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Estate planning, or the lack thereof, and the consequences

Litigation. Trial lawyers. Depositions. Frivolous lawsuits. Excessive damages. Punitive damages. And on it goes. All of these are the buzzwords of the last three years.

The trial lawyers have been vilified; lawsuits are supposedly out of control; everybody is afraid of being sued!
The new mantra for estate planners is asset protection planning. You are advised: “get with an asset protection planner to preserve your assets.”

Protect your assets from whom? We are so worried about the trial lawyers suing us for a car accident, or for some injury, that we fail to see that most estates are dissipated and consumed, not by outside predators, but by inside heirs and in-laws. Why is this? The basic reason is those who have the assets fail to adequately plan to ensure that they get to the next generation or are properly administered.

At a recent seminar that I attended, “estate planning gurus” from all over the United States were brought in as a panel to discuss the future of estate planning. The consensus was that estate planning was down substantially, and in some instances by as much as 50%. The panel was asked why, and two reasons were given. One was obviously the economy. Many people were concerned that their fortunes were reduced because of the decline in the stock market, and the second reason was that many people believed that because of the changes in the estate tax laws, there was no need to plan, since there was no longer an estate tax to worry about.

For years, the bread and butter of our firm’s estate planning was centered on the estate between one million and three million dollars. Yes, Virginia, there are a lot of millionaires in the State of Mississippi. The difference in Mississippi as opposed to Massachusetts, however, is that the wealth in Mississippi is not conspicuous. One thousand acres of farmland here, or 600 acres of mature timber there, or a manufacturing concern producing very valuable widgets, etc., etc. make up the bulk of the “real wealth” in Mississippi. Those with estates this size now believe they have no reason to be concerned about the estate tax.
In my 25 years of tax law practice, the estate tax has been what I would call the “driver” to force people to come to my office to do estate planning. Many a client has been heard to say, “do whatever you can to minimize or to eliminate the estate tax, because I don’t want to pay any more tax than is necessary.”

Oftentimes the estate tax was fairly easily eliminated through the use of tax-driven wills, marital deduction clauses and a few other basic techniques. However, it soon became evident to many of my clients that the estate tax was not their primary problem. No, the lack of a buy-sell agreement with their partner; the tenancy in common property that they own with a second cousin; the ski property located in Jackson Hole, Wyo.; the Downs Syndrome child who is on Medicaid; the spouse who could not manage money; the irresponsible child(ren); illiquidity; and on and on and on. No, the estate tax was not the biggest problem; the management of the assets after the ones who had created these assets were gone was the major problem.

I can remember meeting with a husband and wife several weeks ago to do some basic planning. He and another person had a very nice business, and they were living very comfortably. The company was a C corporation, and both of the owners were pulling all of the earnings out of the corporation, so that they did not have to declare dividends. I asked the husband, “Following your death, how is your wife going to continue to enjoy the same standard of living that you are currently enjoying?” The silence was deafening, and for the first time in over 30 years, he realized that once he was no longer working there, it was obvious that his surviving shareholder was not going to be paying out $250,000 to $300,000 in dividends to his wife annually, and that her lifestyle, as they had known it, was in peril.

Another recent case involved a family that had owned a family business for many years. The husband died and left one-third of the corporate stock to his second wife, one-third of the corporate stock to his son and one-third of the corporate stock to his daughter. You can almost tell what is coming. The son died shortly thereafter leaving his one-third ownership of the business to his wife. Now the business was owned two-thirds by the second wife and by the daughter-in-law. Neither of them liked the sister, so one day they walked into the sister’s office and brought in the husband who was also employed in the business, and fired them both. Subsequently the daughter was forced to sell her interest for “nickels on the dollar” to at least recover something from the “family business” that still bears her father’s name over the front door of all of their business outlets.

Then, what about the special needs child? In a recent case that I had, a substantial amount of wealth was left to a 25-year-old autistic child. This immediate infusion of assets terminated Social Security benefits and Medicaid, because now this child had assets. Thus these assets will be totally consumed prior to Social Security and Medicaid benefits picking back up because of inadequate planning.

Then there is the case of the two brothers who had farmed together over in East Mississippi for years and years. One day the older brother died while sitting on a tractor in one of his fields. Before the afternoon was up, the younger brother, who had hated the farming business, had already secured the services of a lawyer to put his brother’s widow on notice that he wanted the land partitioned and sold.

I can cite you hundreds of examples of situations just like this. So, what is the problem? The problem is that probate and will litigation is projected to be the new “growth” area in the litigation world; more litigation, but now in the probate world! For example, in the fight involving the two brothers, to effect the partition, each brother’s family had to have a lawyer; the estate had to have a lawyer, then another lawyer was brought in to try to determine how the property could be partitioned; commissioners had to be appointed to handle the partition; surveyors had to be employed to survey the property and appraisers had to be employed to determine the value. The sad thing is that a simple buy-sell agreement and/or placing the land in some entity with restrictive provisions (buy-sell/anti-partition) could have alleviated all of this. The litigation and the partition cost will probably exceed $50,000 to $75,000. A good entity, such as a limited liability company that has restrictive covenants and prohibitions against partition, would probably cost no more than $2,500 to $3,000 and would have solved the problem.

No, estates are not being planned. It doesn’t really matter how big the estate is; what matters is simply how much are you prepared to lose. Are you prepared to lose all of it, because litigation, whether it is in the personal injury side or probate litigation, is very expensive.

No, the panel that was put together concluded that because of the lack of planning engendered by the national belief that since there was no estate tax; that there was no need to plan, will drive the cost of probate up by 1,000%. Think about your own situation. If the estate has a lawyer and the surviving spouse has a lawyer, and every child has to have a lawyer, and the business has to have a lawyer, and the other shareholder has to have a lawyer; you do the math. Plus, do you really want to be tied up in court for years? The emotional toll that litigation exacts is just as bad or worse than the financial toll.

It’s much cheaper to fix it on the front end than it is to litigate it on the back end.

Contact Harris H. “Trip” Barnes III of Barnes, Broom, Dallas and McLeod, PLLC, in Flowood at mbj@msbusiness.com.

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