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© Kevin Carden - Fotolia.com
Prince and Aretha Franklin spent decades working on their music, winning acclaim for their talent and leaving a legacy that endures. Despite establishing large estates along with their fame, neither apparently turned their attention to creating wills. Prince’s estate became the subject of extensive and expensive legal controversy after his death in 2016, while analysts have speculated that Franklin’s death this year could cause similar competing claims.
You may not have an estate similar to these iconic musicians’, but you should pay attention to how their decisions will affect their loved ones and business associates.
Kimberly Hanlon, co-founder of Lucere Legal in Minneapolis and author of The Minnesota Small Business Owner’s Legal Survival Guide, notes that a surviving spouse or children would generally inherit a real estate business if no will specifies otherwise. However, if the children are minors or the heirs are not licensed in real estate, that could be a problem. “If you don’t make the will—an estate plan—the state will make one for you,” Hanlon says. “Then the question becomes, ‘Do you like that plan?’”
Even if the family presents compelling evidence of a person’s wishes, the state merely distributes property to heirs according to state law if an estate plan is not in place, Hanlon says. Such a plan also allows a person to pick a personal representative. “You don’t get to pick that person if you haven’t made a plan,” she says, adding that the potential for litigation exists with or without an estate plan. However, she notes, “if you have a really buttoned-down estate plan, it tends to reduce the likelihood of litigation.”
Alex Lehr, broker and proprietor of Lehr Real Estate in San Carlos, Calif., and the author of The Unexpected Sale: Guidance for the Executor/Administrator of an Estate (Advantage Media Group, 2017), has seen the family battles that can develop. He has had to deal with what he calls “the complications and hand grenades” that arise with estates that lack planning. “Many times, you’ll see the darkest sides of humanity come out when money is involved,” Lehr says. He has even sold apartment buildings for families for millions of dollars so they can pay attorneys to continue fighting over estates. “Do you want to leave bad feelings and bad blood as your legacy? That’s usually what winds up happening when there’s no will or trust in place,” Lehr says.
A sibling who took care of a parent may feel he or she is owed a larger chunk of the inheritance, or a parent may have suggested a particular child would receive a certain percentage of the estate but never put it in writing. Other family members may argue the parent was manipulated and the arrangements lack validity. Determining who inherits the family home can create more controversy. The court eventually may determine that the house must be sold and the funds from the sale distributed to heirs. But the market could drop before the sale is mandated.
Our society has created a taboo about discussing death and money, Lehr says. “It’s not a game. You can cripple families financially, emotionally, and spiritually by not taking the time to do a simple will or a simple trust.”
He compared a lack of estate planning to sending loved ones on a cross-country road trip with no directions. “Everybody can make it to the East Coast, but what if you meant Maine and not Florida?” Lehr says. “They may not get to where your true intention or destination was intended, so leave them a map. It’s literally that simple.”
Nick Vertucci, founder and CEO of The Nick Vertucci Companies in Irvine, Calif., used a football analogy in discussing the potential impact on a person’s business. Imagine if a football team loses its quarterback in the first quarter and does not have a replacement, Vertucci says. What would happen to the team if they have to play the remainder of the season without a good quarterback? “The team is over,” he says.
Vertucci, who also founded the Nick Vertucci Real Estate Academy and wrote the book Seven Figure Decisions (Lioncrest Publishing, 2018), says that as a business owner, he has realized that he needs to have a backup plan in case he is not able to run the company. “There are a lot of good people who do great things for our students, and I would not want anyone to suffer if I was not at the helm,” Vertucci says.
Hanlon recommends that a real estate broker or agent with a team enter into a buy-sell agreement that allows for the business to be transferred to a key agent or broker. She also recommends that the business have a life insurance policy on you, the owner, which would allow the new business owner to purchase shares from the heirs, thus providing financial security for family members and allowing the business to continue operate.
Similarly, Vertucci says, “when the driving force behind the investing or the business dies, there will be a financial void that will need to be filled. Life insurance is a great way to fill that void.” Life insurance policies can help pay down mortgages that real estate investors may have, increasing the cash flow for families, Vertucci adds.
Other experts also endorse living trusts over wills. “I don’t care if you’re 20 or you’re 90; a trust is the way to go,” Lehr says.
“Everyone should have a living trust,” Vertucci adds. “There isn’t a state law or probate that is single-handedly beneficial for the real estate investor. It is unwise for investors to avoid protecting their estate for their spouse and beneficiaries.”
A living trust eliminates the state probate process and excessive attorney fees. If a person owns properties in multiple states, a family may have to hire attorneys in each state to handle probates if a trust is not in place. “I can’t imagine a worse scenario for any family than having to hire several different attorneys in varying locations in order to receive what should have passed without any court involvement, had a living trust been created,” Vertucci says.
Living trusts can also help protect assets from creditors if heirs face lawsuits or judgments, provide income for heirs while preventing quick sales for fancy cars or high-end vacations, preserve privacy, and help prevent forced business sales, he adds.
Lehr points out that living trusts can have tax advantages over wills. Creating a living trust also provides an opportunity for real estate professionals to help their clients understand trusts better. “If we’re going to be a true adviser, we need to be educated,” Lehr says.
People should get over the fact they will not live forever, he adds, echoing a George Strait song: “I’ve never seen a luggage rack on a hearse. You’re not going to take any of this with you.”
