A Change of Direction

A sister and brother were beneficiaries of a family trust. Using some of the distributions from that trust, they started a very successful real estate brokerage together. The sister managed finances, while the brother handled operations. All went well for many years, but then problems developed. The sister lived extravagantly, borrowing heavily against her assets. Eventually, she exhausted her share of the trust. She also borrowed from the brokerage’s escrow account. Then, increasingly desperate to find the means to sustain her lifestyle, she borrowed from an elderly relative. There were reasons to question whether the relative understood the terms of the borrowing, which were on favorable terms to the sister.

The sister did not make payments under this loan. Another relative, now managing the elderly relative’s affairs, demanded payment and when the sister refused, the relative sued the sister for breach of trust and nonpayment. Further, during the course of these events, the sister also ran up significant liabilities to the IRS. The brother grew gravely concerned, as he knew the sister’s actions could destroy the brokerage and their reputations. Historically, the brother had mostly deferred to the sister; now, he realized he had to take a greater role in the management of the brokerage. He saw a need for immediate action, such as the sister filing for bankruptcy. On the other hand, the sister wanted to contest the step-relative’s lawsuit. The siblings retained us to address the issues impacting the brokerage.

Initially, it proved very difficult to develop a plan that both siblings accepted. The sister continued in her desire to contest the lawsuit. We encouraged the sister to explore all available practical alternatives to filing bankruptcy and contesting the lawsuit, as her commitment to any plan we developed was crucial and she had to come to see that realistically, there was no other path. After many months of consultations and evaluation of different options, the sister acknowledged that there was no alternative. We developed a plan that contained three steps, which the siblings agreed to implement: 1) the sister would file for bankruptcy; 2) she would sell her only remaining asset of value (a beachfront vacation home) to pay the IRS debt, as that would not have been dischargeable in bankruptcy, and 3) attempt to settle the lawsuit. There were no guaranties that the last element would succeed; the step-relative could not be forced to accept a settlement. Still, after many months of discussions, and a great deal of effort to develop trust between the lawyers, a settlement was finally reached.

The sister filed for bankruptcy six weeks after the settlement. The brokerage survived, but underlying tension remained between the siblings, as both had to adjust to the brother’s assertion of greater authority in their relationship.

The Bloom Group, LLC’s lead attorney, Peter Bloom, published a comprehensive guide to working with your family in 2019. To read more about how families work together and see how the rest of the story above unfolds, download Seeing the Blind Spot today.