Just before her 80th birthday, Ernest (“Big Daddy”) Bux’s octogenarian Auntie Delusional (Auntie Del) died without a will or any other estate plan in place to give guidance to her husband (Uncle Tom) and their two adult children. “Who needs one?” was her retort for decades. And, “Wills are so over-rated.” Was Auntie Del right? Is a will or other estate planning really necessary?
As summer ends and the cooler weather of fall arrives, Tripp Freeley yearned for the days of sun, sand and surf. So Tripp began planning his family’s vacation for next summer. A hotel would not work for Tripp, his wife and three young kids – they needed a house with multiple bedrooms. So Tripp went to an online short-term rental by owner website and reserved a house near the beach.
The next summer the family drove 7 hours from Dallas to the house. Shortly after they began getting situated there was a knock on the door. Tripp opened the door to find a local code compliance officer. The compliance officer told Tripp that the city made it illegal to rent the house, and they had 24 hours to vacate. Tripp is floored and mortified that his “perfect” family vacation is now ruined. Does the city have the right to ban property owners from renting their homes out on a short-term basis? Continue Reading Think You Can Rent Out Your House While You’re On Vacation? Think Again.
Having just fired up her Amazing Alexis and connected it with her other “smart” devices handling her heat, lights and security, Honor was sharing with her husband some troubling, sensitive health information about her trip that day to the doctor’s office. Honor’s tale was interrupted by a call from her brother who demanded “unplug your Alexis devices right now, You’re being hacked!” Sadly, Honor’s recorded tale also made its way to the editor of the neighborhood news-blog Gladys Gravits, who shared it in the community email, along with her effusive professions of sympathy. Does Honor have any recourse? Continue Reading Privacy Alert – Alexa (and Friends) is Listening!
A number of years ago John Drane, owner of Drane Plumbing & Supply, executed a Power of Attorney (POA) naming his eldest daughter LaTrina Drane as his attorney in fact. John’s debilitating stroke last weekend risks placing him in rehabilitation for months. Determined to continue the family business that offers its customers “Let Us Drain Your Swamp,” LaTrina dusts off John’s POA. Will Latrina have any problems? Continue Reading Returning “Power” to the Power of Attorney
A huge fan of the Hill Country, Skare D. Katz buys a large piece of undeveloped land from the Solable Family outside of Austin. Skare D. plans to build a ranch for retirement. One Saturday while Skare D. is visiting the property to visualize his plans, a woman shows up and stands underneath a large oak tree, staring at the ground. Skare D. approaches the woman and asks her for her name. The woman responds, “Inka Solable.” When Scare D. asks Inka what she’s doing there, Inka responds, “This is where my great-grandfather is buried. I come pay my respects every Saturday.” Dumbfounded, Skare D. responds, “Ma’am, I appreciate that, but I own this property now. I don’t want you coming by every Saturday.” Inka replies, “I have a right under the law to access this property when I want. I’ll see you in Court!” Is Inka right? Continue Reading The Grave Reality of a Cemetery on Your Property
On Valentine’s Day, Zack takes Kelly, his high school sweetheart who goes to a different college, to the Max for a romantic dinner. At the end of the meal Zack says, “Kelly, I want us to promise each other that after college we’ll both move back to Bayside and get married. Will you marry me?” Kelly responds, “Oh Zack, that’s wonderful! I love you so much and I promise.” Delighted, Zack puts the engagement ring on Kelly’s finger and says, “That’s great Kelly! Now there’s one more thing – I spent every dime I made working last summer on this ring. Will you promise me that if we don’t get married after college you’ll return this ring?” Kelly writes on her napkin “I promise to return my engagement ring if we don’t get married after college,” signs her name and gives it to Zack.
Two years later, Kelly decides to take make a surprise visit to Zack’s school one weekend. When she arrives she finds Zack at a party kissing another woman. “You two-timing slime ball! We’re through and never getting married,” Kelly tells him. Zack asks for the ring back and Kelly refuses. Three months later Zack sues Kelly for the ring. He still has Kelly’s napkin from Valentine’s Day. Does he have a good case even though he’s a pig?
Written Promises Around Engagements Are Enforceable
We covered this topic many years ago under a different fact scenario and the law has not changed since then. Zack is entitled to the ring. Kelly promised in writing to return the ring if they did not get married after college. Importantly, Kelly’s written promise was not conditioned on who broke off the engagement or why it was broken off. Thus, Zack gets the ring although his actions caused Kelly to call off the engagement.
What if Kelly Didn’t Give Zack the Napkin?
Kelly probably gets to keep the ring because it was Zack’s fault that the engagement ended, even though Kelly called it off. In the absence of an enforceable written agreement, Texas follows the conditional gift rule, which requires Kelly (the donee) to return the ring to Zack (the donor) if Kelly is at fault in terminating the engagement. But, Texas courts allow the donee to keep the ring if the donee can prove that there was a justified reason for calling off the engagement. Zack’s cheating should be enough, absent other facts.
Tilting the Scales in Your Favor
While some people might find the conditional gift rule offensive, other people may see it as a reasonable approach. Regardless, it’s important to remember that if you have significant assets you are bringing into a new marriage, you may want to consult with an attorney about whether you should have a prenuptial agreement in place in case the marriage does not work out.
Last month, Prince died at the ripe young age of 57. He had no will, as reported by his only full sibling (a sister). She filed for probate of his estate in Minnesota, where he owned a home in Paisley Park. Under Minnesota law, a probate court there will determine who gets what.
Typically, an intestate estate (one without a will) in Minnesota would first go to his children, then to his parents, and then to any siblings. As Prince was twice divorced with no children, and his parents are deceased, his sister and five surviving half brothers and sisters are banking on splitting the estate. Various pundits estimate Prince’s net worth between $150 and $300 million. While some suggest he was very attentive to his business matters, other say he didn’t trust anyone and his financial affairs are in disarray. If this is the case, who will control and manage Prince’s brand, his record label and the thousands of unreleased songs?
Assuming no will exists, Prince’s sister asked the Minnesota probate judge to appoint her as a special administrator. In the probate court, all financial details and business relationships will become public record and all asset decisions and distributions require court approval and will be shared with the public.
Probate Issues and Concerns
The Heirs: There will almost certainly be a fight, even if it’s just among his siblings. Given the amount of money involved, it would not be a surprise if one or more individuals came forward claiming to be Prince’s child. If a claim turned out to be true, they would eliminate everyone else as a potential heir.
Asset Management: The expanse of his assets–a humongous song catalogue (both released and unreleased) and vast real estate and business holdings–would be daunting to manage, even without the worries of taxes and heirship challenges.
Privacy: Unlike the privacy granted in estate planning, every asset must be filed and every minor decision about management and distribution of the assets and payment of liabilities will likely to require approval by the probate court. It’s a lengthy process, and will likely take years.
True to Ben Franklin’s adage, death and taxes are certain. Having not availed himself of the benefit of estate tax planning and legal counsel, the bite could be painful. If we assume an unplanned $350 million estate, it’s conceivable that estate taxes could be over $138 million. Even if the estate was a paltry $150 million, estate taxes could be roughly $58 million.
But wait! Who has that kind of cash lying around? For a farmer or rancher, the dilemma is called “land rich and cash poor.” To get the money to pay the estate taxes, something will need to be sold. If the assets are not readily marketable at full value, it’s possible that some will need to be sold at a fire sale discount to secure the necessary funds. Land sales are especially subject to this risk.
Tilting the Scales in Your Favor
Avoid these 5 Frequent Estate Planning Stumbling Blocks
- No will. Over 50% of Americans like Prince do not have a will and do not expect to die anytime soon. Whether you have a lot or a little, start with a will, particularly if you have kids or are divorced. If you don’t have a will, the laws of your state will determine who receives your assets after you die, how they are divvied up and by whom.
- Failure to set up a trust. Do you want everyone to know how much money you had and who got it? Planning in advance avoids the public airing of your laundry. Consider a living trust. A living trust details who is entitled to your assets and how they’ll receive it, but it’s not part of the probate court inventory that is generally filed, and it can offer some tax benefits.
- Failure to Implement the Estate Plan. As a trial lawyer, I cannot count the number of times that a well-intended couple completes their estate planning process and pays the lawyer, but doesn’t supply the funding of the related trusts and business entities or change the beneficiaries on the insurance policies and retirement plans, saving it all for “later”. Only, “later” doesn’t come before death. Good plan. Good idea. But, it’s as if it never happened, because it didn’t.
- Neglecting to update estate plans. Life changes. Children are born and pass into majority. Divorces affect estate plans as do new spouses. The needs of older children change. Grandchildren are born. Businesses are bought and sold. All of these are reasons to update your estate planning documents.
- Forgetting to plan for disability. Physical and mental needs change as we get older. Power-of-attorney documents can protect you if you become incapacitated, or be subject to challenge if you wait too long to sign them. Properly drafted living wills and advance directives can give loved ones the authority to make medical and financial decisions when you can’t. Without them, your family and spouse may not have the legal right to speak or act on your behalf when you aren’t capable.
Estate Planning Expertise
Gray Reed experienced probate and estate lawyers Norm Lofgren, Greg Sampson and their protégé Jennifer Gurevitz are the experts here. I work with them to pick up the pieces when one or more of these estate planning stumbling blocks erupts into a full-fledged fight between heirs over an estate.
After 30 years of running his family-owned business, Hillbilly Oil Co., Jed Clampett decided to retire in 2013. The board of directors elects Jethro Bodine as Hillbilly’s President and Elly May as Vice President. Both Jethro and Elly May sit on the company’s board of directors. Soon after taking over, Jethro is presented with a proposed lease for the company’s land in Oklahoma. The operator offers Hillbilly Oil above-market bonus payment and royalty. Jethro turns it down though, thinking the company is better off drilling the land itself while oil prices continue to rise. Soon after Hillbilly begins drilling oil prices tank, causing the company to lose $5 million. Jed can’t believe to learn that Jethro rejected the proposed lease, and soon learns that Jethro bought the drilling equipment from a company that he has a 50% interest in and paid double market price, but never disclosed his interest to the other board members. He decides to file a derivative lawsuit against Jethro. Jethro responds to the lawsuit claiming the “business judgment rule” protects him from any liability and that Jed’s lawsuit also fails because he did not make a demand on the corporation. Is Jethro right?
Explaining Closely-Held Corporations and Shareholder Derivative Actions
A closesly-held corporation has fewer than thirty-five shareholders and its shares are not listed on a national securities exchange. Typically the shareholders of closely-held corporations are family members, but that is not a requirement to make the corporation “closely-held.” A shareholder derivative action involves a corporation’s shareholder bringing suit on behalf of the corporation against its officers or directors.
The Business Judgment Rule
The business judgment rule comes up in two contexts. First, it protects officers and directors from a shareholder’s derivative lawsuit for acts that are within the honest exercise of their business judgment and discretion. In other words, officers and directors are protected from liability for past actions that are “negligent, unwise, inexpedient, or imprudent.” Second, the business judgment rule applies to the board of directors’ decision of whether to pursue the corporation’s cause of action against the officers or directors.
The Texas Supreme Court recently held that while the business judgment rule applies to the merits of the shareholder’s lawsuit – that is, the shareholder must prove that the officer or director’s past action was fraudulent, oppressive, or an abuse of power – a shareholder in a closely-held corporation is not required to make a pre-suit demand on the corporation. Thus, unlike a shareholder of a publicly traded corporation, a shareholder of a closely-held corporation does not have to prove that the corporation violated the second instance of the business judgment rule: that the corporation’s board of directors acted fraudulently, oppressive, or abused its power in deciding not to pursue a lawsuit against one of its officers or directors for alleged mismanagement.
Tilting the Scales in Your Favor
Because Hillbilly Oil is a closely-held company, Jethro loses his argument that Jed failed to make a pre-suit demand on the corporation. And because Jethro engaged in a transaction in which he had a conflict of interest without disclosing that conflict to Hillbilly’s board, his “business judgment rule” defense likely fails as well. Minority shareholders in closely-held corporations like Jed should exercise their rights to bring derivative actions when the corporation’s officers and directors engage in abusive or oppressive activities.
Knowing that his old high school friend Iman Dedbeet had just been taken to the cleaners by his ex-wife Goldilocks in a nasty divorce, Johnny Clueless decided to help Iman out by hiring him as his general sales manager at Clueless Automotive. Johnny knew that Goldilocks got full custody of Dedbeet’s kids and that Dedbeet owes Goldilocks back child support. Nevertheless, when Clueless handed Dedbeet the IRS Form W-4 to complete, Dedbeet urged Clueless to make him an independent contractor and pleaded, “You know what I need Johnny. Goldi doesn’t deserve another penny.” Relenting, Clueless classifies Dedbeet as a 1099 independent contractor. Is Clueless getting taken for a ride?
Employers Must Report New Hires. Within 20 days of hiring a new employee Employers must report the new hires to the Texas Attorney General’s Child Support Division. However, this requirement is limited to new personnel classified as employees. An employer is not required to report new hire independent contractors, allowing new hires to avoid having child support withheld from their paycheck.
Employers Are Liable for Falsely Reporting a New Hire’s Status. Johnny Clueless should know, however, that Texas law subjects employers to a $500 fine for conspiring with a new hire to fail to submit a new hire report, or submit a false report. By agreeing to Dedbeet’s pleas Clueless risks sharing Iman Dedbeet’s responsibilities because he knew that his new hire wants to avoid the possibility of having child support withheld.
Proposed Legislation Would Remove Loophole Senate Bill 1727 currently before the Texas Legislature would add “independent contractor” to the definition of “employee” in Texas and close the loophole used by some to avoid child support withholding.
Tax Issues Both Clueless and Dedbeet also create tax issues by misclassifying Dedbeet as an independent contractor. Clueless will not pay FICA. Instead, Dedbeet will have to pay the Self Employment tax on a quarterly basis.
Tilting the Scales in Your Favor Although misclassifying employees may not look overly penal, it will cause a substantial disruption in your business when you have to deal with the Attorney General’s investigation and, is it worth it? It’s easier (and the law) to classify the employee correctly before the hire for any number of reasons. If a new hire asks to be classified as an independent contractor, and particularly if you know the hire owes child support, make sure that the hire is truly serving as an independent contractor – which means the hire provides all of their own tools and equipment, and has complete control over the manner in which it performs tasks.
Record Wealth Transfer. Over the next 30-40 years about $12 trillion from those born in 1920s and 30s will be transferred to the baby boomers, and the boomers are expected to transfer some $30 trillion to their heirs, with more than an estimated $59 trillion transferred from 93.6 million American estates from 2007 to 2061. Much of the wealth is the family business.
70% Never Gets to Third Generation. Shirtsleeves to shirtsleeves in three generations. The first generation makes the money, the second spends it, and the third depletes what’s left. For 70% of all wealthy families, the money has been spent, or otherwise lost, before the end of the second generation and 90% of families no longer have their wealth by the end of the third generation. No planning, no leadership, no communication. No money.
High Divorce Rates and Children with Multiple Families. At its peak, the divorce rate at 50% affected these families and their children, many of whom did not grow up with both biological parents. Less than half (46%) of U.S. kids younger than 18 live with two married heterosexual parents in their first marriage. Blood is thicker than water, and often blood isn’t thick enough.
Geographic Separation. In today’s global society, most adult children live a long distance from their parents, relying upon air travel, cell phones and other technological devices to keep in contact across time and distance. Of about 34 million Americans who are caregivers for an older parent, 15% live one or more hours away and nearly one third of those are helping someone with Alzheimer’s disease or dementia.
Why do Wealth and Legacy Fail to Survive?
Success in the Immediate Wealth Transfer. Most have all the proper structures in place for assets to be seamlessly transferred to the first generation. However they have not properly planned and accounted for the impact of divorce on family relationships, families separated by time and distance and children unprepared to handle new found wealth. There are stumbling blocks that doom their success.
Tripping on Their Legacy. The greatest stumbling blocks?
- No Family Mission – Lack of Purpose
- Distrust or No Trust – Lack of Communication and Mishandled Communication
- No Family Leadership – Lack of a Family Governance System and Lack of Family Leadership
Tilting the Scales in Your Favor. There’s more to your family legacy and your wealth transfer than your will. Planning to succeed. Hand off your wealth well and your legacy does not end when you sign your Last Will and Testament. That’s the easy part. Unless you plan for your estate to be liquidated and the cash distributed (and your children to have little contact with each other after you die), there’s more to be done. Start planning now.
Communication – Lack of and Mishandled.
The often present lack of communication or mishandling of communication is exacerbated by divorced parents who don’t communicate, ex-spouses who have different agendas, half-brothers and sisters who dislike the divorce and each other, and the separation of long distances. And, there’s no substitute for being there. While they had their promise, increasing use of ever-expanding computer technology innovations, such as the internet, e-mail Skype, , Facebook, Twitter, iPhone, iPad and so many other hardware and software developments redefined interpersonal relationships and family communications in unexpected ways.
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