This Article is designed to be of general interest. The specific techniques and information discussed may not apply to you. Before acting on any matter contained herein, you should consult with your personal legal adviser.

October, 1996 Newsletter

Leave Your Heirs a Lawsuit?

California law provides any co-owner with the right to force a sale of a property by a "partition" lawsuit. [Even a 1% owner can force a sale of the whole property.] This legal right may be waived only in writing.

We said, "If Mom had planned it right, this lawsuit ... could have been prevented." How?

1. Mom could have appointed one child to determine when to sell the property.
   "I leave the house to R and B equally, to hold the house until R decides it should be sold."
2. Mom could have specified that the property could be sold only if both children agreed.
   "I leave the house to R and B equally, to be sold when they both agree it should be sold."
3. Mom could have appointed a tie-breaker to make decisions if her children could not reach a majority agreement.
   "I leave the house to R and B equally; if they cannot agree on the management of the house, Uncle Bob shall decide."

Caution: restrictions on sale can backfire: a New York City family still owns the world's best buggy whip company; great-grandpa instructed: "Don't ever sell the company."

If a client wants to limit a sale, we prefer to allow some flexibility, such as, "Don't sell unless X, Y, and Z unanimously agree."

Estate Planning - An Heir's View

Why do we do estate planning? For our children or our other heirs.

Estate planning does no good for us. If my Will simply leaves everything to my wife, at my death a simple Probate (total cost = $750+/-) gives her full ownership of everything we own, with no death taxes. At her later death, before our kids inherit, a full Probate often takes a year or more, costs lots of lawyer's fees, and only $600,000 is tax free.

Basic estate planning (a Living Trust) helps not me, not my wife, but my children. It allows $1,200,000 tax free, with no Probate and only a slight delay. Using more sophisticated estate planning allows the kids to get more, tax free.

It is important to remember why we do estate planning - it's not for us but for our heirs. If you do not like your heirs, don't do estate planning. If you like your heirs, do them a favor and do it right.

Some day (hopefully not too soon) we may be heirs ourselves. To make the transition easier for ourselves, we should discuss with our parents whether they have made plans to simplify our work and reduce the cost as much as possible for their inevitable deaths.

As a Certified Specialist Estate Planner, I talk with clients all week about their own deaths. However, I know how difficult it is to speak with my own family about this topic. Besides being a difficult topic, a child who brings this up with his parents may appear greedy, self-interested, or ghoulish. But doing it right ahead of time makes a huge difference, for 2 reasons.

First, a basic Living Trust should allow Probate avoidance at each death; allow the surviving parent full use of 100% of their assets after the first death; and allow each Parent to leave $600,000 tax free (with no property tax reassessment).

The second reason is that asset protection can be built into an inheritance, if it is done ahead of time. [Asset protection is difficult to achieve with your own assets, but a properly structured inheritance can protect against lawsuits, divorce, and taxes.]

If you would like to see our Brochure on these topics, for yourself or to send to your parents, see Dynasty Trust: a Parent's View and Dynasty Trust: an Heir's View.

Minority and lack of Marketability Discount

Tom had other assets worth $500,000.

How much is Tom's 50% of the condo worth? If it is worth more than $100,000, Bob owes tax, since Tom's net estate then exceeds $600,000.

Half a condo is NOT worth 50% of the total. The issue is Fair Market Value (FMV), which is what an outside buyer would pay (to buy half a condo where someone else owns the other half and lives there). The real question is how hard it is to convert the decedent's asset into cash.

Normally, a buyer could force liquidation of assets (converting the condo into cash) with a partition lawsuit. Then, the proper legal valuation would have been the full value less legal costs of a partition lawsuit [($450,000 - $7,000) x 50%].

Happily, Bob and Tom had unusually thorough documentation, including a written waiver of the right of partition. Therefore, the FMV was what would a buyer pay if he could not force a sale, but instead had to wait for Bob to die before he could cash out his share.

We argued with IRS that the value of Tom's 50% was minimal, because any buyer would have to live with Bob or wait for him to die! The issue is how much an outsider would pay for half a condo - not how much is it worth to Bob.

Finally, one week before the Tax Court trial, IRS gave up.

This is an excellent example of a Minority Discount (or lack of control discount) and a Lack of Marketability Discount, which are similar but different concepts.

Discounts apply in several areas (gift and death tax), and this case illustrates how important good documentation is, without which Bob would have owed a lot of money to IRS.

Good documents can drop the value up to 70% in certain circumstances, even for investment assets. This explains the popularity of Family Limited Partnerships. [See Family Limited Partnerships]

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