A Little Extra Planning Can Avoid ‘Heir Wars’

The legacy of late California Senator Dianne Feinstein was tarnished by a series of law- suits filed before her death. The suits revealed rifts in the family and shortcomings in the estate plans of Feinstein and her late husband.

Feinstein’s late husband Richard Blum, a wealthy investor, passed away in February 2022. Both Blum and Feinstein were in second marriages, and each had children from their pre- vious marriage. After Blum’s death, the senator suffered several health setbacks before passing away in September 2023. Beginning a few months after Blum passed away, Feinstein’s daughter filed a couple of lawsuits in her role as agent under Feinstein’s power of attorney.

The suits had different complaints and involved different trusts. But they essentially alleged the trustees were depriving Feinstein of income or assets to preserve the assets for the children from Blum’s first marriage. Blum’s heirs would receive the assets after Feinstein’s demise. The counter allegation was that Feinstein’s daughter was trying to shift assets from the trusts to her mother’s estate so the daughter eventually would receive them. The suits are another example of what sometimes are called “heir wars.”

Children and sometimes other relatives battle over an estate. The battles usually begin after one of the principals passes but also can start when one of the principals seems to have cognitive problems. Heir wars are more likely in blended families with children from previous marriages. But they can occur in any family that has different personalities with varying interests, and ambitions.

Parents often are unaware of pending heir wars because the extent of conflicts, grievances and grudges is suppressed until one or both spouses pass away. Only then does the lid come off and reveal the depth of differences. Sometimes the details of the estate plan surprise one or more people and trigger the battles. Most of the heir wars are avoidable when the parents take the right actions in their estate planning.

A family doesn’t have to be as wealthy as the Blum-Feinstein clan for heir wars to erupt. Most estate planning attorneys have stories of years- long disputes over property or issues that seem minor and of little value to outsiders. Emotions and personalities are greater factors than wealth. The key action is for the parents to consider and anticipate the possible conflicts. There are several angles to consider.

It is important to acknowledge personality differences or conflicts between family members and any others who might consider themselves potential beneficiaries. Differences that appear minor when both spouses are alive are likely to be amplified after one or both spouses pass. Parents also have to be careful to avoid conflicts that are created by details of the estate plan, such as the terms of the division of the estate.

In the Blum-Feinstein case, several of the trusts had built-in conflicts. After Blum passed away, Feinstein benefitted from the trust assets. Any- thing distributed from the trusts was either spent for her or became part of her estate.

Her estate would go to the children from her first marriage. But assets that remained in the trusts after Feinstein passed away would go to the children from Blum’s first marriage. Under these terms, Feinstein and her children benefitted if money was distributed from the trusts, but Blum’s children benefitted to the extent assets stayed in the trusts. It would have been better to restructure the trusts or asset ownership to eliminate the conflicting incentives. Many estate plans have similar cross-incentives.

A common arrangement is for the surviving spouse to receive income or cash flow from a trust for life, and the children receive whatever remains in the trust after the surviving spouse passes away. Often in those cases, the children want the trust to be invested for growth, so they’ll receive more in the future. But the surviving spouse wants more income. It is a built-in conflict. Another frequent conflict occurs in estates with property that is hard to value or has sentimental value.

When the property is divided, the heirs disagree about the value of the items and believe one heir is receiving more value than another. Or an item might have significant sentimental value to at least one heir, leading to a dispute over its value and who should receive it. Estate planners have a lot of tools to deal with these situations and reduce the conflicts, or at least reduce the potential for the conflicts to become full-blown heir wars.

The first and most important tool is communication. This is where many estate owners fall short. The heirs should be told how the estate is to be distributed and what the parents’ wishes are. That reduces the potential for disputes because every- one is told what the expectations are.

Communication also reduces the potential for heirs to be disappointed or surprised by the plan. Most estate disputes occur when heirs are surprised by part of the plan. They essentially act out or try to use the courts to change the plan.

Explaining the plan ahead of time also gives beneficiaries the opportunity to comment on it and explain their expectations or conflicts the parents might not have considered. The communication could lead to changes in the plan. When hard-to-value or sentimental assets are involved, it’s important to let the heirs know in advance the plan to distribute them.

Again, this is an opportunity for the heirs to make their thoughts and expectations known so differences and conflicts can be ironed out and incorporated into the plan. When communication doesn’t appear to solve the potential conflicts, there are other options. One way to reduce conflicts is to direct the estate or trust to sell most of the assets, especially the intangible assets, and distribute cash.

Some estate owners decide to liquidate such assets during their lifetimes or pre-arrange sales or gifts that will occur automatically after they pass. When assets are in trusts, estate owners and their planners should consider different scenarios when deciding the terms of the trusts. For example, “total return” trusts now authorize the trustee to hold a diversified portfolio and invest for long- term returns.

The lifetime beneficiary receives distributions up to a certain dollar amount, a percentage of the trust value or whatever is needed to meet his or her needs as determined by the trustee. There’s no need to classify money in the trust as either income or principal when deciding what is distributed. That eliminates a frequent source of conflicts. Another issue highlighted by the Feinstein situation is the role of trusts. Many people use trusts partly because they are private.

Unlike a will, a trust isn’t recorded in the public records where it’s open to inspection by any- one. But privacy isn’t guaranteed with a trust. If someone disputes the actions of a trustee or questions the terms of the trust, litigation can make the trust a public document, as happened with Feinstein’s trusts. The worst mistake estate owners make is to say, “They’ll work it out.”

A variation is, “It won’t be my problem.” Those sentiments often lead to tarnished legacies and wasted assets. Some communication and extra work on your estate plan can secure or enhance your legacy. But not taking steps to minimize potential conflicts can split a family and enrich lawyers instead of heirs.