Modesto estate planning council presentation

Blended Family Estate Planning: the Intersection of the Head and the

Heart

Stanislaus CountyEstate Planning Council

November 8, 2012L. Paul Hood, Jr.

© 2012 Emily Bouchard and L. Paul Hood, Jr.

Blended Family Estate Planning: the Intersection of the Head and the Heart

“Second marriage is the triumph of hope over experience.” Samuel Johnson

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• This past May, Emily Bouchard and I did a three part teleseminar series on blended family estate planning that each ran 90 minutes, all of which are available at www.ultimateestateplanner.com

• We also are the co-authors of Estate Planning for the Blended Family (Self-Counsel Press 2012), which is available at the major on-line booksellers’ websites


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http://www.ultimateestateplanner.com/

Our agenda for today’s presentation, which comprises only selected issues:• Define the term “blended family” and

describe how blended families can look• Review some blended family statistics• Analyze some of the business and ethical

ramifications of working with blended family couples


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Our agenda for today’s presentation (cont.):• Review a hypothetical situation involving a

“yours, mine & ours” blended family couple• Consider a simple “empty nester” blended

family business hypothetical• Consider some power of attorney issues• Take up some post-death administration issues,

including asset allocation and estate tax apportionment


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What is a “blended family”?• For our purposes, a “blended family” is one in

which two people are partners and at least one of the partners has one or more children who are not birth children of the other partner

• Blended families can be quite different and, in fact, each blended family is unique


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What is a “blended family” (cont.)?• What follows are examples of blended

families – to give an idea, while also being clear that this is in no way exhaustive

• Each of these situations is quite different in how you should approach the estate planning

• The bottom line: each blended family is different


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• The Brady Bunch: Widow and widower in their 40’s, each with 3 children from prior marriages.

• May-December Relationship: 80yo wealthy widower with 3 grown children in their 50s, marries 26yo who has a daughter, age 7.

• Empty Nesters: 72yo widower with 3 grown children, a pension, and benefactor of his wife’s life insurance, marries 72yo who is long divorced with three grown children, no savings or retirement other than social security, and her only asset is her home.


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• Eat, Drink, and Remarry: 63yo man with one grown son and large alimony obligations marries 35yo wealthy, two-time divorcee with two dependent sons, as his fourth wife

• Nontraditional Blended Family: 46yo woman recently moved in with her 37yo partner, who is also a woman. Both are single parents, one is divorced with a 10yo, the other’s adopted son is 18

• Yours, Mine and Ours: 43yo divorced man marries 41yo divorcee, each having a child younger than 18 from a prior marriage, and each having joint custody. They also have a 7yo and a 3yo together


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Blended Family Statistics:• More and more, blended families are becoming the norm• 50% of the children in the U.S. are being raised in blended

families• 1,300 new stepfamilies are formed every day• As of 2010, there are now more blended families than any

other type of family • At least one-third of the children living in the U.S. are

expected to live in a blended family before the age of 18• Over 50% of blended family divorces are caused by the

children of either or both partners• Source: http

://prtl.uhcl.edu/portal/page/portal/SOE/Programs/COUNSELING_MS/Counseling_Resources/Files/BlendedFamilies.pdf

Blended Family Estate Planning: the Intersectionof the Head and the Heart

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http://prtl.uhcl.edu/portal/page/portal/SOE/Programs/COUNSELING_MS/Counseling_Resources/Files/BlendedFamilies.pdf



Key Considerations towards Working Effectively with Blended Families:• Business and ethical issues, especially regarding

Conflict of Interest• Joint or Separate representation• This is a time when zealous representation

actually may harm the couple’s relationship• Avoid “zero sum game” negotiations-look for

win-win solutions


Conflict of Interest: This issue is much more vexing when it involves a blended family couple• You have to take into account that

approximately 60% of second marriages fail—and the number is even worse-approximately 74%-for third marriages

• The problem with conflicts of interest is that they almost always look worse in hindsight after time has elapsed than at the time of engagement


Conflict of Interest (cont.): • Conflicts of interest are not confined to the

lawyers but to other estate planning professionals too

• Conflicts of interest are bad business even if they aren’t ethical problems

• Let’s look at the conflicts of interest rules for lawyers, since they are very well developed

• However, similar risks attend to the non-lawyers in this area too


REMINDER:• The Rules of Professional Conduct

(“RPC”) for lawyers essentially restrict a lawyer from representing people who are at odds with one another or who have issues that are in conflict with each other


• RPC 1.7 provides the general rule for conflicts for lawyers: it generally proscribes simultaneous representations of clients that have a “concurrent conflict of interest” UNLESS the lawyer reasonably believes that she can provide “competent and diligent” representation; it isn’t against the law; the matters don’t involve an assertion of a claim by one client against another client in the same proceeding before the same tribunal; AND the clients give “informed consent” in writing [emphasis added]


• A “concurrent conflict of interest” is one where the representation of a client will be “directly adverse” to another client OR (and this is a big “or”) there is a “significant risk” that the simultaneous representation will be “materially limited” by the lawyer’s responsibilities to another client, a former client or a third person or by a personal interest of the lawyer”

• Can’t clients simply waive a conflict of interest in writing, you ask?

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• Rule 1.0(e) defines “informed consent” and requires the lawyer to communicate “adequate information and explanation” about the “material risks” and “reasonably available alternatives” [emphasis added]

• The official comments to Rule 1.7 (which, while not a formal part of the rule, clearly should be taken into account in its interpretation) provide that the conflict must be “consentable,” so some aren’t

• Guess what? Consentable is a circumstantial test under the comments-that’s not much help!


What types of routine “conflicts of interest” between blended family couples could come up, you ask?

• Classification of property as separate, jointly owned or as community property

• What about advice regarding severing joint tenancies to allow for funding of a credit shelter trust?

• Waiver of spousal rights in a retirement plan• Advising about the applicability of a possible spousal

election


Routine conflicts issues in blended family couples (cont.):

• QTIP trust terms• Types of legacies and restrictions on legacies

(trust v. outright) to spouses in general• Wealth disparities or economic dependence

between the partners• Interpretation of a marriage contract or

property agreement, including whether the agreement would withstand attack


• There are some very conservative lawyers who simply won’t represent a couple in a blended family and will only represent one partner

• Shouldn’t the proper focus be on what is best for the client?

• I maintain that the answer to that question is a resounding “yes!”

• I maintain that looking out for the client actually is in the estate planner’s long-term best interest too


What are the benefits to the clients of joint representation?• Cost savings (only one set of estate

planners)• Efficiency and synergies of effort• Joint representation could used to better

the communication between the partners• Being treated as partners, not adversaries


What are the benefits to the clients of separate representation?

• Undivided attention and loyalty of the estate planner

• Total freedom to say what the client feels and wants to have done in his or her estate planning

• Lower chance of estate plan challenges, but it doesn’t eliminate challenges by a surviving partner or that partner’s children


Potential signposts of the possible need for separate representation of a blended family couple, despite what they say that they want:

• Where one partner is childless (the partners usually have different loyalties)

• Where one partner does all of the talking or seems to exert control over the other

• Short length of the relationship• Number of past relationships• Significant age disparity between the partners


Potential signposts of the possible need for separate representation of a blended family couple (cont.)

• Significant disparity in wealth or income between the partners

• Economic dependence of one partner on the other that is used against them

• Existence of a pre-nuptial agreement • Information held by one partner is off-limits

to the other partner, e.g., a secret, etc.


• The bottom line: Practice defensively because blended family estate planning can be treacherous waters where storms can come up instantly and without warning

• Nevertheless, trying to work within the family system usually is best where the decision is made to represent the couple

• Recognize that the clients have some tough choices to make and act accordingly



Case Study:Harry, age 62, and Marge, age

48, married for 16 years and with a prenuptial agreement, come to see you about their

estate planning

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Children:• “Ours”: Harry and Marge have one child

together, Tom, age 13• “Mine”: Harry has two sons, Harry, Jr., age

37 (who has two children who are the apples of Harry’s eye) and Steve, age 35• “Yours”: Marge has a daughter, Anna, age

19

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Children (cont.):• Harry, Jr. is COO of the family business, having

succeeded his father, is very successful and being groomed as Harry’s successor, and there is a funded buy-sell agreement in place in which Harry, Jr. will purchase the stock from Harry’s estate

• Steve is a “free lance writer” and frustrated artist who lives with Harry and Marge, over Marge’s vehement objection, as she sees him as lazy and not contributing

• Anna is in pre-med at Stanford with a 4.0 GPA, who also lives with Harry and Marge when she’s not at school, with Harry’s blessing, who loves her, having lived with her since she was three 28


Children (cont.):• Neither Harry, Jr. nor Steve care for Marge at

all, believing her to be a gold digger, especially given that she used to work for Harry as his personal assistant, and view Tom as less than a half-brother

• Anna loves Harry, and Harry actually considered adopting her. Anna adores Tom and thinks of him as her brother.

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The Pre-Nup:• Property held before marriage, and the

income from that property, was separate• All other property was community property• On divorce, Harry would give Marge his rights

in the family’s primary residence and give her $100,000 for each year of marriage

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Assets:• 90% interest in Harry’s, Inc. (Harry’s separate

property, a C corporation): $25,000,000• Residence (joint tenants-free and clear):

$3,000,000• Vacation homes in Park City, Utah (joint

tenants)-$1,000,000 and Naples, Florida (joint tenants)-$1,000,000

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Assets (cont.):• Harry’s 401(k) plan (Marge is the beneficiary):

$1,800,000• Marge’s IRA (Anna is the beneficiary): $250,000• Life insurance-Harry: $20,000,000 (split dollar

arrangement with a trust for the benefit of Harry’s descendants, but Harry, Jr. is given the bulk of the interest)

• Life insurance-Marge: $100,000 (Anna is the beneficiary)

• Debts: $032


Income and Expenses :• Harry’s salary (separate property): $2,000,000• Marge’s dividends and interest (separate property):

$50,000• Harry’s dividends and interest (separate property):

$150,000• Joint interest and dividends (jointly owned property):

$200,000• Monthly household expenses (shared expenses, but

paid with Harry’s income): $50,000

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Behind the Scenes:• Harry steps over a dollar to save a dime; Marge

worries about becoming a “bag lady” and has anxiety when Harry books expensive trips.

• Other than being a little overweight, Harry is in good health

• Harry used up his then $1,000,000 gift tax exclusion in gifting 10% of Harry’s, Inc. to Harry, Jr., but Marge has not used her exclusion

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Behind the Scenes:• The couple is not financially charitably

inclined, although Marge volunteers for the American Cancer Society, being a two-time survivor of cancer

• Harry, Jr. wants Marge to have nothing to do with Harry’s, Inc. when his dad dies and is very worried that she will because she’ll need income after Harry dies

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Behind the Scenes (cont.):• While not charitably inclined, Harry expressed

a strong preference to give it to charity rather than to the government “to buy more $5,000 toilet seats”

• Harry and Marge want to do something special for his grandchildren, and their future grandchildren (Anna’s future offspring are a point of contention)

• Harry and Steve want their shares free from Marge’s rights or control

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Behind the Scenes (cont.):• Harry wants to take care of Marge and treat

the children equally, but is torn between Marge and his older boys, and Marge is seriously concerned that Harry might choose his sons over her and Tom, and Marge wants more to pass to Tom because he’s younger

• The estate planner is of the opinion that the marriage is tumultuous and may not be on solid ground

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Behind the Scenes (cont.):The couple uncovers unaddressed areas of concern,

including:• Marge feels that she’s not being adequately

acknowledged or recognized for giving up her career to support Harry behind the scenes in building his business while also raising Tom

• Harry feels caught in the middle and in a no-win situation: he wants to assure Marge that she and Tom will be well provided for while also keeping the integrity of the company for Harry, Jr. and possibly Tom

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Questions:• Can you represent the couple at all? If so,

how will you represent them? Jointly? Separately? Assuming that you are comfortable representing the couple, should you?

• Can you simultaneously work with Harry’s, Inc.? Should you?

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Questions:• What would you advise relative to

the ownership of the real estate?–Joint tenancy issues–Severing joint tenancies to help Marge

use her applicable exclusion amount• Are there any obstacles in your way?

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Questions:• There is quite a disparity between the net worths

of Harry and Marge from what they brought to the marriage.

• How do you account for Marge’s intangible contribution? Should this be addressed? How could it be done? What are the advantages and disadvantages of each technique?– Estate equalization– Inter vivos QTIP trust– Remainder purchase marital trust

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Questions:• Harry wants to treat all three of his children equally

but wants Harry, Jr. to get the whole company unless Tom gets involved in the company, in which case he wants the business to be divided between the two boys. How can Harry accomplish all of his goals?

• How do you see including Marge in this conversation, as she believes she had a role in building the business by keeping the home fires burning? Should she have any say at all?

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Questions:• Harry asks about how he should plan further

with his Harry’s, Inc. stock. What could he do with that stock either during lifetime or at death?– Does the buy-sell agreement permit modification or

lifetime gifting of shares?– Life insurance trust modification?

• What issues would Harry face, and how could he solve them? What concerns do you anticipate Marge having related to the company stock?

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Questions:• Would Harry want to give Marge

either a general power or a special power of appointment? What risks would Harry face in either situation? How do you see including Marge in this consideration?

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Questions:• What would you recommend relative

to planning for their primary residence? • What issues might they face in any

planning with their primary residence?

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Questions:• Who should serve as executor of

Harry’s estate? • Who should be trustee of his QTIP

trust? • What protections can you build into

the trust to protect everyone?

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Questions:• How might you simultaneously

address the couple’s separate concerns and get them to sign their estate planning documents?

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Questions (cont.):• What issues lurk under the water for

property powers of attorney for the couple?

• How about for health care powers of attorney?

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Consider another simple family business example: • Pete owns the majority interest in a closely

held business, Pete’s, Inc. Prior to marrying Rita, Pete gifted some shares in Pete’s, Inc. to his son, Steve, who is being groomed to run and own Pete’s, Inc. and who works in the business, but Pete retained control


Consider a simple family business example (cont.): • Pete and Steve have a buy-sell agreement in place

wherein Pete’s estate will sell his shares to Steve, and Steve owns life insurance on Pete’s life to pay the sales price

• The couple live on Pete’s substantial salary. Pete’s estate plan at present will hold his estate in a QTIP trust for Rita and Steve, who don’t really know or trust each other.


Questions:• Who should serve as Pete’s executor?• Who should serve as trustee of Pete’s QTIP

trust?• Does Steve have a conflict of interest in

serving as either executor or as trustee of the QTIP trust?


Questions:• Does Rita have a conflict of interest in serving as

either executor or as trustee of the QTIP trust?• If either has a conflict, do you solve it by

suggesting that they serve as co-fiduciaries?• How might you solve the dilemma between the

desires of the income beneficiary of the QTIP trust for income maximization and the principal beneficiary’s desire for growth?


Who should serve as Pete’s executor?• Clearly, Steve would have a conflict in serving as his

dad’s executor, since he would be on both ends of the buy-sell transaction and thus could manipulate the deal to his benefit

• On the other hand, Rita as executor could cause friction in the buy-sell transaction and even endanger Steve’s at-will employment prior to the sale since she and Steve neither know nor trust one another

• This is a situation that cries out for a third party executor, even if only for this transaction


Who should serve as trustee of Pete’s QTIP trust?• Clearly, both Rita and Steve would have a conflict in

serving as trustee of the QTIP trust, since there would be a substantial difference in investment philosophy—Rita favoring income and Steve favoring growth

• This again is a situation that calls for an independent third party trustee or a unitrust arrangement that would effectively go into effect after the sale of the stock by the estate


Could you solve the problem by making Steve and Rita co-trustees and co-executors?

• While this may work in theory, we’ve rarely seen it work well in action—it usually isn’t wise to team up step-relations unless they really know, trust and get along well together—otherwise, you’re likely to create a litigious standoff and a lot of extra court time

• I recall a situation where, against legal advice, a client teamed up child from wife number one and wife number three as co-executors and co-trustees—after suing each other for a year, the frustrated court removed them both and installed independent third party trustees and executors


How might you solve the dilemma between the desires of the income beneficiary of the QTIP trust for income maximization and the principal beneficiary’s desire for growth?

• One might think about a unitrust, given that the stock is to be sold pursuant to the buy-sell agreement, thereby diversifying the asset mix and obviating the drawback of a periodic valuation, which would be required with a private unitrust, although the terms would have to be the greater of trust income or the unitrust amount if QTIP treatment is desired


Powers of attorney issues -modifications often are necessary to your regular forms for a blended family couple• The power of attorney should not permit

an agent partner to significantly alter the principal’s estate plan; likewise, the powers of an agent child should be similarly restricted


Powers of attorney issues -modifications often are necessary to your regular forms for a blended family couple

• The limitations might need to be both affirmative and negative (negative) e.g., restricting beneficiary changes and gifts that are not in accord with the principal’s estate plan; (affirmative) requiring continuation of annual gifts, etc.

• In order to dispel uncertainty, which can lead to litigation, the power of attorney should expressly require the agent to give the children of the principal access to financial and medical information, or to the partner, if a child is the agent


Powers of attorney issues (cont.):• Should limit giving away precious family heirlooms (e.g.,

silverware, china and pictures)• Limit changing beneficiary designations• Limit changing distribution provisions in IRAs and

retirement plans• Should automatically terminate on separation or divorce• Should limit the exercise of powers of appointment• Should not waive any accountings, and in fact should

probably require periodic accountings by the agent• Should affirmatively and broadly restrict self-dealing


Post-death allocations of assets within the client’s estate or trust• There are actually two issues in the allocations of assets in

an estate or trust:• What amounts are allocated between the various

legatees or beneficiaries; and• Whether a QTIP election will be made, and, if so, what

assets will be QTIP’d• I feel that both of these issues should always be decided

by an independent third party fiduciary in a blended family context


Post-death allocations of assets within the client’s estate or trust (cont.)• Only an independent third party fiduciary can be “above

the fray” when allocating assets between the credit shelter and QTIP trusts

• If you can’t get an independent third party fiduciary to make those calls, one group is going to be unhappy with the calls

• Even if the family won’t go for an independent third party fulltime fiduciary, the situation cries out for a special trustee to make these calls


Post-death allocations of assets within the client’s estate or trust (cont.)• You should consider some “fairly representative” (Rev.

Proc. 64-19) language that directs the executor to fund the trusts with assets or cash, or both, and to value all assets at their fair market values determined as of the dates of their respective transfers so that each transfer shares proportionately in the appreciation or depreciation of assets between the date of the decedent’s death and the date of transfers, particularly where a “pick and choose” funding formula is used


Post-death allocations of assets within the client’s estate or trust (cont.)• You should include guidance about

considering the income tax consequences of funding and of the assets themselves in the instrument

• Appraisals of subjectively valued assets are a must, especially for interested trustees!!!


Post-death allocations of assets within the client’s estate or trust (cont.)• If you can’t convince a client to select an independent

third party as trustee or executor, you could give significant guidance in the documents on how the asset allocations should be made

• While you would generally give the independent third party fiduciary a blanket indemnification and hold harmless right, you should reduce that right to make it clear that their decisions are subject to review for compliance with their fiduciary duty


Post-death allocations of assets within the client’s estate or trust (cont.)• Language such as the following should work to provide guidance on

asset allocations: In funding the trusts established in this instrument, I direct [my Executor/The Trustee] to fund each trust with assets or cash, or both, and to value all assets at their fair market values determined as of the dates of their respective transfers so that each transfer shares proportionately in the appreciation or depreciation of assets between the date of death and the date of transfer. In making the funding decisions, [my Executor/The Trustee] also should consider the short term and long term prospects for appreciation or depreciation in the assets selected, as well as the associated income tax consequences. [My Executor/The Trustee] is strongly advised to obtain independent appraisals from qualified appraisers in making the funding decisions over assets that have no readily ascertainable fair market value on an established public market.


Post-death allocations of assets within the client’s estate or trust (cont.)• I typically modified the indemnification language to permit

liability for breach of the duty of loyalty and impartiality due to conflict of interest in that regard. I think that they have it any way, but I liked to put it in there to remind them of what they’re supposed to be doing and how they’re supposed to go about doing it

• Consider language like: My Executor's decisions with respect to allocations of assets between sub-trusts established hereunder all be final, binding and conclusive on all parties in interest, and my Executor shall have no liability as a result of such decisions except for a breach of fiduciary duty or the duties of impartiality or loyalty


Estate tax apportionment issues• Blended families can present some real

challenges for estate tax apportionment• Don’t just assume that the client will want to

defer the estate tax as long as they can through the marital deduction

• At the first death, it would be highly unusual in a blended family to waive recovery of the estate tax attributable to the property that was QTIP’d in the first estate


Estate tax apportionment issues (cont.)• I’ve seen lots of situations where the client wanted

to treat his or her spouse the same as the children, even if it means paying more in estate tax

• The differentials in estate tax and what each “side” nets can be large in situations where the donor wants to treat the “sides” the same

• Document the client’s intention very well, because that differential could make you (or your e&o carrier) a prime target


Estate tax apportionment issues (cont.)• Contrary to popular belief in a married couple

estate plan, tax apportionment issues lurk at both the first death and the second death, not just at the second death

• Suppose that your very wealthy ($50,000,000) client decides to leave 1/2 of his estate to his children and 1/2 to his wife—is this intended to be before or after estate taxes—don’t assume! Be sure to ask about this


Estate tax apportionment issues (cont.)• For example, suppose Al dies in 2012 with a $50

million estate in a state with no death tax and an estate tax rate of 35%, leaving 1/2 to his surviving spouse, Beatrice, and 1/2 to his children

• Considering the exemption, which under present law will shelter $5,120,000 of assets from estate tax, if taxes come off the top, Beatrice and Al’s children will each take $19,647,692.50 and $10,704,615 will go to estate taxes


Estate tax apportionment issues (cont.)• If taxes come out of the children’s share instead,

Beatrice will take $25 million, Al’s children will take $18,042,000 and $6,958,000 will go to estate taxes

• In this example, then, there is a negative swing of $5,352,307 in what Beatrice takes, a positive swing of $1,605,692.50 in what Al’s children take, and an additional $3,746,614.50 in estate taxes paid, just depending upon how the estate taxes are apportioned!



Questions?

Paul can be reached at 504.452.7574 or 406.243.6274 and

[email protected] or [email protected]

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mailto:[email protected]

Modesto estate planning council presentation

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