Clarity is Key to Planning

When problems arise in an estate plan, often the source is a lack of clarity.

Tom Petty died in 2017 and left a fortune estimated by Newsweek to be around $38 million. Petty did some things right, but he could have done better.

What did Tom Petty do right? First, he planned. Most people just let nature take its course and fail to plan. There’s an old adage: when you fail to plan, you are planning to fail. That’s usually as true in estate planning as with most things. Each state has a statute which sets forth what happens to your assets if you don’t plan. It’s called intestacy and it may be very different from what you want.

Next, Tom Petty used a trust for his assets. This means his assets can avoid the cost and delay of the probate process which must occur at death for assets not in his individual name. Further, a trust can provide privacy. However, when the trust ends up in litigation, privacy may be lost, which brings us to what he could have done better.

Petty’s trust provides that his widow, Dana York Petty, is the trustee. It also provides his two daughters from a prior marriage, Adria Petty and Annakim Violette, should have “equal participation” in decision making concerning his assets. So, the three are in court trying to determine what he meant. His daughters contend that it should be by majority rule and they can outvote his surviving spouse. His surviving spouse contends that she, as trustee, has decision-making authority and merely needs to include them in the process. Here’s a link to more information.

If Petty had been clearer, he would have served his loved ones better. They may not have liked what he determined, but they probably wouldn’t be in court arguing over it. The acrimony of litigation is the last thing Petty would have wanted.

A dispute between a surviving spouse and children from a prior marriage is quite common. One way to avoid such a dispute is providing clarity in the estate plan. Another way to avoid disputes is to make sure their financial interests are aligned. Often a trust provides for all income to the spouse for life and then for the remaining assets to go to the children.

However, such a trust puts their interests at odds. The surviving spouse would want the trust invested in high-yielding assets and the remainder beneficiaries would want the trust invested for growth. This financial conflict can be avoided by aligning their financial interests with a “unitrust” for the surviving spouse.

A unitrust provides a set percentage of the trust each year to the spouse (such as 4%) and at the spouse’s death, gives the remainder to the children. With a unitrust, the spouse and the children all want to maximize the value of the trust.

It’s important to draft an estate plan to minimize the possible conflicts. Clarity is key to minimizing conflicts.

Stephen C. Hartnett, J.D., LL.M.
Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128
www.aaepa.com