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Family Story Highlights Importance of Updating Estate Planning Documents

Estate planning attorneys work with residents to plan for their financial future and plan inheritance issues for families. It is crucial not to forget that this planning does not occur with just one meeting. That’s because the plan must be edited from time to time to accommodate changes in the law, changes in family life, or changes in one’s long-term wishes. Failing to appreciate the need to update planning documents can have serious adverse effects.

For example, a recent Reuters article shared the story of estate planning gone awry and the legal ramifications of the failure to properly update these documents.

The Story
Eileen and her husband Leonard Tweten amassed a fortune and set up a trust to minimize estate taxes like many families in similar situations. Their trust included a formula clause which typically divides the estate among the children for the amount of money/assets excluded from federal estate tax (this amount was $2 million dollars when they established the trust in 2008 and is currently $5 million) and the rest of the money/assets was going into a marital trust for the surviving spouse because there is no estate tax on money left to spouses. Ordinarily, including this formula clause in a trust allows for all of the estate assets to transfer without having to pay the federal estate tax.

But there was a problem. The formula clause is specifically based on the amount of money subject to the estate tax exclusion in the year in which one of the spouses dies. Eileen died in 2010, a unique year in which there was no federal estate tax (in other words an unlimited exclusion). Because the family did not update the planning documents to account for this anomaly, the formula clause triggered that the entire fortune go to the children with nothing left for her surviving husband Leonard.

As a result, two estranged daughters filed suit seeking to have the entire estate go to them, leaving their father with nothing.

Recently, the court case was finally concluded with the court finding in favor of Leonard Tweten. So, his two estranged daughters will not receive their late mother’s half of the $100 million estate right away. The $50 million in dispute will go into the marital trust and remain in the control of their father, who will derive income and other benefits of ownership. The daughters will only receive money from their late mother’s estate upon his death.

The legal battle was intense, with the father arguing that an amendment to the trust documents made less than two weeks before the mother’s death should be ruled valid. The court rejected the amendment because it was not properly made. However, they reasoned that the father should still receive his wife’s part of the estate because that was likely the overall intent of the parties when the estate planning documents were considered as a whole.

The Lesson

This situation is an important reminder for all families-even those without a $100 million estate. Even small estate planning documents may use formula-based clauses. Changes in circumstances or laws might render those formulas unsuited for their original purpose. If planning documents are regularly updated, the formula may cause controversy at the very moment it was supposed to work to help families pass on assets.

In our area, be sure to get in touch with a San Diego estate planning attorney to create and update your planning documents.

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