Mary Owens: Estate planning from the heart
March 11, 2018
The most frequent challenges I have consistently experienced as a professional trustee, or guided my clients through, is when they were the successor trustee surrounded with issues of insufficient liquidity in the estate. It impacts many more estates than most folks realize. It's an important concept to thoroughly understand since the size of the estate has little to do with the problem.
Let's start with an example that is common and easy to understand.
Ma and Pa Smith have social security income, a modest pension, a house with a mortgage and an Individual Retirement Account. They like to keep their income tax bill as low as possible, so they keep a relatively small balance in their checking account and pull from their IRA account as they need funds.
To keep life simple, they have their financial advisor send them a monthly distribution that supplements their monthly income to the extent they need each month. If they have a balance due on their tax return, they pull extra from their IRA to get the cash to pay the taxes.
They also have a Certificate of Deposit with a bank. The CD has a TOD (transfer on death) designation that leaves the CD to a specific family member in case of their death. The designated beneficiary on the CD is their daughter, Marie, who is a single mom with children.
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She struggles to pay her bills since her ex-husband is not consistent in sending child support. She relies on her parents to pull her through when she runs short.
Lately, she has asked for support more frequently since she has not received a check from her ex-husband in over four months. The ex-husband is now unemployed and does not appear to be making any effort to support his children.
Suddenly Ma is diagnosed with pancreatic cancer and passes away quite quickly. Pa is devastated.
Lonely and wanting company, he decides he wants to see his daughter go back to school and get out of the difficult situation she is in with low employment income. He offers to babysit the grandchildren while she goes back to school at night.
The daughter is overwhelmed with joy with the thought she can have a future with financial security. His spirits lightened just knowing he will have someone in the house with him again. Pa eats better and Marie takes care of cleaning the house. It's a good solution for both.
The ex-husband never sends another child support check again. Fortunately for Marie, this is no longer a life endangering issue for her and her two young children.
Two years later Pa turns ill and Marie takes care of him, nursing him all the way till the end. The family is so grateful that she was there and gave so much of herself to the care of her dear father.
Marie's two brothers live in another state. The eldest son, Thomas, is the successor trustee and executor under the will.
The trust indicates the three children are to share and share alike. The only assets in the estate are the CD, the house, a very small checking account and the IRA. Seems rather simple to distribute and resolve but here is where the fireworks begin.
When things go from bad to worse
Since Ma and Pa are now both gone, the monthly distribution from the IRA, pension and social security stop immediately. So how are the ongoing bills going to be paid? Let's walk through that problem.
Thomas goes to the bank to cash in the CD thinking it will solve the estate cash flow issues until the house sells. But Marie has already been to the bank before her brother arrives. She was told by her parents to go directly to the bank at their death to get this cash for her security.
Thomas is furious at Marie. He feels her getting the CD was unfair and demands that she turn the cash over to him. She refuses. She insists this was her parent's wishes and the CD was clearly left to her in the form of a transfer on death instructions by her parents.
She also points out that she has to move immediately while working part time and attempting to go to school. She starts to cry both out of grief and fear that her future is once again very uncertain. The relationship with Thomas has been damaged. The conversation ends very badly.
Thomas goes to visit the investment advisor that is managing the small IRA account that Pa still owned when he died. The investment advisor instructs Thomas that the account was left directly to the three siblings equally and must be distributed to inherited IRA accounts for each sibling.
Thomas is now in a panic. Where is he going to get the cash flow to pay the mortgage on the house, the utility bills, property taxes and the other estate administration costs?
Thomas's life only gets more complicated. Next, the accountant calls Thomas and lets him know how much is owed on Pa's income tax return. And the payment is due in two weeks.
The next call is from the real estate agent with the results of the house inspection. The home has significant dry rot and other major problems, all of which need to be fixed before the house goes up for sale. If they are not fixed first, the house price must be dramatically reduced.
So where does this leave Thomas? How is he going to pay for the bills and the mortgage without any cash?
Next month I will be exploring the various options Thomas has and what could have been done to avoid all this grief. But most importantly, what could have been done in advance to avoid the emotional damage to the relationship between the siblings.
Liquidity is king in managing estates. It does not matter if they are large or small. The bills still have to be paid.
Effective estate management is not all about assets and debts. It's also about managing relationships at the same time.
When cash flow is pressed, relationships frequently get pressed as well.
Mary Owens, Managing Principal/Branch Manager, RJFS, 426 Sutton Way, Suite 110, Grass Valley, CA 95945, 530-272-7500. Securities offered through Raymond James Financial Services, Inc., Member FINRA/SIPC. Owens Estate and Wealth Strategies Group is not a registered broker/dealer and is independent of Raymond James Financial Services. Investment advisory services offered through Raymond James Financial Services Advisors, Inc. The case study discussed is hypothetical and has been provided for illustrative purposes only. Individual cases will vary. Neither Raymond James Financial Services nor any Raymond James Financial Advisor renders advice on tax, legal or mortgage issues, these matters should be discussed with the appropriate professional.
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