Thursday, June 30, 2011

Inheritance Scenarios - Why You Should Never Count on One!

Waiting Around to Inherit is Problematic.   Here are some Real-World Examples of Why.

As I noted in a previous posting, inheritances are problematic for everyone involved.   They can create a lot of ill-will among family members - between siblings, as well as parents and children.  Some children feel "entitled" to an inheritance, and others feel "entitled" to ALL of their parent's money - to the exclusion of others.

Other parents use inheritances to play favorites or play one child off against the other.  While still others claim to want to be "Even-Steven" while blatantly favoring one child over another.  And these issues fester like an ingrown hair until they erupt, over time, when the parent dies.  And even then, it is not all over, as a wily executor can loot an estate and leave his siblings with nothing.

Let's look at some examples I know of, and how an inheritance caused nothing but grief for everyone involved:

1.  Joe was an alcoholic and divorced.  He was able to support himself through odd jobs, but had little money and was having trouble making child support payments.  He was hoping that when his Father died, he would come into a little money - enough to support himself in retirement.

Joe's Father ran the Old Stone Mill restaurant which was a successful restaurant and even had two satellite operations in the city.    Before he died, he retired and sold the restaurant.  He left an estate of about $500,000 in investments and the family home, which was filled with antique furniture and other possessions, as well as his 1987 Cadillac and his 1992 Oldsmobile (This was in 1993).

Joe had a brother, Sam, who was a successful executive in a small electronics company in the city.  Joe's Father, realizing that Joe was an alcoholic, made Sam the executor of the Estate, on the premise that Sam was the more responsible of the two.

After the funeral, Joe approached Sam and asked him about the proceeds of the Estate and the reading of the will.  Sam indicated that it would take time to inventory all the contents of the house and tally up all the stocks and bonds and figure out what the Estate was worth.  But the will left everything equally to Joe and Sam and Joe would get his share.

When leaving funeral, Joe noticed that Sam was driving his Father's Cadillac, and thought that was odd.

Months went by and still no word from Sam.  Joe would call on occasion, and Sam would say that the Estate was "being probated".  Joe indicated he needed some money, and on occasion, Sam would send him small checks for trivial amounts, which he said would be deducted from the Estate, once it was settled.

One day, Joe decided to go out to the old family home.  When he got there, he was shocked.   The house was empty - no furniture, no possessions, no nothing.  The house was stripped bare, down to the carpets.  In the garage, both cars were missing.  a "For Sale" sign was out front.  Joe was furious.  He called Sam.

"What happened to all of Mom and Dad's stuff?" Joe demanded.

"We've been selling it off, piece by piece," Sam replied, putting his legs up on his Father's antique desk, which was now safely in his house.  "I'll give you a complete accounting of all of it, in due course, once we probate the Estate!" Sam said.

They argued on the phone and eventually, Joe backed down, particularly after Sam promised him another small check - enough to keep Joe in cheap booze for another month.

And so, the process continued, for month after month, until a year went by.  Sam drove his Father's cars as his own personal vehicles, on the grounds that "they needed to be kept running".  He kept much of the good furniture in his own house "to protect it from damage in storage, until it could be sold".  And he sold a lot of things in the house, such as the antique coin collection, without ever telling Joe about it, and pocketed the cash.

The way Sam figured it, if he gave all that money to Joe, it would be blown on booze and gambling in a heartbeat.  So Sam was doing his brother a "favor".  And so long as he could keep the Estate tied up, he could make use of the proceeds of the Estate for his personal uses - legally and illegally - and benefit.  The properties were de facto his to play with, but he didn't have to re-title them to his name - just yet.

His Father left them both the vacation home as well.  Sam didn't strip that of furnishings.  Rather, he and his family used the vacation home several weeks of the year.  And when they weren't using it, they rented it out, for cash of course, and kept the proceeds.

Being an Executor is a good gig - and can be a license to steal, if you have no morals whatsoever.

By now, Joe was depressed and drinking even more.  How could his own brother do this to him?  (Answer:  Quite easily, when there is money involved).  Joe became the "Friend with the Perpetual Problem" as he whined and moaned about what a lousy deal he got in life.  His friends said, "See a Lawyer!  Sue your Brother!"   But Joe always said he never wanted to do that.

Joe finally went to see a Lawyer, almost two years later.  The Lawyer listened to Joe's tale of woe and then gave him the bad news.  First, he would need a retainer of $10,000 to begin work.   They would have to sue Sam in court to force him to settle the Estate and to provide an accounting of the Estate.  It could take years to settle the case, and legal fees could eat up a lot of Estate.  Sam could hire a lawyer of his own - and have the Estate pay for it - which would further decline the value of any proceeds to Joe.

Worse yet, since Joe had no independent accounting of the Estate (or even a copy of the Will!) he would have a hard time challenging his Brother's inventory of assets and how they were disposed.  And moreover, many of the apparently egregious actions of his Brother could be excused as "expenses" of probating the Estate.  In other words, it would be a hard case to prove.

Of course, the point was moot.  Joe did not have $10,000 to give the Lawyer, and the prospect of spending years in litigation did not appeal to him.   Maybe he could talk to Sam and get him to pay up at least a portion of the share he was due?

And this went on for quite some time - with Sam handing Joe pittances of money now and again, until even Sam tired of this game (and had squirreled away what he could from the Estate).  Sam settled the Estate and offered Joe a nominal amount of money as his "share" of the Estate.  It was far less than Joe expected, but as Sam explained it, all those little checks he had sent Joe over the years were deducted from the total.   Joe took the money without complaint.

What do we learn here?  Well, First, don't be an alcoholic, for starters.  Second, never count on an inheritance as a means of survival - if you don't get it, you are screwed.   Third, the executor can loot an estate, plain and simple, and all you have is a "cause of action" to sue them.

2.  Wilma was an elderly widow living in a retirement home.  A bitter, angry, and racist old woman, she did not endear herself to others, including her children, Fred and Ethel.  And her children didn't like each other much, either.

Ethel married well and had a modest sum set aside for retirement.   Enough to get by, but hardly comfortably.  Fred drank even more than Ethel, and had little saved for his early retirement.  While Fred lived nearby the retirement home where Wilma was parked, Ethel lived a thousand miles away and rarely saw her Mother.

Fred got a clever idea one day - he went to visit Wilma with a proposition.   Wilma didn't like her kids much, but she favored Fred over Ethel.  "Mom", Fred said, "I have a new Will for you to sign."

"What's wrong with my old Will?" Wilma asked.  "Well, you know," Fred replied, "Ethel is such a spendthrift - you remember how she squandered money as a teenager.  And she is so unstable.  I thought it would be a good idea if put her inheritance in a Trust for her, with me as the administrator.  That way, I could make sure she didn't spend it all at once!  If she needed money, she could come to me, and I could determine whether she really needed it or not, and then write her a check!"

Wilma thought this over, and in her clouded 89-year-old mind, this sounded like a swell idea.  And this scenario illustrates another problem with inheritances - the people making the major decisions in these cases are often on the fringes of dementia, if not in the full-blown kind.  So often, irrational decisions are made and very odd Wills and other documents drawn up.

Now, you might argue that the new Will was fair to both Fred and Ethel.   After all, they both got half the Estate, and Fred will do a good job of managing his Sister's Trust!

But the problem is, the administrator of a Trust is about the same as an Executor of an Estate.   If they choose to, they can loot a trust in no time, and leave the Trustee nothing.  The Trustee can sue, but it takes years, costs money, and the Trustee can defend themselves with the money from the Trust.  And that was probably Fred's plan all along.

And since the amount of money in the Trust wasn't too large, it made it hard to sue - without squandering a lot of money in the process.

Moral:  Never count on an inheritance for your retirement, never count on your siblings to "play fair" if there is more than 50 cents on the table, never count on your senile parents to do the right thing - if they do anything at all.   Welcome to the fabulous world of elder law!

Trusts are tricky, and for middle-class people, stupid, as we shall see in the next example.

3.  Susan predeceases her husband, but leaves her money in a Trust for her children.   Susan came from a moneyed family and received a modest (half-million dollar) Estate from her Father.  She was reluctant to leave it to her Husband, as he had a track record of extra-marital affairs and was prone to being seduced by younger women who then tried to blackmail him for money.

"I don't want your Father squandering all his money on young girls!" She said, before she died, "I want to leave some of this money to you kids!"

So she had a lawyer draw up a Trust document, where her husband would be the Trustee and her children the "remaindermen" of the Trust.   Her husband would have use of the income of the Trust for life, with the money then going to the children, when her husband died.  Like most Trusts, it had a vague clause that allowed her husband to dip into the "corpus" of the Trust, if needs dictated.  In theory, this should carry out her wishes.  In reality, Trusts are only as good as the Lawyer you hire to enforce them - or break them.

Under the terms of the Trust, Susan's husband was the administrator, which is akin to putting the fox in charge of the henhouse.  At first, Susan's husband lived off the interest of the money, but over time, started finding little "emergencies" which required that he dip into the trust.   Within a few years, he abandoned all pretense of administering the Trust and just used it as his personal checking account.  By the time Susan's husband died, the Trust was pretty well sacked.  Her kids were left with nothing.

This example illustrates the folly of Trusts for people with less than a million dollars.  Enforcing the terms of a Trust are difficult, if not impossible.  The legal expenses involved are huge - compared to the balance of the Trust - and most Trust documents are drafted so vaguely that they mean little, if anything.  Susan would have been just as well off leaving the money directly to her husband and saving the $2000 she paid the lawyer to draft the Trust agreement- or giving it to her kids and cutting off her husband.

Trust agreements have their uses, but too often, people with modest means waste their time with them.

4.  Betty didn't want an inheritance to be the cause of family disharmony.  She saw firsthand how it can cause siblings to become bitter enemies over time.  When her Father died, he left a will that favored some children over others, and the net result is, no one in the family talked to one another anymore.

So Betty told her kids, "This won't happen to you!  I've written a Will that leaves everything to each of you, Even-Steven!  Regardless of what happens, it will all be divided equally!  And to prevent any disagreement over the settlement of the Estate, I have made you all co-executors of the Estate!"

Now, Betty may have had the best intentions, but the only way to insure that your kids won't fight over your money is to just spend it all and leave them nothing.  They may hate you as a result, but they won't fight with each other.

The problems with Betty's scheme were apparent from the get-go. While her Will left everything "Even-Steven," Betty was in the habit of writing checks to some, but not all, of her children, when they came to her with sob stories of needing money - often to pay off credit card bills, buy brand new cars, or pay off the cable bill.  These are called Inter-Vivos Transfers of wealth, and are subject to the Gifts and Estate Tax (the so-called "death tax") just as an inheritance is - because the law treats them as the same thing.  There is, however an exclusion (e.g., $20,000 per year, consult your tax adviser for the latest numbers).  So if you want to transfer wealth to your children, you can do so, tax-free, a little bit every year - and wealthy people do this, every year.

But Betty was hardly wealthy, and the $500 checks she sent to her kids here and there, added up over time, to the point where by the time she died, her Estate was half of what it once was.

But the fun was just beginning.  As co-executors, all the children would have to sign off on the probate of the Estate.   One hold-out would be all it would take to hold up matters forever.  And oddly enough, the one child who received the bulk of the Inter-Vivos Transfers was the one who held things up the longest.  As you might imagine, this was also the child who lived closest (geographically) to Betty and thus took advantage of her location to loot the Estate of small valuables and generally tie things up for as long as possible, living in the family home, driving her Mother's car, and the like.

Sometimes, it is just better to play favorites and be done with it.  Pretending to treat your children equally while blatantly favoring one over the other just compounds the problem by throwing in the hypocrisy factor.

5.  Eileen had two daughters, one a spendthrift, and the other thrifty.  During her life, the spendthrift daughter would constantly harangue Eileen for money, often to pay off debts or buy new furniture, or to pay for a new car.  And Eileen gave her spendthrift daughter money - time and again - during her life.

As Eileen got older, she became infirm.  Her thrifty daughter lived nearby and took care of her Mother.  Eileen decided to put the house in Joint Tenancy With Right of Survivorship with her thrifty daughter and also open a joint checking account, so her thrifty daughter could take care of her affairs.  "I realize I've given thousands and thousands of dollars to your sister over the years," she said, "And I never gave you anything and you never asked for anything.  I want you to have this house when I die."

And when Eileen died, the house transferred to the thrifty sister's name, as it was in Joint Tenancy with Right of Survivorship.  Of course, the thrifty sister was chagrined to discover that since it was not an inheritance, she did not get the "Stepped up" basis at the time of death, and if she sold the house, she would have to pay a pretty steep capital gains tax.   So she moved in and made it her personal residence, for at least two years, to take advantage of the personal residence capital gains exclusion.

Meanwhile, the spendthrift sister was furious.  Still heavily in debt from her spending, she assumed that Mom would leave her a ton of money as an inheritance, and was mad at her Sister that she got the house, free and clear.

"You should sell that house and give half to me!" Spendthrift Sister screamed into the phone.  But of course, if Thrifty Sister did that, she would have to pay capital gains tax on the sale.  Needless to say, once again, money comes between siblings and another family is turned from harmony and goodwill to bad feelings and animosity.

The moral here is multi-fold.   If you give out money to someone during their lifetime, they learn only to depend on handouts and never learn to fend for themselves.  You think they "need" the money, and so you give it to them, and it becomes a self-fulfilling prophesy - they need more and more.

Second, trying to make things "even up" by giving the house to the other sibling is nice, but don't expect the first sibling to be happy about that.

Third, while you get a "Stepped Up Basis" in an inheritance (so you can sell it, with no Capital Gains Tax problems) when you sign over a house to a child during your lifetime, their basis may be less than that.  Again, consult a tax adviser for more details.

6.  Linda is a pretty girl who came from a good family.   Her Dad was a successful attorney, and her Mother (now deceased) was from an "old-line" moneyed New England family.

When Linda's Mother died, most of her estate was left to her Dad.   The problem is, Dad's drinking problem went from bad to worse, and in no time, he was a full-blown alcoholic, and not a functional one, either.   He started hanging out in strip clubs and dating young floozies - white-trash trailer-park girls who were often younger than Linda!

Linda had a good job and a career, and her maternal Grandmother really supporter her emotionally, after her Mother died.  Grandma was also shocked by the antics of her son-in-law.

Dad's liver finally gave out, and Linda flew back to Florida to attend the funeral.  She was appalled at what happened.  "Tiffany" - her Dad's new stripper-girlfriend-turned-wife was at the funeral with all her trashy friends.  After the funeral, Tiffany had a "party" at the family home, to celebrate her new-found wealth.   You see, Dad left everything to Tiffany - or simply forgot to write a will, leaving it all to her by default.

Tiffany and her friends got drunk and belligerent.  They insulted Linda to her face.  "This is all MINE bitch!  You can get out of here!"  Tiffany's friends laughed.  Linda cried. As Linda left, Tiffany appeared at the door and tossed boxes of family photo albums and keepsakes onto the lawn.  "You can take this SHIT with you, bitch!" and Tiffany's friends all had a good laugh at that.

Crying, Linda gathered up the scatted photos and keepsakes - all that was left of her childhood and family, other than her Grandma.

Linda is doing OK.  Like I said, she has a career and has met a nice young man.  Her Grandmother has a little money and Linda might get a small inheritance from her - but she isn't counting on it.

The moral here is that you should never count on an inheritance.  It's isn't your money to begin with - it belongs to your parents.   And they might decide to do something really stupid with it, like give it all to a stripper.  Or donate it to the ASPCA.  Or just spend it all on themselves.

After all, it is their money.  Right?

* * * 

There are, of course, many other scenarios.  These are just ones I am personally familiar with, having seen them happen to friends and family.   And yes, some of the actions in the scenarios above were blatantly illegal.   But in order to challenge such actions, you often have to bring suit, which is difficult and messy.  Moreover, many illegal things are difficult to prove in court.  It is hard to prove that the purloined coin collection ever existed, particularly when it was a family legend and no one ever saw it (yes, I have seen this firsthand as well).

As you can see, inheritances can be evil, and inherited money - even a little bit - can cause all sorts of disharmony and grief among a family.

One way to avoid this is to just leave your kids nothing.  That may sound cruel, but look at it this way - if you were poor or broke, that is what you would leave them, anyway.  So why not just pretend you are destitute?  Give it all to the humane society or whatever, and then leave the kids $50 each.

But of course, that doesn't take into account the sometimes evil things older people do with money.   You see, once you are beyond a working age, you cannot provide for yourself.   You have to live off your savings and income from your savings.   And you may find yourself lonely and isolated.  Your children have moved far off and have lives of their own.

A needy or dependent child that calls occasionally for money is sometimes an older parent's only lifeline or hobby.  So they say, "Sure, son, I can 'loan' you $500, why not come down and we'll have lunch?"

And of course, these continual 'loans' allow the parent to insinuate themselves into their adult children's lives - and be a parent a little bit longer - and criticize their child's choices in career, spouse, and child-rearing.

And the needy child, having no money of their own (or making the Faustian bargain of dancing in this sick little dance in return for money) will put up with it all, but not before they bitch, bitch, bitch to all their friends how Mom or Dad is a "real asshole" all the time - but all the time taking those $500 checks and cashing them.

And kids like that are icky. Children whose only ambition in life is to inherit are really disgusting on on a number of levels.  Avoid such folks at all costs.

The best thing you can do, if you can do it, is walk away from all that and have your own estate.  And I realize that some of you can't do that - particularly if you are already 60 and have nothing saved.  And I feel for you.  But your situation is one reason I decided to stop smoking pot and go to Law School - so I would not have to dance to someone else's tune all the time.

And parents can be very emotionally sick in this regard.  Oftentimes your reward for being successful and independent is not accolades and approbation.  Rather, the needy children are valued higher, as they are needier and come back to the parental teat, time and time again.

So if you want to be truly independent, you have to do it for its own reward, not for parental acceptance.  If you can afford to do it, walk away from inheritances and all the bullshit strings attached.  It simply isn't worth it!

And if you do get an inheritance, don't be surprised if there is trouble, bad feelings, or other issues.  From what I can see, this is the norm, not the exception.

UPDATED April 18, 2015.