29/04/2010

Working in estate planning means very often having to ask the hard questions – questions about their family that can make clients feel a little uncomfortable.  I had to ask one of those the other day.

 

Adam and Donna came to see me about their estate planning.  They particularly emphasised that they wanted their grandchildren to receive a substantial sum from their estate.  After we discussed it for a while it became clear that they wanted that sum protected by the use of a testamentary discretionary trust.  During our discussions I asked “How do your children get on with their children?  Is there any friction?”  They immediately wanted to know why I would ask such a question.

 

The answer is that if they decided to set up a testamentary discretionary trust then they will have to decide who will be the trustee.  That trustee will have a lot of power and we need to know that they will carry out the deceased’s wishes.  If there is any friction between, say, the deceased’s daughter and one of her children then making the daughter the trustee of the testamentary trust might not be a good idea.  The daughter might make decisions that don’t favour the child she doesn’t get on with.

 

It was clear that this explanation unsettled the clients, but it certainly got them thinking. I told them a war story about a case we handled where the daughter received 90% of her father’s estate but sued the estate for the other 10% which had been given to the deceased’s grandson i.e. the daughter’s son.  The daughter and her son were so estranged she wouldn’t even let him have 10% of his grandfather’s estate.  We successfully defended her claim but the case shows just how extreme some people’s behaviour can be when family relationships break down.

 

Of course that’s not the only hard question you might be required to ask.  For example - how do brother and sister get on?  That question should have been asked when Ervin Katz did his estate planning.  Katz had been the sole remaining member of a SMSF and had appointed his daughter as an additional trustee to the SMSF to allow the fund to continue. He put in his Will that he wanted to leave the super death benefit in the fund equally to his son and daughter.

 

After his death in 2003, his daughter had her husband join as a fund member, giving them control of the fund. The daughter then refused to pay her brother any of her father's benefit as he had directed in his Will. The brother sued. The court held the daughter could do as she did (Katz vs Grossman).

 

When it comes to large amounts of money you never know what family members might be capable of. Estate planners have to test their clients’ resolve to protect the estate and to ensure that the client’s estate ends up in the hands of the family members chosen by the client and not otherwise. 

 

It’s those kinds of hard questions that can cause people discomfort.  Will the family members do the right thing by one another? Is your child’s marriage strong and likely to survive? Would your widowed spouse do the right thing by your children even if he or she re-marries? Are family members likely to be influenced by their spouses?

 

Ultimately it is the client’s decision as to how they want their estate handled.  I once raised with a mature couple that they might want to try to protect their son’s inheritance from his spouse in case the son’s marriage failed at some time in the future.  The husband fixed me with a determined gaze and said quietly “I love my daughter-in-law and I would feel very uncomfortable doing any such thing”.  No problem – the important thing from the adviser’s viewpoint is to be able to say that he gave the advice.  It is up to the client whether and to what extent they take it.

 

The moral of this story then is that it’s much better to err on the side of caution, assume the worst of everyone, regardless of whether they are family or not, and plan to put in place protections that will safeguard against self-serving manipulation of the estate.

 

So what did Adam and Donna do?  Well even though they didn’t believe that their children would behave like that toward the grandchildren, it was decided to appoint an independent trustee of the testamentary trusts so that if there were a problem between a child and a grandchild the independent trustee would be there to ensure that the estranged grandchild still received their entitlement from the trust.

 

Estate planning is not just for rich people.  It is for everyone who wants to ensure that their families are looked after following their death.  

 

For more assistance and advice on Estate Planning contact Peter Townsend of TOWNSENDS BUSINESS & CORPORATE LAWYERS on (02) 8296 6222.