Three of the Biggest Estate Planning Mistakes

The following is an excerpt from The 101 Biggest Estate Planning Mistakes, copyright Herbert E. Nass, with permission from John Wiley & Sons, Inc.

Perhaps the single most important decision you can make when it comes to estate planning is your choice as to who will handle things after you are gone. The person who will execute the terms of the Will is called an executor in most states and a personal representative in some others. His or her role is to collect the decedent’s assets, pay the decedent’s bills and taxes, if any, and then to fulfill the terms of the Will. It is often a very big and thankless job, and the many celebrities whose stories are told in the following chapter did not always make the best decisions when it came to their choice of executors and trustees.

Whether it is too many or too few executors and/or trustees, the wrong choices can lead to disaster, as illustrated by the estate planning mistakes and stories involving some of the rich and famous.

Mistake #31: Selecting an Even Number of Executors

Suppose the executors of your Will disagree on some aspect of the administration of your estate or the execution of your Will. Since each executor normally has one vote, you may have an intractable problem if you have an even number of executors. As many states provide that the majority rules when it comes to fiduciaries (i.e., executors or trustees), it may be advisable to have an odd number of executors. Having an odd number can potentially avoid a stalemate, deadlock, or logjam that could result in the disputing executors going to court to resolve their differences. Going to court can be time consuming and expensive.

As mentioned throughout this book, the choice of the executor or executors of your Will is a critical one. Care should be taken to be sure that two, four, six, or eight Executors don’t run into an administrative nightmare. This potential problem can easily be avoided by remembering the benefit of a tie breaking voter—an odd number.

Mistake #32: Selecting Executors with a Conflict of Interest

Besides being one of the greatest painters of the 20th century, the abstract expressionist artist Mark Rothko also left an estate that became synonymous with the term “conflict of interest.” Although he avoided Mistake #31 by appointing three executors of his Will—Bernard J. Reis, the accountant for Rothko’s art dealer, Marlborough Gallery; Theodoros Stamos, an artist who showed at the Marlborough Gallery; and Morton Levine, an anthropology professor who had little to do with Rothko’s art world—he failed to consider their inherent conflict of interests. Unfortunately for Professor Levine, the two executors with connections in the art world constituted a majority of the named executors and consequently called the shots. Their decision to sell Rothko’s paintings at a deeply discounted price to the Marlborough Gallery was highly criticized; and as a result, all three executors were subsequently removed and surcharged by the New York County Surrogate’s Court.

The New York County Surrogate’s court proceedings, known as “Matter of Rothko,” were concluded seven years later, when Surrogate Millard Midonick voided all of the estate’s contracts with the Marlborough Gallery, ordered that many valuable paintings be returned to the estate, and ordered that the three conflicted and self-dealing executors be removed and surcharged nine million dollars. Rothko’s daughter, Kate, was named as the sole administrator of his estate. She and her younger brother Christopher received about one-half of the estate’s holdings, and the other half was distributed to museums around the world by the Mark Rothko Foundation.

Remember, it is a big mistake to select executors who may have a conflict of interest with your last wishes or with their co-executors. Therefore, please take this advice into account when selecting your executor or executors.

Mistake # 33: Not Compensating (or Under-Compensating) Your Executors

Although she established a $12-million trust fund for her pet dog Trouble, Leona Helmsley expressly stated in her Will that the five named executors—her brother Alvin Rosethal, her grandsons David Panzirer and Walter Panzirer, her lawyer Sandor Frankel, and her friend John Codey—were not entitled “to statutory commissions” for serving as an executor of, or trustee under, Leona’s Will. It is noteworthy and perhaps revealing that Leona refers to only one of the five named executors as her “friend.” However, with friends who do not compensate friends for doing a big job, who needs enemies?

Being an executor of a Will entails a large amount of work. Being an executor of Leona Helmsley’s Will, and administering her humongous estate, entails a humongous amount of work and a great amount of “exposure” as well. What do I mean by “exposure?” Whenever a person has a fiduciary duty in connection with a trust or any estate, that person is legally responsible for the preservation, and growth, of the assets under his or her control. If the value of the assets decreases or even stays flat, the beneficiaries of an estate will often complain that the executor or trustee was not minding the store properly. When you have billions of dollars of assets—including real estate, operating businesses, art, furniture, jewelry, and dog toys—the potential problems for an executor or a trustee are magnified a billion times. Who needs the aggravation, especially if you are not being paid for it?

Leona’s Will was prepared by a lawyer who was apparently in Leona’s favor on the day, hour, and minute that she signed her Last Will and Testament, and he does not leave himself totally out in the cold, as the Will provides:

"Any one or more executors or trustees may render services to the Estate or any Trust hereunder as an officer, manager, or employee of the Estate or any Trust hereunder, or in any other capacity, notwithstanding the fact that they may appoint themselves to serve in such capacities, and they shall be entitled to receive reasonable compensation for such services."

As evidenced by the clause above, Leona’s lawyer is covered for his services to be rendered, but what about Leona’s one named “friend” and her two grandsons? What type of services would they render to the estate that was separate and apart from their fiduciary duties as the executors? (It is noteworthy that Leona’s Will initially capitalizes the words “Estate” and “Trusts,” but keeps the titles of executor and trustee in the lower case, with the other “little people” to whom Leona had so infamously once referred in connection with her tax evasion conviction.)

So if a person is not being paid for all of the aggravation related to the administration of an estate, what is the incentive for spending much of his or her time working on it? Leona made a mistake by not compensating her executors in accordance with the New York statute, which establishes a formula for determining the executors’ commissions. This statute states that two full commissions are to be divided among two or more executors. Even if Leona could not stomach the statutory commission amount, which on a large estate is a very significant amount of compensation, New York would have allowed her to provide some lesser formula or fixed amount.

The five named executors all undoubtedly had better, more lucrative things to do than working for free for the late Leona. It could be expected that the administration of her estate would be delayed and suffer as a result. Alternatively, executors who know that they will be remunerated at the conclusion of the estate administration have a strong incentive to handle the estate administration as expeditiously as possible.

As a consequence of her tightfisted approach to things, Leona may have shot herself in the foot by believing that her grandsons, friend, and lawyer would move as quickly as they did when she was still around cracking her whip. It is often true that you get what you pay for, so it is a mistake not to pay for the services of the executors of your Will. Perhaps Leona believed that paying executors’ commissions was only for the “little people.”

Comments

[Old Limey]

It would appear to me that this topic is about very large estates with values in the tens of millions of dollars. Mine is nowhere near that size and never will be so my estate planning is far simpler.

Mine starts with a living trust, the primary reason is to avoid probate and to have a seamless transition of our assets when the first of us pass away. When that event happens, one's estate plan need revisiting and probably updating or changing. At this point no taxes are due and everything carries on with the surviving spouse in total control of everything.

When the surviving spouse passes away is when the estate plan really kicks in and the work of the executor commences.

In our case we have selected one of our children to be the sole executor. We chose the executor carefully because the job requires a person that you trust 100% to carry out all of your wishes, especially those relating to health and incapacity issues. The child that we selected is a major beneficiary so there is no remuneration for the work involved in settling the estate.
A good friend of mine is in the midst of this at the present time and there can be a lot of work entailed. In my friend's case it was made unecessarily much more complicated because his father's assets were an untidy collection of stocks, CDs, brokerage accounts, etc, widely scattered and held at many companies. It was also complicated because his father had suffered from Dementia in his final years and did not take care of his affairs very well. The son even found out that the father had not paid his homeowner's insurance for several years.

I have always believed in the KISS principle (Keep It Simple Stupid) so our estate will be far, far easier for our executor to deal with. Apart from personal items it consists of just 3 brokerage accounts at one institution, 4 Credit Union accounts at one institution, and two pieces of property. When we had our estate planning documents revised earlier this year our attorney remarked that our instructions were the clearest that he had ever received, but then I'm a retired engineer, as well as being a compulsive nitpicker. It only took me two sheets of paper to diagram precisely how we wanted our estate to be disposed of, and yet after all of the legalese had been added in we ended up with documents about 1/2" thick.

[Aaron @ Clarifinancial]

Old Limey, I don't think that estate planning is only for large estates. Consider the point about an even number of executors without conflicts of interest(or trustees). This can apply to a couple with minor children or adult children they have guardianship over.

While the information about estate planning here seems solid, I doubt I will keep it on my bedside table.

[Evan]

Old Limey,

As I always point out the biggest problem with Living Trusts is that most people don't then retitle the assets. I am sure that is is Mr. Nass' Book.

If your home is not owned by the Trust, if your brokerage accounts are not owned by the trust, etc. than they will need to be probated upon the second death (or the first if they owned by one of the spouses vs. jointly).

[Financial Samurai]

This is all about executors? What about mistakes of planning our estates, not just all about executors.

[FMF]

Financial Samurai --

This is an EXCERPT from a book. It has 101 mistakes about all sorts of estate planning issues. The three here simply are about executors because that's what the section they gave me was about.

[MC]

The choice of executor is important even for small estates.

My grandmother died in 1992 and her estate was max $200K at the time. Her will divided her estate in half between her son (my uncle) and my mother (who was dead, but survived by several children including myself). My grandmother made the mistake of naming her son as executor---but since he was property developer and had property adjacent to hers, (and he was a sketchy guy) this was a huge conflict of interest.

Strangely, he took *14 years* to sell her property and settle the will, meanwhile renting out her house and charging the estate for his "oversight" of the property (which coincidentally = the rent on the house).

Apparently he did this because he thought he could get away with it--we were just high school and college kids at first. He also kept sending us kids legal papers to sign that would turn over control of our shares of the property to him, but I never signed it so he didn't have that right.

Finally after 14 years I got fed up and hired a lawyer (which enraged him) who discovered that he'd broken many executor laws---but it was useless to sue because the small estate would be eaten up the legal costs. Instead my lawyer pressured him to finally sell the property and made him eat the capital gains and tax costs over the 14 years. Me and my sibs finally (!) got our small share of our inheritance. Which would have been more useful to us 13 years for down-payments on our first houses, but is still nice to get I suppose.

I'm sure this isn't what my grandma wanted. Choose a lawyer as your executor, not a family member. Especially not a sketchy one!

[Old Limey]

Evan: The attorney that I dealt with also provided all instructions on how our assets needed to be retitled from joint ownership into the Trust ownership. With our real estate the new ownership descriptions were also filed with the County Recorder. I cannot imagine any attorney worth his salt not seeing that this was done.

[Evan]

@MC,

You have to be careful when hiring a lawyer as an executor because of fees associated with doing so. Also, there are usually extra docuements associated with naming a drafting attorney as executor (at least there are in NY) - not that this should be a hurdle just something you should be aware of.

@Old Limey,

Most attorneys I have dealt with (and that is multiple attorneys each week) don't feel that it is their responsibility, unless adequately being compensated, to follow through on the changing of title of property, brokerage accounts, etc. As such, they draft the docs, send a letter telling the client to do so and walk away.

Not saying it is right or wrong, just reality.

[Old Limey]

Evan: I guided one of my daughters through a divorce. Her husband was also an attorney and his attorney was the best (and most loathed) divorce attorney in the area. We started out with a female attorney that was very low priced and inexperienced and quickly found out that she was in over her head so we switched to a very experienced and much more expensive and aggressive male attorney. The new attorney had dealt with the husband's attorney before and hated his guts. However what he achieved was that the husband soon realized that they were in for a long and expensive fight so he became anxious to settle out of court. After much haranguing between the three of us he eventually caved in with the result that my daughter obtained the settlement that she wanted, had a "no cohabitation" clause removed from the agreement; the husband avoided washing his dirty linen in public and in a court where he was very well known; and they both saved themselves lots of money in attorney and forensic accountant fees.
I feel very fortunate that my only need for an attorney in my whole life was for estate planning and with that I knew, up front, exactly what the cost would be and it was very reasonable.

[Yolanda Artiga]

I am the executor for my single brother who left an old outdated will, and an unsigned estate, it is less than 100K yet I need to go thru probate in order to get his life insurance check.