When good estate planning goes bad

Estate planning is done with the best of intentions. When the documents are all signed, a business owner should be left feeling that not only will his or her wishes for the future of the business be followed, but there will be a legacy for all of those who were near and dear to his or her heart. But the best-laid plans go awry, eroded by the passage of time and a change in circumstances. So it was for a cantankerous, unmarried business owner who sat down with a top-notch estate attorney about 10 years ago. 

The original plan called for a revocable trust for his assets, with the trust assets going to his named children. An irrevocable life insurance trust was set up to cover estate taxes. His main company was to be split between his son and key employees. Other business interests were subject to buy-sell agreements, and there was a significant amount of cash and marketable securities. The attorney had kept all possible contingencies in mind.

Cupid’s arrow found its mark, and the estate documents were revised when the marital attorneys sat down to write a pre-nuptial agreement a few years later. Within a year, he and his new wife were blessed with a daughter.

Fast forward a few more years and his world changed again. The downturn in the economy brought heavy financial pressures on his company. As his buddies and partners succumbed to these pressures, he tried to help them by personally guaranteeing their debt. He watched as real estate ventures he had invested in went “underwater” when property values slid downward. With advancing age, health issues arose and then tragedy hit twice — the child he had expected to succeed him in business died unexpectedly and his esteemed estate attorney succumbed to cancer. Too overwhelmed by business pressures to seek legal guidance or discuss matters with family and friends, he took what he may have viewed as a step to maintain liquidity and quietly stopped paying his life insurance bill.

Matters came to a head last year when he suffered a serious health issue and died a week and a half later. While he lay helpless in the ICU in that interim, it was discovered that he was the sole signatory on all of his personal bank accounts; the named party on the medical directive was never informed of his role; the stock broker listed as executor and trustee had moved out of state; and there was a good possibility that he no longer had life insurance.

All those involved in those plans could not have foreseen the problems that arose:

1) The original signed estate and trust documents had to be tracked down. The law firm had merged after the death of the original estate attorney. The attorney who had taken over the files had retired. 
2) The out-of-town stockbroker was unable to serve as executor and trustee because of conflicts of interest that the position would pose with other clients. A “beyond the grave clause” in the pre-nuptial agreement prevented the spouse from stepping into those roles.
3) There was no immediate cash available to cover funeral costs and pay household bills because the client had never placed any money in joint accounts with his wife.
4) The deceased used the “circular file” as his filing system, making it difficult to get an accounting for all companies and investments.
5) New beneficiary forms for retirement plan investments were not filed at the time of the second marriage.
6) The young daughter was not provided for in the will and trusts.
7) The personal guarantees on his buddies’ debts extended past death and now were a responsibility of the estate. 
8) The rental properties were “underwater,” and there was no potential for sale. 
9) Payroll tax and sales taxes had not been paid by the business, and the U.S. Internal Revenue Service (IRS) was looking for the money from the estate.
10) There were questions regarding ownership interests and debt responsibility in various investments due to poor record keeping and unsigned documentation.
11) Because there was no life insurance, cash was tight and needed to pay estate taxes.

All of these problems created quite a bit of billable work for the attorneys and accountants. In hindsight, there are steps that you can take to avoid similar unplanned costs:

1) Meet with your attorney and financial adviser or CPA annually to review possible changes in your lifestyle, your business and your financial position. Encourage your spouse to be part of the process so that he or she knows where to turn if help is needed.
2) Maintain, and update at least annually, an electronic inventory of all of your assets and liabilities.  Copies of files can be put on flash drives to be given to your advisers and other named recipients.
3) Maintain an electronic file of tax returns for all of your closely held investments. If possible, copy the entire tax return, as the Form K-1 you receive for tax preparation may not provide information needed for review.
4) Review and maintain copies of assessments and appraisals, as well as related liabilities for real estate.
5) Keep a file of signed copies of all shareholder or operating agreements for closely held businesses in which you hold and interest. Life insurance needed for any buy-sell agreements should be reviewed. Be aware of changes in the financial health of your partners that may affect their ability to fund contributions and debt payment in the future.
6) Check loan documents to see if personal guarantees survive death and if the notes come due on transfer.
7) Consider joint signature authority on some bank accounts so that cash is available in an emergency.
8) Maintain a list of contact information including professional advisers such as CPAs, bankers and insurance brokers as well as beneficiaries.
Successful estate planning requires thorough, relevant information. The world in which we live is constantly changing and our plans require attention to keep up with everything else that affects us.

Edith E. Weiss, Dixon Hughes Goodman, LLP, Norfolk, B.A SUNY at Stony Brook, M.B.A. Hofstra University.
Weiss is a Certified Public Accountant with AICPA designations as Accredited in Business Valuations (ABV), Personal Financial Specialist (PFS) and Certified in Financial Forensics (CFF).  She is a member of the Virginia Society of Certified Public Accountants as well as numerous other professional associations and has presented on topics regarding business valuation, income and estate taxation and succession planning to professional advisors and the IRS.