Wealthy & Wise: Estate Planning Disasters

About the Video

Don’t leave a mess for your heirs. Leave them with a structured plan that will avoid the hassles of probate and make their lives much easier in that process. CEO, Cort Christie and Attorney, Kurt Harris give us a sampling of estate planning disasters that they’ve witnessed.

Prefer to read? A full transcript is provided below.

Cort:

Hello, and welcome to another edition of Wealthy and Wise. I’m your host, Cort Christie. And today we’re going to be talking about estate planning disasters. That’s right you heard me, estate planning disasters. This is when people didn’t plan properly and it blew up or was worse than that. To give us some of these insights into what can go wrong, we have the one, the only, Kurt Harris of the Harris Law Group, our expert attorney that works with so many of our clients at NCH, and he does so much more. But one of his great areas of specialty is estate planning. Kurt, tell us about these disasters that you’ve experienced.

Kurt:

Well, thank you. Thank you so much for having me on.

Cort:

Thank you for being on the program.

Kurt:

You know, pretty much everything we’re talking about today are things that have happened within my universe. So, there are things that I’ve kind of personally observed throughout the court system or within my own family or within those around me. And much, much of what has been reported to me by so many of our great clients. And so, many times some of the problems that occur are when people try to do the do it yourself type of scenario and they think perhaps they’ve got everything under control or that they would like things to go a certain way and then they find out in the end that it is problematic. The first thing that comes to my mind, as you know, we love limited liability companies. Limited liability companies are fantastic. But sometimes when you transfer property into a limited liability company in preparation, even for an estate planning maneuver or mechanism that might trigger a transfer tax. And that can be problematic when people don’t foresee a transfer tax coming. And so, they might say, What is this? I’m getting a tax bill now, for a transfer of property I didn’t really transfer. I transferred it from my name personally into my LLC, where I’m a single member LLC, or I have other members that I intend to take over the LLC after I pass away. And now I’m facing a transfer tax which is a potential problem.

Cort:

And people don’t like surprises, do they?

Kurt:

No, not at all. And if there’s a mortgage on the property, you do face a potential due on sale clause violation where your mortgage company might say, well, now that’s a commercial loan that you need, so we’re going to raise your interest rates or else we’re going to call your loan due, or something like that. So, these are some of the nightmares that occur when you try to use the corporate shell occasionally. So, you got to use some caution and care when you get into that and when you do that. There are certain ways to kind of get around that and those tactics need to be employed.

Cort:

And that’s why you need to talk to somebody before you start messing around, moving properties around and not knowing exactly what the impact can ultimately be.

Kurt:

Very much so. There was an individual here in Henderson, Nevada, and as a lot of people know, we live in a desert. It is a vast wasteland out there. But we do have a land shortage here, which a lot of people also don’t know. And so prime property goes for a lot of money. There was this one man that bought a large tract of land in Old Henderson that he sat on for 20, 30 years and was waiting to leave that to his six children. So, as a gift to the children, this gentleman took that large tract of land and subdivided into six perfectly sized parcels, one sixth each to each of his kids. When he did…

Cort:

It sounds like a very nice thing he did.

Kurt:

Oh, it was amazing.

Cort:

Yeah.

Kurt:

It was great. But property values shot up as we as we’ve all seen everywhere across America. But the property was worth in the millions now that he bought for hundreds or maybe thousands back when he purchased it. And then it got reassessed. And not only did it get reassessed, one property, it got reassessed six lots of substantial size. And he got the bill for the taxes and he about died. That about pushed him over then the end of it. And the moral of that story is that had he waited, had he put it into a revocable living trust and sat on that property, then potentially they would have received the stepped-up basis after his death and there wouldn’t have been that reassessed tax value thereafter. And they could have subdivided the property later on after it had been stepped up in the basis for the value and not had to pay that tremendous tax bill. And that gentleman went actually through the county system to try and reverse the subdivision that he had done. And they said, no, no can do. That’s it.

Cort:

The genie does not go back to the bottle. Once it’s done, it’s done. And I would imagine if he’s held this property for, you know, decades, probably, I mean, the value went up so much, he probably paid 100 times more in assessed taxes.

Kurt:

Yeah. I want to say and I don’t remember exactly, but I think that his tax bill was somewhere around $75,000, where it before it had been about $2,000, something like that. Then all of a sudden, it’s like, oh my heavens, what have I done?

Cort:

That’s a mistake. That’s a disaster.

Kurt:

A simple revocable living trust would have solved that whole issue on the tax reassessment.

Cort:

And all the kids could have had the property and divided it from basically the point that they ended up with the property.

Kurt:

Yeah, right. The other day somebody brought up a transfer on deed. The TOD deeds which they have which transfers the property to the named beneficiary on the deed after my death. It’s a great mechanism, It’s a great tool and it’s not available in all jurisdictions. But those jurisdictions, it is available, it’s widely used and it’s one way to get around a lot of the estate planning hassle and headache, but that only covers a single property. And so, if I have other properties or other personal property, that’s sure to go through probate. So, I may have been able to pass my home on a transfer on deed death, on transfer on death deed. But that didn’t solve everything. It didn’t quite get me everywhere. But it is one great tool that can be used. The problem is when you don’t foresee that I have other property to leave. Or I may want to name a number of beneficiaries rather than just one. And so, if I don’t get that taken care of, I’ve got another problem that I’ve created.

Cort:

Oh, absolutely. My own state does that transfer on death. So, they have a very unique, Minnesota has a very unique set of laws and where, you know, there’s certain estate planning you can get around with the transfer on death. So, by submitting those but it’s very different.

Kurt:

Yeah, I heard of one individual that thought he could get around the system by doing a quit claim deed and he quitclaim the deed to his beneficiaries, but he never recorded it. He put it in the drawer and he waited until he passed away. And then later on they found it in the drawer, and they went and recorded that deed. It had been notarized and signed and they just recorded it after the death and they were able to get away with that, so to speak. And were able to transfer the property after the death. By way of the quit claim deed that just had not been recorded prior to the death but had been signed and notarized.

Cort:

Interesting way of getting around things.

Kurt:

Pretty dicey.

Cort:

Right.

Kurt:

And, you know, while in the meantime, you’re living your whole life with a quit claim deed that’s worth perhaps hundreds of thousands of dollars sitting in your drawer, you know, terrifying. But that’s the way some people, you know, live. Had another situation where a father added a son to the deed as a joint tenant. And in joint tenancy, I like to describe that as it’s a winner take all scenario. Whoever lives the longest and joint tenancy takes the property. Tenants in Common is a different situation. You own an undivided interest in the property, and it can be sold and bartered. But in joint tenancy you can’t sell or barter and if you live the longest, eventually you will receive the property, whoever lives the longest. And so, when it happened here was a father had added the son as a joint tenant, and later on the son went into bankruptcy. And the bankruptcy trustees are some of the nicest folks you ever want to meet. And that trustee came at the house and wanted a piece of the house, and the dad was trying to homestead the house and saying, well, you can’t do that. Then he wanted to unwind the quitclaim deed that put the son on the title as a joint tenant. And the bankruptcy Trustee was saying, no, no, no, no, no, you can’t do that. He’s filed bankruptcy and all the assets are frozen. And this is a listed asset on his schedules because he’s listed as an owner of the property and a joint tenant at that. And it’s unfortunate because you’re just gripping and hoping that that father doesn’t pass away because potentially, if he does, the son inherits and then the bankruptcy trustee swoops in and takes the house.

Cort:

And you hear about that, people doing that, it’s like, oh, I’ll just put one of my kids on the property with me as well. That’s a major mistake.

Kurt:

It can be terrifying.

Cort:

Another disaster.

Kurt:

And you could be on the hook potentially, or at least your property could be for a car accident they might get into or something like that, some litigation, some silly thing that could tangle things. Even a divorce of a married child somehow could tangle up and muddy the waters there. And so, joint tenancy, while it is the most quickest and effective manner to do it, is also the most scariest. And it carries with it high liability. Something to be concerned about.

Cort:

A lot of things. And I think as we were talking earlier in the program, I have a family member, right? You know, and the second marriage, which is when things get even more complicated and if you haven’t sat down and organized things in a very clean and legal fashion and thought about all the what if scenarios. Well, this is a case where we’ve got a husband or wife, and the husband is 15 years older than the wife. And they worked on their estate. They divided the assets and then they put their home in the wife’s name. Well, they always thought that the wife would outlast the husband because he’s 15 years older. Well, it turns out that’s probably not going to be the case due to some serious medical issues that are going on right now. And they put the home into the wife’s name and the trust as they divided the assets. They gave the husband one year to live in the house. If anything were to happen differently. Well, usually you get a life estate or something like that, even if it goes to the other spouse’s family, you don’t kick out the spouse out of the house. Well, in this case, this family member, if the spouse dies first, which it looks like it may, will only have one year in the house. And then our family members have to figure out where’s this other individual is going to go? Where are they going to find? Are they going to end up in an apartment? They have a beautiful house, but he’s going to get kicked out of the house.

Kurt:

Which is wild because you’ve got the younger spouse.

Cort:

Yeah.

Kurt:

Passes away and that will trigger the older spouse having to get out.

Cort:

Right. That’s a disaster. That’s a disaster.

Kurt:

And you’re saying, how could that be? This is my home, you know, it’s part of that. And so, it’s problematic. I know in my family, my grandfather had a second marriage and he thought he had a will. He had thought he had everything taken care of. But in Idaho, that second marriage nullified, essentially, the will after a certain amount of time. And he essentially passed away intestate, despite the fact that he had told me on numerous occasions, I got it all taken care of. Everything is taken care of. Everything is going to be fine.

Cort:

I don’t need you, Kurt.

Kurt:

Didn’t need any help. And I kept prodding him because I just wasn’t sure. But I hated to be that guy to say, you know, hey, I’m trying to pray on that. I know here at NCH and as well as in my practice with blended families, we love blended families, we love second marriages and second families. We’re all for it. But in certain instances, two trusts might be the best option. I know that’s generally the recommendation sometimes to maybe have a prior trust or draft a trust for my prior family and then have one for the current family right now. It may eliminate a lot of problems. I know you want to roll your eyes and think lawyers and attorneys saying I need two when I only need one. But what I’m thinking to myself is who do you want to be your trustee and do the children from your prior relationship want your current relationship to be their trustee? I don’t think so.

Cort:

Right.

Kurt:

You know, and so and vice versa. And so maybe I just have two trusts with two separate trustees and just try to take care of these two separate individual families in two separate individual ways. And I think that would be a very positive approach to solving a lot of problems and maybe some contention after we pass away.

Cort:

And we know lots of situations where, you know, even blood siblings can’t get along. Now you start talking about step, you know, siblings in trying to get through that. There could be so many issues that go along with that. I know in my particular case, we have his hers and our trusts, so we’re talking three different trusts to take care of things because we had pre-established trust, both of us, with separate kids and separate assets. And then when we got together and got married, which has been quite a while now, we have assets that we have accumulated together as well. So, you know, there’s a benefit to doing it this way. So, as Kurt said, it’s not just an estate planning attorney trying to sell you more things. It makes a lot of sense to get it organized, get it done right. You know, I don’t want my wife’s trustees handling things for my children. I want my trustees to handle things for my children because I know them. I trust them. And it’s not that I don’t trust our trustees, but they have different interests, you know, so just different lines. And I think it’s really smart to look at it in whole and think about what’s best for your situation.

Kurt:

And your children and your heirs will thank you. Trust me, they will thank you. They will be so grateful that things are just more partitioned out and it’ll be much better for them all the way around.

Cort:

What a great memory. Right? The memory that my parents did it right.

Kurt:

Right. They did it right.

Cort:

They organized things in a way that didn’t make our lives more complicated. They actually organized it in a way where now I can look back and say thank you. Thank you for doing it right, keeping it clean so that there aren’t confrontations, conflicts that happen all so often when a parent dies and the kids get involved and it gets muddy.

Kurt:

Yes. You know, there’s a kind of, to cap that off there was a very famous kind of case with Tom Petty, who we love, who had an LLC that he set up to hold the rights to his music. He had a couple of daughters from a prior relationship. He had a current wife who was much closer to the same age as the daughters, and they were all members of the same LLC. And yet the current wife was the managing member. And the daughters, they didn’t get along so well. It was really unfortunate, I don’t know it, but they thought things were going to congeal at some point down the road. But it caused a lot of tension in that family where those things could have been separated and everyone could have gone on and lived their own respective lives and they would have said, thank you very much.

Cort:

I know one thing, though, that there’s attorneys that probably made a lot of money in that case.

Kurt:

No doubt about it. The attorneys won, they generally do.

Cort:

And, you know, people like Tom Petty, you know, oftentimes you’re like, oh, I don’t want to get too into it. I don’t want to break it up. I don’t want to have to lay it out and really get into the weeds because I might tick off my daughters, I might tick off my wife. I don’t want to have to deal with conflict. Well, guess what? You left a whole bunch of conflict on the table. So, you have to deal with that in your life now or you kick the can and make them all sort of have some ill feelings towards you later on.

Kurt:

Yeah. And another celebrity note, Robin Williams did very much the same way as far as well on the opposite. He had several trusts that he had laid out. And one of the things that struck me the most about his estate plan was he actually left something to his ex-wife. They just left her something. It wasn’t a whole lot as far as his estate went, but it really made the point like, this is the way I want this to go. This is who’s to get what. And you, the ex-wife, you’re also going to get yours.

Cort:

Interesting.

Kurt:

Yeah. And he made sure that he shut down any challenges. There was a very brief challenge there in the California courts that got shut down because of the strength of his daughter and the dynamics of his estate plan.

Cort:

He had a great attorney, didn’t he?

Kurt:

He had somebody that did it. Right. Right.

Cort:

Well, thank you for sharing these disasters and how to head some of this stuff off for those that are listening today, you know, hopefully nobody has to go through a disaster or leave a disaster for your heirs. Do it right, get advice ahead of time before you start moving assets around or thinking that you have things covered or thinking you’re going to do it an easy way of just slapping the kids on a deed or, you know, transferring something before you die. Know there’s ramifications. Get some advice and call us at NCH. We’d be glad to set you up with Kurt and have a chance to figure out what’s right for your situation. We’re here to help you. This is what we do day in and day out. Thanks again for tuning in to another edition of Wealthy and Wise. And thank you, Kurt, for educating our audience.

Kurt:

Thank you. Cort.

Cort:

Absolutely. Thank you. Thanks again!

DISCLAIMER: The above material has been prepared for informational purposes only, containing opinions of the provider, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.