Over the years when families get together for the holidays, siblings often revert to childhood roles and act differently than they normally do. Family dynamics can bring out unexpected behavior in otherwise well-adjusted adults. It’s unexpected except that it happens every time the family gets together.
Later, as the family gets older and the parents pass away, it doesn’t get any easier. Often, the presence of the parents acts as a constraint on their children’s misbehavior. When it comes to the disposition of estate assets, the misbehavior often gets even worse, especially if one or more of the children hasn’t been great with money.
Fiduciary vs Fairness. What is the objective?
Parents will often choose the child they feel is most responsible to execute their wishes. In the case of a trust administration, this person is named as trustee. In the case of a probate estate administration, this person is named as personal representative. Despite this exceptional responsibility, the most responsible child rarely recognizes their main goal: acting as a fiduciary. The fiduciary is required to maximize the value of the estate (or trust estate, as the case may be) and to perform the written objectives the parents as described in the documents, in the best interest of the beneficiaries of the estate or trust.
Real estate investors looking for below-market deals actively seek out "motivated sellers"—people navigating divorce, financial hardship, or urgent relocations. Estate properties are frequently lumped into this category. Bargain hunters assume the family just wants to get rid of the property and avoid the hassle. If one of the beneficiaries needs their distribution sooner than others, they can put pressure on the fiduciary to accept a quick offer.
If a trustee or personal representative treats the property like a hassle to be discarded, they are making a costly mistake – and could be breaching their fiduciary obligations to the other beneficiaries. When parents write their final wishes, they do not say, "Sell my assets for as little as possible." They want their family or favorite charities to benefit as much as possible. If the estate's decision maker fails to sell the property for its highest possible value, disputes with fellow beneficiaries are likely to arise.
Sneaky Traps:
Underpricing
An idea people often have to get the most out of a home is to price it low and let the animal spirits of a bidding war take the price back to where it should be and hopefully higher. This can work well in a strong seller’s market, or other instances where buyer’s positive emotions rule the day. However, in buyer’s markets or if the home needs work or is on a busy street, the price normally needs to be exceptionally low to start a bidding war, leaving money on the table.
Not considering all options:
The trustee/personal representative should consider whether to fix up the house or to sell it as-is, especially if there’s money in the estate to do the fixing. Sometimes, it can be clearly demonstrated that taking on certain projects will result in a higher net value. Other times it’s less clear. In situations when the projects do have clear value, fiduciaries should resist the tempation of quick money when a greater return may just be a few weeks or months away. Ultimately, one of the hardest jobs of being a trustee or personal representative is balancing the fiduciary obligation to handle the administration in an efficient manner, while still maximizing value to the beneficiaries. This is an area where an agent who understands these obligations and who can weigh the pros and cons of repairs is invaluable.
Not communicating:
The sibling fiduciary should be sure the other beneficiaries are informed of the decisions, ideally through a qualified attorney assisting them with the administration. Hopefully everyone agrees on the course of action. If agreement is elusive, then it’s particularly important to document conversations and establish solid reasons why certain decisions were made. The sibling trustee that has felt like the boss of the family for their entire life easily neglects this step.
Unequal Inheritances:
One instance that can easily start an argument is when parents leave the kids unequal amounts. That’s usually not as simple as leaving unequal amounts of cash, it’s usually because the assets are individual real estate holdings that inherently have unequal value. The parents may have in mind that the real estate will be kept in the family, but they normally lose control after they pass away. “Asset driven estate plans” of this nature can often lead to difficult administrations and conflict.
Of course, something to keep in mind with inherited assets: those who inherit the assets also receive a step up in basis, meaning the initial value for capital gains purposes resets to the current market value at the time of death. Careful consideration should be given on whether it’s more practical to sell, or whether to keep the asset just based on this aspect alone.
The safest plan:
If you find yourself as the trustee or personal representative responsible for an estate or trust administration, your best bet is to hire an attorney for advice and counsel. This may be the attorney who drafted the documents, provided that they are also experienced in estate administrations, as well as drafting. In some cases, these can be separate practices, and it’s important to make sure the attorney who is representing you understands the legal, tax, and practical requirements of an estate or trust administration.
An important note to consider is it is generally acceptable to use estate or trust funds to hire an administration attorney, provided that in the case of an estate administration in certain jurisdictions, fees must be approved by the court. Secondly, if a sibling is contentious, the likelihood of a dispute can be drastically reduced if there is an attorney providing well thought out advice and counsel to the fiduciary. Beneficiaries then know you’re taking your responsibilities seriously and you have the support of a professional. Beginning consultations with the administration attorney and carefully following their advice is the safest thing you can do.
Working with a real estate professional who is experienced with the process can help as well. Realtors can’t advise on legal matters, but they can help the process go a lot more smoothly. As mentioned earlier, pricing in such a way that prevents disputes is a helpful step. If the family does decide on committing to certain improvements prior to listing the property, the agent can serve to provide contacts of high-value vendors and contractors to help keep the project moving forward in a timely way and on budget.
If you or someone you know finds themselves in the position of administering an estate, reach out to Spears Property Group, we can help.
