Don’t Let Probate Assets Become Probate Disputes

BARRY: So, number four we kind of touched on when we were talking about assets. The assets in probate. I like to use stories. You have this person with three kids — good, bad, and medium. Say this person passed away with three million dollars, IRAs, 401(k)s, life insurance. All stuff that you manage. House, cars, bank accounts, brokerage accounts, some annuities and CVs. You know, CVs that are “crushing it,” paying point-zero-zero-zero-two percent.

CHAD: They’re doing really awesome right now.

BARRY: I know. Those kinds of big winners. Say there’s that whole array of assets. If you don’t have a handle on it, and you and I aren’t able to talk through it quickly, that becomes a process. You have to get institutions to respond, confirm information, once they confirm, get the court orders, send them out, and wait for transfers. You need to have someone like Chad working alongside you, or else it’s a real pain in the butt. And it will be expensive.

CHAD: You talked about assets and figuring out where they are and how much they’re worth. For most really successful people, their largest asset is their business. And I’d imagine that unless they’re doing proper planning all along, working with people like us, I imagine it’s very difficult to quickly ascertain what the value of their business interests were. 

Have you encountered a lot of situations like that, where someone passes away and they haven’t done proper-by-self planning? That’s something I thoroughly enjoy and was one of my hot items on our last video, so I know how to plan for that ahead of time. But how difficult is it on the back end to figure out business value and divide it from an estate standpoint?

BARRY: So jumping to number eleven, which I’m going to bold because I get fired up about this issue that you bring up. First of all, I love business — anything business. When it comes businesses and estate planning businesses and probate, it’s an extremely important topic to talk about, so forgive me if I get excited.

When you pass away and you own a business in your own name, if you don’t have proper documents, your management team kind of just lost its leader. And legally, the personal representative — the executor — may very well be your successor. And that’s not happening overnight. So you can have a disruption in your business until that happens.

Now your personal representative/executor may be running your business, which could be a good idea or a terrible idea.

CHAD: I’d imagine most times they have no idea how to run it.

BARRY: Often, especially with married couples, it’s the spouse. So think about whether you’d want your spouse running your business. It’s nothing negative about the spouse, it’s just that they’re usually not involved in the business day-to-day and don’t have relationships with partners. So you suddenly have a different legal manager, and that’s one issue.

Another issue is that not you have an asset. I deliberately skipped mentioning the business earlier when listing assets. But a business has value. How do you determine value? Who determines value? The personal representative? The PR usually has no idea. They’re not valuation professionals. So who does it, in your experience?

CHAD: In my experience, it’s not really done on the back end. It’s done on the front end using a professional business valuation specialist. There are multiple methods they can use, but really it’s important to work with someone qualified. I guess that can be part of the triumvirate, but really a subdivision of the triumvirate, you know? Really having a business valuation specialist for your business. And it’s important to have that updated as the business grows. You don’t want to have an outdated valuation on your business, because it can increase substantially over the years.

BARRY: Let’s talk about that. That’s a great point. The first part is the valuation itself. Then, what happens when the valuation did some planning, but is wrong?

Professional valuation companies exist. It’s an art and a science. I’m fascinated by how they do it. It’s not cheap. People often say, “It’s expensive, I don’t want to do it. Let’s just get a broker’s opinion.” But then you’re in a cage fighting situation. A cage match. Creditors and beneficiaries and people who have rights in the estate don’t like your valuation because they get less if there’s a percentage or they don’t feel comfortable that the person you hired is qualified. You’ll end up with multiple valuations, disputes, and ultimately a judge stepping in to make decisions for you. Now he’s telling you what your business is worth.

CHAD: I’m sure he has tons of experience doing that. Valuating businesses.

BARRY: Yeah, right. I’ve seen this happen. In the case of a beneficiary, the IRS as a creditor, and I guess another creditor trying to bring assets back from a fraudulent transfer. But all complaing over the valuation that was done. And it was a lot of money spent on an estate that had very little real value. You’re really putting your business in a blender if it goes through probate.

The second issue you mentioned was on your front end you’re doing valuation and you’re planning. So your business is great, you do a million dollar valuation, so you did a buy-sell agreement funded with life insurance. Someone passes away, the insurance buys out the deceased partner’s interest, the surviving partners keep that interest that was just purchased and the company cruises along, right?

CHAD: And the family gets what they’re supposed to get.

BARRY: Family gets “the fair value of the deceased shareholder’s share,” right? Okay. What happens if, before death, the valuation is now 10 million and the buy-sell still reflects one million? What happens?

CHAD: Issues.

BARRY: A lot of problems. There’s a lot of issues there, right? What do you do? The family is not gonna be happy that there’s $9-million they’re not getting.

CHAD: The remaining partners won’t be happy either, because it’s very likely that someone in that family will be part of the business.

BARRY: That aside, if you have a buy-sell that says you have a million-dollar valuation, and you’re not building into the framework the possibility that the business could be worth more later, please call Chad and me today. Right now. Do not even listen to any more words. Pick up the phone. Because that’s a disaster waiting to happen.

But more likely than not, if you have a good business plan, a good buy-sell, it will adress the contingency where you have a framework to ensure fair value. But again, it all goes back to value. Fighting over value in the cage-fighting match.

So I think that addresses those two issues. You really have to plan ahead, you really have to be flexible and have a framework, and you really want to get it out of court so you don’t have disruption. The business is a big deal. We talk about it a lot, so I won’t belabor the point. I’ll wait for your next cue.

CHAD: Sure. We’ve talked a lot about probate and ways to avoid it. And we’ve mentioned that there are lots of accounts with beneficiary designations that would bypass probate. But what happens in the scenario where beneficiary designations haven’t been updated? For example, you get married and you never really thought to update your beneficiary designations from your former spouse. What are some of the consequences in terms of taxation and who might get the money?

BARRY: So… a lot in there.

CHAD: I seem to be very good at those questions.

BARRY: If you get divorced, the law generally treats your former spouse as predeceased. Your settlement agreement usually reflects that as well. If you want to give your former spouse something after divorce, that’s fine, but it requires intentional planning.

One of the biggest things that gets me crazy is not being attentive. It’s not just forgetting to name a beneficiary on those accounts, but not being attentive to them. Just to be clear, we’re talking about accounts like IRAs, 401(k)s, 403(b)s, life insurance, annuities. Those are types of accounts where you can designate that someone is to inherit it by contract. You show a death certificate, paperwork starts, and there’s no court. No toll booth. If you screw that up, you go through probate. There’s two main problems with that.

CHAD: Would that be like not having batteries in your Sun Pass? For those who had the old ones?

BARRY: This is like not having batteries in your Sun Pass and you get a flat tire and fixing the tire and going to the toll booth and the booth person is leaving for the day so they close up the booth and you now have to go in reverse and get in line. It’s just a disaster.

So, what happens is two main bad things. Well, three things, actually. Number one is that the person you probably wanted it to go to is not going to get it — or they’re going to get less. Okay? Secondly, it’s going to go through the toll booth of probate and that means it’s now subject to creditors. You know, in the A-B-C, the C is creditors. You’re bringing in an asset that previously was exempt from creditors. It’s now on the table because it’s a probate asset. It went from a non-probate asset to a probate asset. And now it’s on the table to be taken away from the surprised beneficiaries. And third — and I think this is probably equally as important — is that you could have an adverse taxation situation now. 

Before the SECURE Act, and tell me if I’m wrong, spouses could roll over Roth forever, right? And then non-Roth they could roll it over for their life expectancy. Because if you were to give an IRA to a 10-year-old, there are R&Ds — requirements and distributions — that are much less than if the beneficiary was 84. Thus allowing it to grow over time.

CHAD: With multiple beneficiaries, if one sibling was a lot older, that could be another issue. The younger one could be paying tax that the higher one made.

BARRY: That should be on here. Because when you do your trust to kind of play games with that, you’re right — the pooled trust with the elder beneficiary does trigger the R&Ds are at that person’s age even though there’s a younger person. I’m adding to the list. We’re now at 13.

But going back to the issue of pre-SECURE Act, you could stretch it out. Post-SECURE Act, I believe the spouse can still roll it over, but the non-spouse beneficiary now has to max out within 10 years. They have to fully liquidate inherited retirement accounts within ten years. And correctly if I’m wrong, but the RMDs are not spread out over 10 years. They’re spread out over life expectancy, but you have to liquidate within 10 years. If the account ends up in probate, distributions may be accelerated even more, increasing the tax burden.

This is a mistake. Don’t make the mistake of thinking everything is good. You need to review beneficiary designations regularly. That’s why we work closely with financial planners — what Chad calls the “triumvirate,” but actually it’s what we sometimes call the “trifecta,” but that’s okay. People make mistakes. Our job is to catch them before they cause damage. That’s a good one. Thanks for bringing it up.

CHAD: Absolutely. We spoke about the next one and difficult family dynamics. I don’t know if you want to add anything there, but I think the biggest one is when you have the “good, bad, and medium” children dynamic, as you say, where control over money, caregiving, or access to a parent becomes an issue.

BARRY: We’re in South Florida. Down here, it’s so prevalent. The situation where you have good, bad, and medium. And medium is often playing politician. They’re on the fence. Sometimes they’re supporting good. Sometimes they’re supporting bad. The issue is that elderly parents can become political footballs in a tug-of-war between kids. Who controls finances, influence, visitation. Believe it or not, that’s a big deal, who’s spending time with them. Because one kid has the ability to influence the parent the more they’re with them. This is where guardianship might be beneficial. Elder abuse isn’t just physical. It can be emotional, psychological, financial, or medical. I’ve seen some really disturbing things in my bad. And I’ve only been practicing for 12 years. Elder abuse is real.

CHAD: One the financial side, there’s special rules in terms of different vehicles that an elder may be going into. Even on the financial professional side, certain obligations that we have to abide by because of the elder abuse that goes on.

BARRY: Yeah, there’s now a statue on it that defines what it is and provides remedies for it. It’s really prevalent down here. It’s really sad.