July 8, 2020
By Joe Price
In our business, it has become a cliché to talk about the dangers of procrastination. Usually, it comes up in the context of a client dying or becoming disabled before making an estate plan. However, one situation from my earlier days illustrates a whole different danger.
About 15 years ago, I took a call from a financial planner who told me that he had a client I’ll call Harold who was in his early 90s, in failing health and unable to leave his house, and he wanted to finally make an estate plan. I was asked if I was willing to travel to the client’s home, talk to him there and see what I could accomplish. I agreed and drove to his modest home one summer afternoon. I was greeted at the door by an elderly woman who I assumed was his wife; she was not friendly but said that she would show me to Harold’s bedroom because he was no longer able to sit up or move around. Along the way, we passed through the living room where two middle-aged women with stern expressions sat on a sofa with their arms folded. They both harrumphed when I said “hello.” The wife did not bother to introduce us. I thought that was strange but it soon became clear who they were, why they were there and why their greeting was so icy.
Harold was unable to even raise his head off the pillow but he was able to communicate his desires pretty clearly. He told me that the woman who had led me to his room was his second wife; she had been married previously as well. Harold wanted to leave the majority of his estate to his son from his first marriage. I asked him how his property was titled and he said “Well, that is the problem. It is all in joint names with my wife Rose (not her real name). Can you talk to her and convince her to change the title back to my name?” The desperate look on his face told me that he had previously had that conversation with Rose and she was not likely to give in.
I walked out to the living room where Rose was talking in quiet tones to her daughters and asked if I could speak to her in private. Rose gave me a firm, “no” and her daughters beamed. “Anything you have to say to me can be said right here,” Rose told me. So, I conveyed Harold’s wish that the property, or even some of it, be retitled to his name. Again, a firm “no” from Rose, while the daughters glared at me. It occurred to me that the daughters were at the house to provide moral support to their mom and make sure that no argument could make her change her mind.
Harold died shortly after that and his son never received any of the jointly owned property.
The lessons that I took away from that afternoon have been valuable. The first lesson is (to paraphrase Notorious B.I.G.) “Mo’ Marriages, Mo’ Problems.” The phrase “second marriage” is synonymous with “Danger Ahead” to an estate planner. Clients who don’t sign prenuptial agreements or make other arrangements – often using trusts – to ensure that the desired estate plans will be carried out are simply just kicking the can down the road. The problem seldom disappears on its own; it just lies in wait.
The second lesson is that the Harold and Rose story is not unique to estate planning matters. It arises every time two people enter into a business arrangement and don’t agree on what happens if one party dies, becomes disabled or wants to exit before the other one does. When the parties are getting along and neither one knows who will depart first, they have a good opportunity to agree on terms that will be fair and reasonable to both. Once either party knows for certain who will likely die, become disabled or want to walk away first, everything changes. As Harold learned the hard way, partners are a lot less likely to compromise when they know they can win just by waiting you out.
What planning arrangement would have worked better for Harold? If Harold had acted earlier, before Rose knew that she would outlive him, he could have separated the jointly owned property into tenancy in common interests and contributed his interest to a “Qualified Terminable Interest Property (QTIP) Trust. A QTIP Trust is a form of trust that qualifies for the marital deduction that allows the spouse who creates it to provide an income interest and a few more assurances to the spouse who survives. It gives the spouse who creates it the right to say where the trust property remaining winds up when the surviving spouse dies. It is compassionate in that it provides for the surviving spouse for his or her lifetime and yet it will spare you the helpless feeling of lying in bed and knowing that your death will cause your children to be disinherited unintentionally.