From the May 2008 issue of Wealth Manager Web • Subscribe!

May 1, 2008

Thicker Than Water

Shakespeare's King Lear was hardly the only father to bemoan the existence of a "thankless child." Consider the case of the client we'll call "Joe Mason." He lost his wife years ago and tried everything to get along with his only daughter. They tried talking, negotiating, even counseling--to no avail. "He spoke with us a lot about it. He wanted to get it out, to say what he was feeling about it," says Mason's advisor, Karl L. Hicks, CFP, of the Leonard Financial Group in Riverside, Calif.

As they prepared his will, Mason was torn. He didn't want to leave much to his daughter, but he felt it was wrong to do that. She didn't help matters by making clear what she thought she was entitled to. Hicks encouraged his client to do what he wanted to do, not what he thought he should do, and in the end, the man left most of his money to his two grandchildren.

"He felt they would appreciate his gesture more," Hicks says. "His daughter was demanding and very outspoken about what she thought she deserved. I think that, in and of itself, turned him off. In the end, he said 'You're not entitled to any of this.' "

Mark Colgan, a certified financial planner in Rochester, N.Y., says advisors often presume parents are going to share their assets equally among all of their children, and that's not always the case. In fact he now finds himself saying, "Okay, so for the two children, we're going to leave it 50/50?"

"I should probably stop saying that," he adds.

And then there are times when parents mean to distribute the assets equally, but it becomes clear after they're gone that one child was inadvertently left more. Colgan had a recent situation where the client died unexpectedly in a car accident, and he left one daughter a little more than the other. The father had been putting money into 529 plans for both girls, who were two years apart, but somehow, one daughter wound up with more. Colgan believes the discrepancy may have been entirely inadvertent, but to the daughter who received less, the error was a blow.

"She said, 'I don't think daddy intended to give me less,' but she sat back in her chair, and her eyes were watering," Colgan relates. "I felt awful for her. And it wasn't about the money."

Wills can be particularly unkind in second marriage situations. Husbands often feel their own children should receive more than the children of their second wife, creating almost a caste system of entitlement. It becomes even more complicated when the couple has children of their own. "Sometimes, you'll hear, 'I'm leaving all of this to my son, and this account we'll split 50/50,' " Colgan says.

That's just what happened with a client who was a retiree from Kodak and had $600,000 in savings and investments as well as a 401(k). Since most of his assets had been earned during the years before his second marriage, he wanted to leave that chunk of money to his son. When it came to the assets he truly felt were part of his second marriage--their joint savings, for example--he was willing to split that equally among his children from both marriages.

"[The second wife] was in agreement, but I'm not so sure I was convinced. But clearly, it wasn't my responsibility to get involved," says Colgan.

Some parents wield their estates like a private school headmistress might wield a cane. One advisor recalls a female client who was divorced from a famous Hollywood actor. She felt the son she had by that marriage--her only child--was completely incompetent. So when she inherited the actor's money--an estate worth several million dollars--she stipulated that her son receive it in increments: a third at age 35; half the balance at 40, and the rest at 45. The son was between 35 and 40 when his mother passed away and struggling at the time. The trustee told him he could receive one third of his estate to spend as he wished, or an advisor could put it into a trust for him that would provide income for the rest of his life. The son opted to put it into a trust.

"His mother never acknowledged the fact that he could make a decision, and we became facilitators of that," says James F. "Buddy" Thomas Jr., CFP, of Superior Planning Inc., an investment advisory firm in La Jolla, Calif. "He was very intelligent, but for some reason because of their relationship, he had such a low self esteem."

Since then, Thomas says the son has matured and seems to be blossoming. He's set up a foundation in his father's name to pass on some of the money after he dies.

"He's a different guy than he was five years ago," Thomas says.

Clients who are successful at estate planning and wealth transfer plan early, but paradoxically, the earlier they plan, the less they know about what their family will look like in later years. Even the most stable family situations can change suddenly--for better or worse. A child's health can deteriorate, marriages fail, people go bankrupt, and children can fall into bad habits like gambling or substance abuse. Because of this uncertainty, advisors encourage clients to incorporate flexibility into their estate plans so they can adapt to their heirs' changing circumstances. Parents can set up plans that enable them to exercise some control over the disposition of their assets even after their death. For instance, they can create trusts that provide incentives designed to encourage certain positive behavior. Or they can endow their trustees with a lot of discretion, enabling the trustees to give more to a child, or less--depending on that child's behavior.

"Trustee decisions may lead to inequity and conflict among the children after the parents have died. That is why it is critical that the parents give careful thought about their selection of trustees from the start," says Claudia J. Shilo, CFP, CPA, of Ballentine, Finn & Co. in Wolfeboro, N.H.

It is not uncommon, Shilo points out, for parents to leave unequal amounts to their children. Sometimes, those decisions are based on such obvious circumstances--one child may have special needs; another may work in a charitable but low-paying field--that everyone involved understands the rationale. But even though the children may be on board, advisors should encourage parents to share their estate plans with their children while they are still alive in order to reduce the risk of conflict after the parents die.

This becomes even more important when the estate is being distributed unequally, and there is no obvious reason. Of course, in those situations the parents are actually less likely to want to discuss their plans with their children. And who can blame them? The conversations are likely to be painful and contentious. Shilo says she has one client, a widower with three grown children--two daughters and a son. His wife's estate divided the assets equally among the three children, but the client has since changed his plan, excluding the son as a beneficiary, although he doesn't want his son to know what he's done.

"We try to be sensitive to our clients' wishes to avoid conflict and be silent on the matter, but to the extent they are willing, we encourage them to discuss their estate plans with their children, to reduce the risk of conflict after their deaths," Shilo explains.

Alyssa Moeder, a private wealth advisor with Merrill Lynch & Co., says she has two clients right now whose children have not been told they will be receiving less than their siblings. One will actually be getting only half of what his siblings will receive. These children are aware there will be a discrepancy because both are estranged from their parents, but they don't realize the extent of it, Moeder says.

Keeping children out of the loop is only the half of it. Some children don't even know how much money their parents have.

"I can't tell you how many scenarios I've seen where the children don't know the scale of the wealth," says Moeder. "Maybe there's a family business, and they know what that's worth, but they don't know the investable assets the parents have."

Fights over how the assets should be distributed sometimes begin even before the children enter the room. Moreover, even the parents may not agree on how the money should be doled out. In such cases, advisors are often caught in the crossfire. Mark Colgan says when those discussions get too heated, he tries to play politician, a tactic he picked up from a friend who owns an M & A company. The conversation might go something like this: "Chuck, I can appreciate where you're coming from, because you felt like all of this money was earned before you met Sally, and all of that money had been left to your son, so why should that suddenly change? And Sally, I can see your point because on your marriage, everything is 50/50. Why is Chuck changing his tune on this particular asset? I can appreciate where each of you is coming from, but why don't you go and talk about it? There's no rush on signing the beneficiary form."

Painful as it is, however, it's vital for families to understand what everyone will be receiving prior to the parents' death, because even the most well-intentioned plans may cause controversy among the surviving family members. When a lot of money is involved--sometimes millions and millions of dollars--people change, says advisor Karl Hicks. And what they find amenable in those early discussions may not be amenable to them later, when the money is actually parceled out.

"It's not necessarily that they're trying to screw someone else over. They're just trying to get what they think is fair. But it may not be what someone else thinks is fair," Hicks says.

When the squabbling begins, it's often not a direct family member making waves, but someone once removed: a child's spouse, perhaps. In one family, the middle child had always taken a lead role in the family finances--he had taken over the father's accounting practice--so when the parents died about five years ago, he oversaw the distribution of their estate. And one of the loudest voices of acrimony in that process was his older brother's wife. She had heard her husband complain for years how he felt he'd been mistreated by his family, and now that money was being handed out, she wanted to make sure they got their fair share. The money was distributed, and the middle brother hasn't spoken to his older brother or his wife since.

"Quite often when you talk to a client, they're confident their children will be fair and get along. There's no issue there. It's usually not the children. It's their spouses," Hicks said.

While most wills usually don't come into force until both parents are dead, some children begin chipping away at the estate before that happens. Sometimes, the play for money begins after dad has died but before mom has passed. Like a Shakespearean drama, there are power struggles over who should take charge of the family finances. Maybe Mary stepped up to the plate because she was the oldest, but then Johnny steps in and tries to take over--claiming Mary is incompetent.

"I've seen children who come out like sharks. They're smelling blood, and they want some of the money they think will be their future inheritance," says Robert Mecca, CFP, of Mt. Prospect, Ill.

Perhaps one child needs the money now--to pay for school or bills, or they've lost their job. Mecca says he's seen family brawls because even though a child cares deeply about their mother's well being, they feel that if they could just have those 3,000 shares of AT&T she owns, they could turn their life around. Indeed, Mecca had one client whose son had just been laid off and whose wife wasn't working. When his father died, his mother inherited everything, and the son kept "borrowing" from his mother--essentially making an end-run around the will.

"They would play on Mom, and in most cases, she would give it out, even though it created a significant amount of stress on her situation," Mecca says.

He knows of another woman whose husband was hit by a truck. The family filed a lawsuit and won, and the woman collected a significant sum of money. Combined with the assets her husband had already left her, she wound up sitting on an estate of several million dollars. Again, Mecca says, the kids were like sharks.

"They were a middle class family, and to them, this was like winning the lottery," Mecca recalls. "They didn't know how to react, other than filling instantaneous needs: "I need a car." "What about Joey's braces?" "We need it now!"

They felt it would be better to grab the money now than to wait until the will kicked in. And they might have been right. For all they know, their father may have meant the lion's share of the estate to go to their siblings. In this case, is it any wonder why?

Caren Chesler has written for the New York Times, Investor's Business Daily and Investment Dealers' Digest.

Reprints Discuss this story
This is where the comments go.