Beyond The Will, Client Compass

Welcome to the story of the Austens — made-up people with a wild accumulation of fictional (but factual) circumstances that raise all kinds of probate and fiduciary litigation issues. What potential problems do you spot here? What are the arguments to be made on all of these contentious issues? Stay tuned to Beyond the Will throughout the next few months as we dig deep into this family’s saga.

The Austen family had been running a rental real estate company, Oceanic Real Estate, LLC, in Massachusetts for over forty years. The company was founded by Jack Austen, who immigrated to the United States from the South Pacific at a young age. He became a United States citizen in his early twenties and founded the company shortly thereafter. He began purchasing and renovating residential real estate properties and using the rental income paid by tenants to purchase additional properties.

Oceanic Real Estate, LLC was a Massachusetts-based limited liability company. Jack was the initial member of the company but, over the years, gifted a portion of his membership interest to his children, Kate (age 35), Charlie (age 32), and Claire (age 30). The value of the underlying real estate owned by the company was projected to be over fifteen million dollars.

Two of his children, Kate and Charlie, took an early interest in the company. Jack’s youngest child, Claire, unfortunately, could not help with the company due to various disabilities.

Kate and Charlie both went to college out of state. Kate returned to Massachusetts immediately after graduating in 2007 and began assisting her father with the company’s management. As time went on, she became responsible for coordinating development projects and handling the company’s finances. Jack began referring to her as his right-hand woman and continually promised to leave the bulk of the company to her when he died.

Charlie graduated from college in 2010 and decided to spend some time traveling before settling back in Massachusetts. Jack appointed him project manager, but after a few years, Charlie was eager to move up within the company like his sister Kate.

Jack’s spouse, Juliet, had little involvement with the company since the beginning and focused on raising their three children. Juliet spent the most time with Claire, who was diagnosed with schizophrenia and bipolar disorder as a teenager. Unfortunately, Claire was unable to maintain steady employment.

After hiring both Kate and Charlie to work full time in the company, Jack decided that he would retire at the age of 75 with the intent that the company would remain in the family. He met with an attorney, Eko Hume, in 2016 to discuss a succession plan. Attorney Hume reviewed the Operating Agreement for the LLC and the membership interests held by Kate and Claire, each of whom held a two percent membership interest, with Jack holding the remaining ninety-six percent. Jack stated that he had made gifts of a one percent membership interest to each of Kate and Claire in 2013 and 2014.

Attorney Hume asked who had prepared the transfer documents each time Jack gifted a portion of his membership interest to his children. Jack admitted that the documents were prepared in-house but that his accountant was aware of each transaction, and the K-1s for the LLC reflected the appropriate membership interests. Attorney Hume asked Jack if gift tax returns were ever prepared in connection with the gifts of the membership interests in the LLC, and Jack admitted he was unaware gift tax returns were required to be filed. Attorney Hume advised that given the projected value of the company, gift tax returns likely should have been prepared in connection with each gift.

Attorney Hume prepared an estate plan for Jack’s review based on the information Jack provided. Specifically, Jack’s estate plan directed that his remaining ninety-six percent membership interest in the company be divided equally and distributed outright to his three children. His remaining assets were left to Juliet with an option for her to disclaim the assets, which would leave them to a trust for her benefit during her lifetime and on her death would be distributed outright to the three children. Notably, Jack failed to tell Attorney Hume that his daughter Claire suffered from both schizophrenia and bipolar disorder and had begun receiving governmental benefits. Jack signed his estate plan without advising any of his family members, including Juliet, that he had done so.

Unfortunately, before Jack was able to retire, he died in a plane crash (in 2019) while on his way to visit family in the South Pacific. After hearing the news, Juliet suffered a stroke. She was rushed to the hospital, where she remained alive but unresponsive. Notably, Juliet did not have an estate plan in place.

Both Kate and Charlie were devastated to hear the news about both of their parents. Kate found the business card for Attorney Hume in her father’s office and called him to see if he could help. She and Charlie met with Attorney Hume. Kate was astonished to find out that the remaining membership interests in the company were divided equally between her and her siblings and not left solely to her like her father had indicated.

Kate advised Attorney Hume that her mother was currently in the hospital incapacitated and unable to meet with him to discuss Jack’s estate plan. Attorney Hume advised that given the state and potential federal tax implications on Juliet’s death, it would be best for Juliet to disclaim the assets Jack had left to her outright so that they could be held in trust for Juliet’s benefit and offer additional estate tax minimization on her death. Given Juliet’s current physical and mental state, Attorney Hume indicated that he would need to apply for a conservator in order to have someone execute the disclaimer on Juliet’s behalf.

In the meantime, Kate sought out her own attorney, Hugo Reyes, to discuss options with respect to the business, given the fact that her father told her she would inherit the business upon his death.