of the person writing it. This is called a holographic will, and it is just as legal as any will drawn by an attorney.
This is exactly as it sounds. There is no catch. You could rip a page from this book and write your inheritance instructions in the margins. As long as the notations are entirely in your handwriting, those notations can serve as your holographic will.
No lawyers. Just you and a pen. Sure, there may not be any of the provisions we lawyers like to throw into a will to make it a complete document; but as long as you write down who gets what in your own handwriting, and as long as you sign and date it, you have a valid inheritance Band-Aid.
Cautionary Tale 6: Joint Tenancy Gone Wrong
Lesson to be learned: Don’t place title to your house into co-ownership with your child just to avoid paying a lawyer to do your Living Trust. If your child gets into money problems, there goes your house.
She said, “Mr. Condon, I want to apologize about what I said to you.” I responded, “I gladly accept your apology, but who the heck are you?”
I’m not very good at recalling names, but facts are my stockin-trade. The more she talked about what happened, the more I recalled about her. It must have been about 10 years earlier when she first conferred with me. She owned a 10-unit apartment building in Santa Monica. Her husband had died and she had one child, a married daughter with an eight-year-old son.
I advised her to establish a Living Trust that would transfer her apartment building to her daughter after her death. She agreed. I then quoted her the fee to prepare her Living Trust. She was not happy. “Another money-grubbing attorney! she said. “What a surprise!”
There are three certainties in this life: death, taxes, and people who don’t want to pay a lawyer a fair fee. My father said one thing to me about charging clients that I use as my standard to this day when I determine a fee: The fee has to be fair to both the client and the attorney.
Such is the truth. If the fee is not fair to the attorney, the attorney will perform the work grudgingly. If the fee is not fair to the attorney, the attorney will not bust his hump for the client to do the best work possible. If the fee is not fair to the attorney, the attorney may only want to do the minimum amount of work necessary to avoid a malpractice action.
You have every right to complain about what an attorney has charged you for services rendered. Heck, I complained a lot about the bills I received from my divorce attorney, because he charged me up the kazoo for very shoddy work that had to be redone by the attorney who replaced him. But when you speak with the attorney to discuss that bill, keep in mind this fairness standard and approach the discussion on that basis. It may save you a lot of wondering . . . and yelling and screaming.
In any event, the lady in my office 10 years earlier was not complaining about a bill for services performed, but rather my quote for a Living Trust yet to be performed. She said it was too high, and that the same probate-avoidance objective could be achieved at a fraction of the cost by putting her apartment building in joint tenancy with her daughter.
Of course, she was right. By signing a deed placing the property in her and her daughter’s names as joint tenants, she could arrange that the daughter would end up with the entire property after the mother’s death without any probate procedure. And compared to the Living Trust, the cost to prepare and record that deed was almost negligible.
When she mentioned the joint tenancy option, I immediately dove into my canned diatribe about the dangers of a parent and child as co-owners of real property, which is this: Your property becomes subject to your daughter’s problems. If she gets into a divorce, if she or her husband files bankruptcy, or if she or her husband gets sued, there goes your house.
This was her response: “You did not talk about joint ownership until I raised it first. You don’t fool me, Mr. Condon. It’s a secret that you and all the other lawyers want to keep from people like me just to make more money.” With that, she concluded our meeting with the “money-grubbing attorney” remark and walked out the door. I did not have any more contact with her until 10 years later with the call of apology.
So what happened? She hired another lawyer to prepare the joint tenancy deed, which put the apartment building in the names of her and her daughter as joint tenants. For about 10 years, nothing happened. She continued to collect rents and manage the building.
Then one day, her daughter sent a letter to each tenant telling them that she, the daughter, was a 50 percent owner and instructing each tenant to send her half the rent.
As soon as the mother found out, she confronted her daughter, who said, “My husband and I are having money troubles, and the only thing we could think of to help us out was use the apartment rents.”
I had warned this lady 10 years before that making her daughter a joint tenant could lead to losing the building because of her daughter’s problems. That the daughter might actually assert her right to receive 50 percent of the rent didn’t come up. That was my mistake; but given her haughty “I don’t need you” attitude, I doubt mentioning such a possibility would have had any effect.
I asked about what happened after she confronted her daughter. She said, “My grandson came into the room and chased me out. While I was running down the stairs, he said that he would hurt me if I ever came back and bothered his mother.”
It is a sad story, but it ends with a halfway decent result.
The good half: The lady sued her daughter, which resulted in my client reclaiming her entire property.
The bad half: It took several years of litigation to achieve that result; the attorney fees and costs were 100 times more than what I had quoted her for a Living Trust; and she lost her daughter and grandson.
Post-Cautionary Tale Comment: Never put title to any real property in joint ownership with your child for the purpose of that child becoming the 100 percent owner if you die first. Yes, it is an inexpensive way of transferring ownership to your child after your death. Yes, it avoids the expense of a probate court procedure. Yes, it avoids the cost of a Living Trust. But, look at the downsides.
• It exposes your property to creditor problems of your child and your child’s spouse.
• It exposes your property to the bankruptcies of your child and your child’s spouse.
• It exposes your property to the IRS problems of your child and your child’s spouse.
• It may give your child’s spouse marital rights or claims in the event of a divorce.
• It will require you to get your child to sign deeds and other documents if you want to sell or refinance your property, and perhaps the signature of your child’s spouse.
• It exposes your property to any malpractice and accident claims against your child or your child’s spouse.
• It exposes your property to the risk that your child may attempt to sell or convey a share of the property to a third party.
There is also the remote possibility your child will die before you, which would put the property back in your name as a 100 percent owner, requiring you to start over with another transfer plan.
Cautionary Tale 7: When It Comes to Money, Family Loyalty Goes out the Window
Lesson to be learned: A senile surviving spouse + a little greed = zero protection for the surviving spouse.
No lawyer likes to be accused of not protecting a client. But there I was, standing so accused when Mrs. Ray said to me, “You didn’t protect me.”
How did I get there? How did it come to that point?
About eight years before that day, Mrs. Ray and her older son, David, arrived at my office. She appeared mentally alert and straightforward about what she wanted. She was weary and too old to continue to live alone in her Santa Monica home, which was the primary asset of her Living Trust. She wanted to move into an assisted-living facility that would cost about $5,000 per month. She would have to sell her house to pay for this.
Mrs. Ray relied on David for her daily needs, and now she wanted him to handle all aspects of the sale: hiring the listing agent, reviewing the offers, signing an acceptance, dealing with the escrow documents—all of that. The plan was that when the house was sold, David would place the funds in the bank and write the checks to pay the monthly assisted-living fee, as well as checks for whatever else she needed.
It was a decent plan, though a little unrealistic. A sale during her lifetime would generate an immediate capital gains tax; but that’s what she insisted, and she seemed clear-minded enough to know what she wanted.
The solution was simple enough. Mrs. Ray would resign as trustee of her Living Trust. With that act, the person named in her Living Trust as her after-death agent, David, would elevate to the position of lifetime agent. As lifetime agent, David would have the power to manage Mrs. Ray’s Living Trust assets for her benefit and sign all documents (including checks) necessary to conduct business with the Living Trust assets.
I did not hear from Mrs. Ray until eight years later. Actually, the call came from one of the nurses in the nursing home section of the assisted-living facility, who said that Mrs. Ray wanted to see me. Putting aside my normal reluctance to visit this type of place (which always struck me as a storage facility for those waiting to die), I went.
In bed, and disheveled in appearance, it was fairly obvious that Mrs. Ray was suffering from some loss of mental acuity. She said, “I want to go home, but the nurse says I have no home to go to. What happened to my house?” I said, “Mrs. Ray, don’t you remember? You came to my office with your son and resigned as trustee. You put him in charge of your financial affairs. He followed your instructions to sell your house and use the money to pay the bill for the nursing home.”
I knew there was going to be trouble when I heard her response: “I don’t remember being in your office.”
It seemed pointless to repeat what had happened. So I just sat there and took it when she pointed her finger at me and accused me of not protecting her. She felt cheated and taken advantage of, and, to her, I was to blame.
As she laid into me, for all the patients and staff to hear, I engaged in a series of mental gymnastics reliving the part I played. Eight years earlier, Mrs. Ray was fully aware of her action of resigning as trustee and appointing her son as lifetime agent to sell her home. That decision created a result that the client now did not want—the loss of her home. At the time, I gave her my usual written disclosure that a person who resigns as trustee surrenders management and control of the Living Trust assets to the new lifetime agent. But, should I have done more? Perhaps that disclosure works more to cover my backside than warn and protect the client. Should I have refused the client’s instruction for her own safety and not taken that business?
With Mrs. Ray’s accusation still ringing in my ears, I left the nursing home, went back to my office, and called David. I explained that I had visited his mother and she was wondering why she couldn’t go home again. David responded, “Forget it, Jeff. She won’t even remember you were there.”
In light of Mrs. Ray’s condition, I felt that David was probably right and I sighed a bit in relief. While I had David on the phone, I asked him about the sale price of his mother’s home. David said, “Uhhhh . . . I didn’t sell the house. My accountant told me that if I sold it, there would be a huge capital gains tax on it. He said that I could avoid that tax if I rented it out for two years and then exchanged it for another investment property. So, I did. I turned that house into an apartment building, and the rent goes for Mom’s expenses.”
That seemed like a good plan to avoid the tax. But then it dawned on me—that apartment building belonged to Mrs. Ray’s Living Trust. I reminded David that as his mother’s lifetime agent, he still had the duty to use that property for his mother’s benefit only.
It was then that David casually pointed out that the property was now in the joint names of him and his wife. “Jeff, she’s getting her rent paid. She doesn’t know what’s going on, so it just doesn’t matter. It goes to me anyway after she’s gone.”
The hell it didn’t matter. Mrs. Ray’s Living Trust said that all of her Living Trust assets would pass to her two sons on her death. By taking that property out of his mother’s Living Trust and giving it to himself and his wife, David stole his brother’s half of that property. When I shouted this at David, he casually replied, “Calm down, Jeff. You’ll blow a gasket. My brother died three years ago. It’s just me. I get it all when Mom dies.”
“David,” I asked, “did your brother have any children?”
“Sure. He has three children.”
“Well guess what, David? Your brother’s children step into his shoes. They take his one-half share of your mother’s Living Trust assets. You stole your brother’s children’s half of their inheritance.”
David would not be fazed. To that he simply said, “Well, Jeff, they don’t know anything about it. All they know is that my mother gave me the house in my name. So long as Mom is taken care of, I don’t think they care.”
“But David,” I countered, “that’s not what your mother’s trust says. It says everything equally—one-half to you and one-half to your brother’s kids if your brother dies before your mother. What part of that don’t you understand?”
“Well, Jeff, maybe they will just never know.”
For reasons dealing with attorney-client privilege, I could not notify anyone about this major breach of trust. Mrs. Ray was incompetent, so telling her would have no effect. I suppose I will have to deal with this situation when Mrs. Ray dies. But in the meantime, I cannot help but think of the Ray situation as another example of family loyalty having no meaning when it comes to dividing money in the inheritance arena.
Post-Cautionary Tale Comment: The Living Trust is not just a vehicle that contains your inheritance instructions. It also appoints a lifetime agent to manage your Living Trust assets for your benefit in the event of your incapacity. That is a terrific objective, but, as this tale has shown, one that clearly can be abused by your lifetime agent when you become incapacitated.
From an objective standpoint, I made no error with Mrs. Ray. I did what she instructed me to do, and I sent her a letter discussing the ramifications of that decision. She resigned as trustee, which brought in her son as the manager of her Living Trust assets with the instruction to sell her house.
But in hindsight, I now recognize that for some reason I failed to get the usual vibrations from my radar that something was up. There are times when you should say no to a client, and that was clearly such a time. Although she was fully capable of making that decision, I should have anticipated the possibility of her becoming senile, leaving her vulnerable to her son. But, with her so bright and vibrant in my office that day eight years ago, I did not consider it.
Should Mrs. Ray be responsible for her own actions? Should she have anticipated that she might someday be incapacitated to the extent that she would be unable to fathom or resist financial abuse perpetrated by her lifetime agent? Of course. We are all in charge of our own destinies. You reap what you sow.
Still, she came to me, the professional, for advice, and I should have been more vociferous in warning her about the possible negative wake created by her decision to resign as trustee. I will always believe that I should have jumped in to protect my client against herself, even if that meant refusing to do the work and not getting a fee.