Wednesday, February 27, 2013

An Estate Plan For Cinderella's Parents


A good estate plan I saw Cinderella for the first time with my daughter recently, and though I (and likely you) were familiar with the outline of the story, we often forget the backstory. It starts with the disaster, specifically, an estate planning disaster in a world that does not need to worry about the estate tax or probate, or even lawyers.

You see, Cinderella’s mother died when she was a child. Her father decided to remarry a woman with two girls that are about the age of his own daughter. Cinderella’s father dies next, when she is still a child. He leaves the estate to his widow (the normal thing to do in the real world), who serves as Cinderella’s stepmother. This woman takes control of the estate for the benefit of herself and her own two daughters. Cinderella then, as presumably everybody who is reading this knows, is treated as a servant in her own home by the infamous wicked stepmother. Cinderella is now reduced to befriending rodents and birds with dressmaking skills.

What is interesting about the Cinderella backstory is how common it is. It is a theme that exists throughout all of human civilization and in stories from ancient times. Rhodopis is essentially the name of Cinderella in ancient Greece. There are many other versions of the story told throughout history around the globe. It is also well known that men are very likely to remarry when they become widowers, a social phenomenon that has been noted and studied for years.

The theme of subjugation of a child (in Cinderella’s case, being a presumably unpaid servant) using the orphan’s own assets is based on the inherent structural problems of asset succession, much of which cannot be addressed through legislation. The old manage the money of the young. This is often what leads to a version of the oppression experienced by fictional Cinderella. Of course, societies have attempted to remedy these concerns by regulating individuals and institutions known as “fiduciaries.” Minors are often represented in court by a “guardian ad litem.” Judges in probate court often presume to protect the interests of minors in what seems to many as a paternalistic system. Indeed, in some jurisdictions, probate court is known as “orphan’s court.”

The structural problems, however, can never really go away. For the most part, societies developed remedies that may be imposed when it is already too late. The presence of laws by itself will not completely stop men (or wicked stepmothers) from taking advantage of wealth when the opportunity presents itself.

Every year in virtually every jurisdiction in the United States with a sizable population there are cases involving breach of trust or similar claims relating to estates. The cost of such disputes could easily surpass the cost of probating a last will and testament or paying an estate tax to the federal government, if there was one.

The good news for people litigating with a competent attorney is that they actually have some sort of a claim that they can make to a court. Much of the time, affairs are structured so poorly that there is nothing anybody can do about the resulting injustice. It is common for spouses to own their property jointly, even widowers who remarry. Married couples like to name each other as beneficiaries in their retirement plans and life insurance, and they like to structure ownership of their homes in such a way that all of the property passes to the surviving spouse through the deed (joint tenancy with right of survivorship for example). They do the same with their financial accounts and everything else that they own. There is no probate, no trust administration, and no notice to anybody. The surviving spouse just gets everything. Often, even when there is a trust or a will, the spouse gets everything in a way that makes the Cinderella problem no less likely. Now in the era of portability and a high estate tax exemption where the vast majority of the U.S. population will never have to worry about the estate tax, this type of “estate planning” may threaten to become the norm.

Married couples often plan for their own convenience. When people plan their estates, they often think about their own mortality but not the consequences of the mortality of others and the results that may come from other unfortunate occurrences. Most have little to do with the government.

In the non-Disney world, wicked stepmothers are everywhere. We call them bankruptcy trustees, judgment creditors and yes, actual wicked stepmothers. The stories of modern-day Cinderellas are remade and retold every day throughout the country. The wicked stepmothers are often real brothers and sisters, uncles and aunts, people will assume the title of “trustee” or simply hold assets that should belong to others but have been usurped.

The parents of modern-day Cinderellas were not bad people in life; they often failed to properly plan. They certainly did not wish ill for their children. Though ill they wrought by not planning for things common in the human experience. An attorney and client, often with other advisors, collaboratively develop solutions for issues such as creditor protection, remarriage protection, guardianship and special needs. This type of planning requires attorneys as counselors. State legislatures and the Federal Government cannot write laws to protect families they have never met.

Litigation attorneys in the trust and estates world are not Fairy Godmothers. They may be helpful in fighting injustice and helping resolve the agony that occurs when there is a cause of action, something a lawyer can file in court in the first place. Unlike fictional Fairy Godmothers, litigation attorneys are paid. Litigation itself is not only expensive, but burdensome and difficult in a myriad of other ways. There is no guarantee that good estate planning will eliminate the risk of litigation, though all good estate plans certainly plan for risks that are known. Some risks have been known for thousands of years.

Fairy tales may end well because of magical fairies and rodents, but like Cinderella, they start with avoidable tragedy common to the human experience in a world without talking mice. A good estate planning attorney will help families avoid what could be avoided.

This article was original posted in and can be seen here

Wednesday, February 13, 2013

How to Leave Assets to Minor Children

leaving assets to minors Every parent wants to make sure their children are provided for in the event something happens to them while the children are still minors. Grandparents, aunts, uncles and other relatives often want to leave some of their assets to young children, too. But good intentions and poor planning often have unintended results.

For example, many parents think if they name a guardian for their minor children in their wills and something happens to them, the named person will automatically be able to use the inheritance to take care of the children. But that’s not what happens. When the will is probated, the court will appoint a guardian to raise the child; usually this is the person named by the parents. But the court, not the guardian, will control the inheritance until the child reaches legal age (18 or 21). At that time, the child will receive the entire inheritance. Most parents would prefer that their children inherit at a later age, but with a simple will, you have no choice; once the child attains the age of majority the court must distribute the entire inheritance in one lump sum.

A court guardianship for a minor child is very similar to one for an incompetent adult. Things move slowly and can become very expensive. Every expense must be documented, audited and approved by the court, and an attorney will need to represent the child. All of these expenses are paid from the inheritance, and because the court must do its best to treat everyone equally under the law, it is difficult to make exceptions for each child’s unique needs.

Quite often children inherit money, real estate, stocks, CDs and other investments from grandparents and other relatives. If the child is still a minor when this person dies, the court will usually get involved, especially if the inheritance is significant. That’s because minor children can be on a title, but they cannot conduct business in their own names. So as soon as the owner’s signature is required to sell, refinance or transact other business, the court will have to get involved to protect the child’s interests.

Sometimes a custodial account is established for a minor child under the Uniform Transfer to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA). These are usually established through a bank and a custodian is named to manage the funds. But if the amount is significant (say, $10,000 or more), court approval may be required. In any event, the child will still receive the full amount at legal age.

A better option is to set up a children’s trust in your will and name someone to manage the inheritance instead of the court. You can also decide when the children will inherit. But the trust cannot be funded until the will has been probated, and that can take precious time and could reduce the assets. If you become incapacitated, this trust does not go into effect…because a will cannot go into effect until after you die.

Another option is a revocable living trust, the preferred option for many parents and grandparents. The person(s) you select, not the court, will be able to manage the inheritance for your minor children or grandchildren until they reach the age(s) you want them to inherit—even if you become incapacitated. Each child’s needs and circumstances can be accommodated, just as you would do. And assets that remain in the trust are protected from the courts, irresponsible spending and creditors (even divorce proceedings).