I work in southern California, and many of my clients are first-generation Americans. Unfortunately, I hear of many situations where hard-working couples have received inadequate estate-planning advice. The following story, based on a number of cases, describes what can be lost when careful planning doesn’t happen.
Jose and Rita lived the American Dream. They met in high school in southern California, both first generation Americans. Soon after graduating, they got married and started their family.
The couple worked hard at a dry-cleaning establishment. They initially mopped floors, then steam-pressed clothes in the sauna-like, windowless, central-operations cleaning facility far from the pristine storefronts that customers visited. They came home stinking of perchloroethylene (PERC), a commonly used dry-cleaning solvent, but never complained. Each moved up through various positions. Jose eventually managed operations; Rita greeted customers as the face of the business at the flagship store.
After the birth of their third daughter, the couple decided to chase their dream. With help from family and friends, they opened their own small neighborhood cleaners. Behind their cramped storefront they cleaned and pressed clothes. Their years of experience in almost every position in the industry — along with long days and nights — enabled them to succeed. Their love kept them going through the tough times. Through meticulous work and outstanding customer service, they earned many long-time customers.
Within a few years, they opened their own central operations facility and had three storefronts throughout the area. They also bought a home in which to raise their three daughters.
Jose and Rita loved what they built and were often amazed by it all. But they knew it wasn’t just luck; it took hard work, persistence and planning. They also recognized they needed an estate plan to protect their family and American Dream. So, they hired an estate-planning law firm to help them. That was a step that many other Hispanics don’t take: Only 21% of Hispanics feel comfortable talking about end-of-life planning because of “trust issues, language barriers, and cultural differences,” say experts. According to Consumer Reports, while 1 in 3 Americans have a will, only 18% of Hispanic people have one.
Jose and Rita spent a half hour with an attorney. After they filled out forms, the attorney advised them to set up a revocable trust to protect their assets from probate and to name guardians for their children in case something happened to them before the girls turned 18. The attorney stated that each daughter would inherit one-third of their estate. He also suggested they name their favorite siblings as their trustees and agents.
Jose and Rita were concerned about many things, including how the business would work if it was divided in thirds, but the attorney presented a plan and drafted the trust before providing these answers. The busy couple assumed he knew what he was doing, so they trusted his advice.
With an estate plan in place, they believed they could relax. They intended to look at the plan again down the road, and update it for the business; but like many people, they never did. Life was good for the next few decades.
The plan hits its first snafu
All three girls, now young women, worked in the family business. Aracely was being groomed to manage it all while Laurita went to business school. Beatrice secretly longed to follow her own path. Still, the close-knit family worked together in harmony until one morning when Jose never woke up. Just 67, he died peacefully but completely unexpectedly.
The family was devastated and Rita was heartbroken. She felt too sad to stay in the big, empty house that she and Jose had lived in for years. However, when she met with a realtor, she learned that the lawyer never took the time to change their ownership from joint tenancy to community property when he retitled it into the name of their family trust.
As a result, she was looking at hundreds of thousands of dollars in capital gains taxes. So, she stayed in the house in order to save her daughters’ inheritance.
Jose and Rita bought their home for $200,000 – giving each a $100,000 tax basis. When Jose passed away, the home was worth $800,000. His half interest got a “step up” in basis to $400,000, but Rita’s basis remained $100,000. If she were to sell the home, she’d have to pay capital gains tax on the $300,000. If the home was owned as community property (available in nine states), Rita would have also received a step up in basis at Jose’s death and she would have been able to sell the home without any capital gains tax concerns.
The girls did their best to be around for their mom, but they had their own families now and couldn’t always find the time. The family still came together at Rita’s home for holidays and celebrations. These were her best days. All her grandkids got along as if they were siblings. She and Jose had built not just a family business, but a family legacy that looked like it would keep the family close and loving forever.
The plan fails again
Rita died six years after Jose, leaving her daughters to pick up the pieces. They thought they could rely on their parents’ estate plan, but they soon learned that it actually put Jose and Rita’s legacy in jeopardy.
Dividing the family home in thirds seemed impossible. Aracely wanted them to sell it and split the proceeds, but Laurita and Beatrice wanted to move their families into it.
It’s possible their parents had considered whether or not the home would be big enough for everyone and how their daughters could compromise if not everyone wanted to live there. But these issues were never brought up by their estate planning attorney and therefore not included in their plan. So, while it could make sense for Laurita and Beatrice to do a structured buyout of Aracely’s share, there was no guidance around this.
Although this doesn’t have to be written into the plan, the attorney should discuss these possibilities. As I see it, my job is to keep families out of court and out of feuds. I have these conversations all the time and know lenders who do these types of loans/mortgages (I made sure it was all possible before I ever brought it up with clients.).
Another problem was that Jose and Rita did not have a current succession plan for the business — who would own it, run it, etc.
They were not alone: In 2021, only 34% of family businesses said they had a “robust, documented and communicated succession plan in place,” according to PwC’s 2023 U.S. Family Business Survey.
The girls argued over what should happen. Aracely wanted to run the business but Laurita, with her newly minted business degree, thought she was better suited for the task. Meanwhile, Beatrice finally told her sisters that she didn’t want anything to do with the businesses. She wanted them to buy her out so she could go her own way and stay out of their feud.
Each daughter was certain she knew what her parents would have wanted them to do. There was no order, no peace. Eventually, a judge made the final decisions. No one was happy. The daughters were forced to sell Rita’s home and business — for far below market value — and split the proceeds. Hundreds of thousands of dollars were wasted from their parents’ hard-earned wealth. The girls rarely spoke to each other again and their children lost their close ties with their cousins.
Such disputes are not uncommon. More than one third (35%) of respondents to a WealthCounsel survey indicated they have personally experienced, or know someone who has experienced, family conflict as the result of not having an estate plan. And more than half (53%) of the respondents who established a trust did so specifically to reduce family conflict.
But Jose and Rita’s American dream became an intergenerational nightmare even though they hired a lawyer to create their estate plan. They trusted him, but he made assumptions instead of taking time to get to know what was important to his clients. Their one-size-fits-all documents didn’t protect anything and they were left with a false sense of security.
Imagine if Jose and Rita had felt comfortable enough to ask the questions they wanted answered. Imagine if their attorney had empowered them by teaching them the basics of estate planning so they could have been truly involved in the planning and made informed decisions. Instead, they didn’t know what they didn’t know.
As financial advisors, many of you are involved in estate-planning and succession-planning conversations with clients. The best questions you can ask them are:
- What is the long-term vision for your family business? How do you envision its growth and development in the future?
- What are your personal goals for retirement? How do you see your role in the business evolving as you transition into retirement?
- Have you thought about who you would like to take over the leadership and ownership of the business when you retire or pass away? If so, who are they and what are their qualifications, experience and interest in running the business?
- Do you have a clear understanding of your personal and business assets, including any insurance policies, investments and other financial instruments that may play a role in succession planning?
- Are there any specific challenges or concerns you anticipate in the succession process? For example, conflicts among family members, maintaining family harmony, or ensuring a smooth transition for employees and customers.
- What are your plans for the family home (often the highest valued asset in the estate)?
A better network
Many of you also work with and refer clients to estate-planning attorneys. When vetting them, you should learn:
- Does the attorney educate clients about the basics of estate planning to empower them to make informed decisions and work collaboratively to create a unique, comprehensive plan that protects whatever is most important to them?
- How much time does the attorney dedicate to learning about the clients and their family? Are they just collecting contact information to fill in a template, or do they delve deeper into family dynamics to gain a better understanding of the goals and concerns of that specific client/family?
- Is the attorney transparent about their process and fees? Charging flat fees only would allow clients to call and email with questions and concerns without worrying about receiving huge bills they weren’t expecting.
- Does the attorney help with funding a trust or retitling assets into the name of the trust? If not, the client’s trust will likely be worthless. Financial advisors can be an enormous help to their clients and add value to their services by assisting them with funding and making and reviewing beneficiary designations.
The bottom line: Every family is unique, every dream is unique, and every proper estate plan must be as unique as the family it protects.
Seth Bier and his wife, Leann, run Bier Law, an estate planning law firm in Los Angeles’ South Bay. Their goal is to educate and empower individuals to make informed decisions about their future, providing them with the peace of mind that comes with being prepared and free to live their lives without worry. Seth can be reached at email@example.com or (323) 999-1230.