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A Bulletproof Estate Plan
Donald S. Russell, Sr., lived a long and full life. He served as governor of and United States Senator from South Carolina, as well as President of the University of South Carolina. Russell was appointed a federal judge for the Fourth Circuit, and he continued to discharge his judicial duties until his death in 1998 at the age of 92. Judge Russell and his wife had four children: three sons and one daughter. The daughter, Mim, had three children. She divorced and remarried, and evidently the grandchildren lived with Judge Russell and his wife for most of their lives. For reasons that we are not privy to, the Judge chose unequal treatment for his children in the disposition of his $33 million estate. The entire estate passed to his wife for her lifetime. At her death, $750,000 was provided in trust to one son, Scott, for life (in other words, each would get one-twelfth of the balance). The remaining two sons each received one-third of the balance outright.
The Contest
Mim and Scott brought a lawsuit challenging the will, alleging that it was the product of undue influence upon Judge Russell from the grandchildren or their father. There was evidence that the grandchildren were at times disrespectful, and that they were in the habit of spending significant amounts of Judge Russell's money while they lived in his home. Two medical doctors testified that the Judge could have been susceptible to undue influence. On the other hand, Judge Russell was mentally competent and continued to work until the day he died. He drove himself to work every day. The Judge executed a number of wills and codicils over the years, but he did so alone with his attorney -- the grandchildren and their father were never present. The trial court ruled against Mim and Scott, holding that the facts did not support the allegation of undue influence in creating the will. The siblings soldiered on, appealing to the Supreme Court of South Carolina, where they lost the case in 2003.
The Consequence
The canny Judge russell had anticipated the possibility of a will contest, and he tried to ward it off with something lawyers call an in terrorem clause. Such a clause makes all the dispositions in a will conditional. Anyone who brings a lawsuit over the will is automatically disinherited, losing everything. This raises the stakes considerably. If a lawsuit succeeds in having a will thrown out, the in terrorem clause goes with it, of course. On the other hand, if the suit fails, a loss will be total. Obviously, the clause failed to prevent the lawsuit in this case, but after the 2003 decision, the other heirs sued to enforce its terms. They also demanded that Mim and Scott cover their attorneys' fees, which came to about half a million dollars. Last spring, the South Carolina Supreme Court sustained both claims. Judge Russell took all possible steps to protect his estate plan from the challenge, the court found, including amending his will and tryst to include the language revoking the interests of any beneficiary who contested the will. He warned his attorney that he expected a challenge, and he retained a former law clerk to represent the interests of his grandchildren should a challenge be brought. The Court concluded: "In sum, he did all that he could have to ensure that his wishes were respected. If a no-contest clause cannot be upheld under these facts, such a clause would not ever be enforceable. Therefore, by giving the no-contest clauses their full, intended effect, we honor Testator's wishes."
The Living Trust Alternative
The true efficacy of in terrorem clauses is not known. (How could we count lawsuits never filed, after all?) But they have been defeated on occassion and so are not foolproof. The better course may be to use a living trust as a will substitute. When a trust has been funded and in operation for a number of years, successfully making an "undue influence" argument is a much bigger challenge. To learn more about living trusts, talk to one of our staff members soon.
From "Concepts in Financial Planning" distributed by Wealth Management at Mechanics Bank, November 2006 issue
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