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Estate planning for blended families

Estate planning for blended families

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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
  • The following slides provide examples are designed to give a feeling for the scope and range you may encounter in your practice where blended families are concerned.While we don’t have time now to go into detail about these, we wanted to make sure you received illustrations to more fully capture blended family dynamics.Brady Bunch Details: Mike, age 40, a widower has three sons. Mike marries Carol, age 38, a widow who has three daughters. They have no joint children. The children are all minors who live together. Mike owns his own business, and Carol has a substantial separate estate that she inherited from her late first husbandMay-December Relationship: Franklin, age 80, a wealthy widower with three grown children in their 50s, marries Bambi, age 26, an impecunious dance instructor who has a daughter, age 7. Franklin and Bambi would like to have a child of their own. Franklin has done a substantial amount of lifetime estate planning and has passed significant wealth on to his children and grandchildrenEmpty Nesters: Michael, age 72, is a widower with three grown children, a pension, and benefactor of his wife’s life insurance. Michael marries Sophia, age 72, who is long divorced with three grown children and who has no financial experience, has no savings and retirement pensions other than social security, and her only asset is her home. The couple plans to live in Sophia’s home, but Michael has a lot more wealth, on which Sophia is somewhat dependent
  • Eat, Drink, and Remarry: John, age 63, marries Judith, age 35, as his fourth wife. John has a son, age 37, and John has some expensive alimony obligations to his first wife. Judith, who has been divorced twice, has two sons, ages 11 and 8, each with a different father, with whom she splits custody. Judith has substantially more wealth than John, while John has far greater income-earning potential as a professional. John and Judith have a separate property prenuptial agreement.Nontraditional Blended Family: Marie, age 46, and Angela, age 37, are a couple. As a single parent, Marie adopted a child, who is now age 18. Angela, who has been divorced once, has a child, age 10, whom she is raising alone with only meager, sporadic child support. Marie stands to inherit money from her parents, but that may be in doubt due to her recent lifestyle choices. Angela has the greater income, and she owns the home that they live in, although both are contributing to the payment of the mortgage.Yours, Mine, and Ours: Bob, age 43 and divorced, marries Bridgett, age 41 and divorced. Each has a child younger than 18 from a prior marriage, and each has joint custody. Bob and Bridgett also have two children together, ages 7 and 3. Bridgett is staying at home to raise the young children, while Bob is working to support the family. Bob provides child support to his son’s mother, and Bridgett receives child support to a lesser degree for her daughter from her first husband.
  • Context/Background: When approached by a new potential client couple with blended family dynamics, there are some specific areas you need to be particularly aware of in their listening, and in your own best-practices and ethics.
  • The very first issue that lawyers have to address is whether they can represent a couple in their estate planning, or whether there is a conflict of interest.Why are conflicts of interest so important?In terms of your business, the mere accusation of a conflict is bad PR
  • EMILY’s voice – one of the biggest issues here is that the legal system is designed to “protect” and to treat others as adversaries to be protected from; the key in having conversations with couples who want joint representation is to see them as partners, as a team, aligned and working together towards common goals – and then, allow them to be aware of where conflicts of interests may arise and see how they respond and what their communication is like with each other.
  • EMILY’s voice – one of the biggest issues here is that the legal system is designed to “protect” and to treat others as adversaries to be protected from; the key in having conversations with couples who want joint representation is to see them as partners, as a team, aligned and working together towards common goals – and then, allow them to be aware of where conflicts of interests may arise and see how they respond and what their communication is like with each other.
  • Pause here and give chance for Q&A; check for understanding related to joint or separate representation.*Future slides starting at 30 will give the details of this case
  • Q & A – show the benefits and problems of each.
  • And… it also shows that you respect them both and see them as a unified team. If one asks you to see them separately, find out what is generating the request and if the other partner knows about it.
  • Think about the Marvin Gaye song “Can I Get a Witness” and worry must I be a witness?
  • Once the client and family have been defined, the next step in blended family estate planning is not any different from other estate planning assignments – clarify and define values and goals
  • All of these can be encountered in traditional families – with much less complexities than when dealing with yours, mine and ours and also with former spouses and obligations. Know that each of these can be quite volatile and that each spouse may have very different desires and approaches to consider. Take care that you don’t avoid these because of the potential for conflict. Use “Active Listening” as a way to create a safer environment for the couple to explore all of these concerns.
  • The “however” POINTS OUT THAT THERE ARE POTENTIAL PROBLEMS WHERE A SPOUSE WANTS TO PURCHASE A NEW RESIDENCE BUT ALSO WANTS TO CONDITION A PURCHASE ON GETTING THE RESIDENCE BACK IF HE OR SHE SURVIVES
  • There are creative and viable ways to incorporate all the potential beneficiaries where they feel that their desires and wishes are known and taken into consideration, while also understanding that the final decision is with their parents. Giving a clear explanation, after receiving your beneficiaries’ input will help everyone understand and potentially decrease the likelihood of legal battles and/or family disharmony.
  • Discussing wishes is one thing; discussing WHO will be in the role of carrying out those wishes and what their responsibilities will be is another – and making sure that they know what is required of them and expected of them ifit comes time to perform this role when emotions run high.
  • PARTNERSHIP CONSIDERATIONS: Assessing their ability to truly be effective partners is essential. Understanding what it takes to be qualified as a partner both in terms of skills and temperament will be important for all parties considering this strategy. AND, their degree of communications skills and ability to manage and handle conflict will also need to be explicitly addressed.
  • Use “vision questions” as a way to support your client in envisioning potentialities as well as their hopes. “What do you see will happen for your children as a result of …?”“How do you see the needs of your children evolving over time?”“What do you envision for your children now and in the future?”“Tell me about the impact you’d like your estate to have on your children at various stages of their lives…”
  • Client Intent: When approaching this with your clients, use phrases as opposed to questions. Questions tend to make people feel put on the spot, and they will often get defensive or have a harder time articulating what they really want. Before posing a question, see if you can put it into a phrase instead – something like: “tell me more about…” or “I’d like some examples to help me see what we’re up to here from your perspective…”
  • Take a breath! With all this data coming at you, check in with your body and see where you may feel contraction, tightness, where your breath may even be more shallow. Now, for a moment, consider your clients and how foreign most of this is to them – it’s truly another language. Use your knowledge and understanding of the law and the nuances of blended family dynamics to help your clients feel assured and at ease. Ways to do this include: naming their concerns and what they might be feeling – simply draw on what you may be experiencing right nowGiving them a chance to take a breath, stretch, move aroundGive them some fresh water; offer a break – give them time to have all that you’re opening for them sink in.And, try to limit the amount of information you give them at any time – more frequent, shorter meetings may be more beneficial than long ones where they cannot take it all it – that’s wasted time and money for them and creates inefficiency and roadblocks in your planning process.

Beta alpha psi presentation Beta alpha psi presentation Presentation Transcript

  • Yours, Mine and Ours: Estate Planning for Blended Families L. Paul Hood, Jr. Beta Alpha Psi Presentation February 7, 2013 ©2012 Emily Bouchard and L. Paul Hood, Jr. www.Blended-Families.com/estateplanning 360.991.9558
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. With Emily Bouchard, an internationally known expert wealth coach with particular expertise in the area of blended families, I am the co-author of Estate Planning for the Blended Family (Self-Counsel Press 2012), only the second book on estate planning for blended families, which is available at all of the major on-line booksellers, e.g., amazon.com, bn.com, etc. www.Blended-Families.com/estateplanning 360.991.9558 2
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. For purposes of today’s presentation, if you have a question about either the material or the comments that I make, then I encourage you to e-mail me at: paul@paulhoodservices.com Paul.hood@mso.umt.edu www.Blended-Families.com/estateplanning 360.991.9558 3
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. • This presentation is a ―greatest hits‖ collection from a three part teleseminar series on blended family estate planning that Emily Bouchard and I did together and that each ran 90 minutes, all of which are available at www.ultimateestateplanner.com • We’ve only got approximately 60 minutes and 14 topics to address, plus at least five minutes at the end for Q&A, so let’s get started! www.Blended-Families.com/estateplanning 360.991.9558 4
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. In this presentation, we’ll address the following topics: • Introduction and examples of blended families • Ethical and business issues that arise in working with blended family couples • Defining the ―family‖ in a blended family system and exploring goals and concerns • Issues around the family home • Issues involving the blended family couple’s living arrangements www.Blended-Families.com/estateplanning 360.991.9558 5
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. In this presentation, we’ll address the following topics (cont.): • Issues around the family business • Issues surrounding the tangible personal property landmine • Powers of attorney and advance care directive/health care power of attorney/living will issues www.Blended-Families.com/estateplanning 360.991.9558 6
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. In this presentation, we’ll address the following topics (cont.): • Issues around the funeral and burial/cremation in the blended family context • Lifetime estate planning options for the blended family couple • Powers of appointment design issues • Allocations of assets in an estate or trust • Tax apportionment issues • QTIP Elections www.Blended-Families.com/estateplanning 360.991.9558 7
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. 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 stepfamilies 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 • Source: http://prtl.uhcl.edu/portal/page/portal/SOE/Programs/COUNSELING_MS/Counseling_Resources/Fil es/BlendedFamilies.pdf www.Blended-Families.com/estateplanning 360.991.9558 8
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. . What is a ―blended family‖? • Blended families can be quite different and, in fact, each blended family is unique • What follows are examples of blended families – to give an idea, while also being clear that this is in no way exhaustive. www.Blended-Families.com/estateplanning 360.991.9558 9
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. 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. www.Blended-Families.com/estateplanning 360.991.9558 10
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. 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 www.Blended-Families.com/estateplanning 360.991.9558 11
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. Key Considerations towards Working Effectively with Blended Families: • Business and ethical issues, especially regarding Conflict of Interest • Joint or Separate representation www.Blended-Families.com/estateplanning 360.991.9558 12
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. 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 worseapproximately 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 • 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 www.Blended-Families.com/estateplanning 360.991.9558 13
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. 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 www.Blended-Families.com/estateplanning 360.991.9558 14
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. 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 www.Blended-Families.com/estateplanning 360.991.9558 15
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. • 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 www.Blended-Families.com/estateplanning 360.991.9558 16
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. • 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 www.Blended-Families.com/estateplanning 360.991.9558 17
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. 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 www.Blended-Families.com/estateplanning 360.991.9558 18
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. 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 www.Blended-Families.com/estateplanning 360.991.9558 19
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. 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. www.Blended-Families.com/estateplanning 360.991.9558 20
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. Preparing For Initial Meeting: How do blended family couples come to you? • You have a preexisting relationship (personal or professional) with one partner but not the other partner • You have separate preexisting relationships (personal or professional) with each partner • The couple comes to you with you having had no preexisting relationship of any kind with either partner We stress that any past relationship potentially taints youtechnicalities rarely help those attempting to use them as a shield www.Blended-Families.com/estateplanning 360.991.9558 21
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. How do you handle the initial conference with a blended family couple? • You meet with each partner separately • You meet with only one partner • You meet with both partners at the same time www.Blended-Families.com/estateplanning 360.991.9558 22
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. • In my judgment and practice, when I represented the couple, I always met with both partners, both separately and together, and would never meet with only one blended family partner—simply wouldn’t do it-it was in my engagement letter • People will try to give all sorts of excuses why their partner can’t meet and said that they could handle it for them, but I didn’t take any of those excuses • Avoid situations where you meet with just one partner in a blended family couple—in my opinion, the risk of being perceived as biased in favor of the partner with whom you met is too great, as is the risk of an undue influence claim www.Blended-Families.com/estateplanning 360.991.9558 23
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. • The bottom line: Practice defensively, especially when representing blended family couples, or you’ll risk either being sued or having to be an unpaid fact witness • Unhappy clients are more likely to sue you or bad mouth you and less likely to pay you www.Blended-Families.com/estateplanning 360.991.9558 24
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. Once you’ve successfully negotiated the client and practice issues, you’ve got to define the family in that particular situation • In Family: The Compact Among Nations, Jay Hughes defines ―family‖ to include people ―who by either genetic lineage or bonds of affinity consider themselves related to each other‖ [emphasis added] • Step-children and step-grandchildren often count as ―family‖ in blended families-don’t just assume that step-family doesn’t count www.Blended-Families.com/estateplanning 360.991.9558 25
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. • Unlike just about every single marriage relationship, blended family estate planning begins with the definition of the ―family‖ • Blended family partners often define their family as a family of affinity rather than one of blood only • It also is not unusual for partners to consider one or more of their partner’s children as family of affinity but not one of their individual inheritors www.Blended-Families.com/estateplanning 360.991.9558 26
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. Defining the client’s values and goals: • The ―wrinkle‖ in blended family estate planning is the fact that quite often values and goals can conflict with each other to a greater degree than in traditional families. www.Blended-Families.com/estateplanning 360.991.9558 27
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. These are the principal concerns that we find blended family partners to have in estate planning: • Choosing between partner and children • Providing for payment/apportionment of estate taxes • Hedging bets in the estate planning just in case the union doesn’t work out (average length of subsequent union is about seven years) • Dealing with ―problem‖ children and step-children • Protecting young/disabled children • Caring for elderly parents or siblings www.Blended-Families.com/estateplanning 360.991.9558 28
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. • Fears of the estate planning process and of estate planners cause clients to procrastinate in their estate planning, which we call ―planning paralysis‖ • We all know that planning paralysis can be very costly, particularly to blended family couples, because intestacy can visit some unforeseen results on blended families, particularly on those couples who aren’t legally married—just consider a health care situation where the patient lacks a health care power of attorney/advance care directive-HIPAA and privacy rights might freeze the partner out www.Blended-Families.com/estateplanning 360.991.9558 29
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. Why do some blended families have so much angst? • Divisions based upon divided loyalties are very common in blended families • Children often are still grieving the loss of their parents’ relationship or the loss of a parent to death and hold on to the fact that, for example, ―no one is going to replace momma‖— jealousy of the new partner also can play a role • Distrust of a new partner’s motives also factors into the mix www.Blended-Families.com/estateplanning 360.991.9558 30
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. Issues around the family home and living arrangements www.Blended-Families.com/estateplanning 360.991.9558 31
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. The family home may be a castle, but it also can be a source of difficulty in estate planning for blended families • One of the diciest issues in blended family estate planning pertains to where the couple resides • The issue differs depending upon who owns the home and who is paying the mortgage and upkeep of the home www.Blended-Families.com/estateplanning 360.991.9558 32
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. • Quite often, a blended family couple lives in a home that is owned by only one of the partners • However, sometimes a partner co-owns the residence in which the couple is living with that partner’s children, which can create problems • The home ownership possibilities are: • the couple co-owns the home • one partner owns the home and pays the upkeep and mortgage • one partner owns the home but the other partner pays all or part of the mortgage and upkeep • one partner co-owns the home with his or her children www.Blended-Families.com/estateplanning 360.991.9558 33
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. • Quite often, marriage contracts and property agreements expressly deal with each partner’s rights and obligations around the family home • A frequently seen gap in a blended family estate plan is leaving a surviving partner a residence but not enough cash/income to keep the home up and pay the mortgage and/or real estate taxes on the property www.Blended-Families.com/estateplanning 360.991.9558 34
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. • The home situation is further complicated by whether or not the couple or either partner has a child who is living in the home • There also is the issue of whether the owning partner wants his or her partner to continue to live in the home after his or her death—often owner partners don’t want their partners living there with another partner after the owner partner’s death • Another big problem with the home in the blended family estate plan is the disposition of the contents of the home, e.g., the furniture, etc. because of the emotions that are wrapped around the home and its contents www.Blended-Families.com/estateplanning 360.991.9558 35
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. • One thing that we believe rarely, if ever, works is passing the home to one partner’s children while allowing the surviving partner to live there for life • This creates animosity between the lifetime and principal beneficiaries over things like maintenance and upkeep, i.e., what is a capital expense versus mere maintenance • We don’t see this work well often even if the surviving partner pays fair market value rent • We see arrangements that give a non-owner partner the right to live in the home for a certain finite period of time after the owner’s death www.Blended-Families.com/estateplanning 360.991.9558 36
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. • Because of the emotions behind living in the home that was the place where the children were raised, I often recommended that the blended family couple ―start fresh‖ with a new residence of their own • However, this can be tricky for gift tax purposes even though most transfers between married partners qualify for the marital deduction • If the wealthier partner agrees to purchase the home but to reflect the other partner on the title in exchange for that partner’s agreement to leave his or her interest in the residence to the children of the wealthier partner if he or she survives, this transfer is a terminable interest that won’t qualify for the gift tax marital deduction unless a QTIP election is made—old IRC Sec. 2515 was repealed in 1981 www.Blended-Families.com/estateplanning 360.991.9558 37
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. • I’ve seen living arrangements in blended families that run the gamut from one partner essentially paying for everything to the partners judiciously keeping track of house and living expenses between themselves • I have even seen division of expenses in blended family couples go so far as phone bills being divided with long-distance calls charged to the calling partner. A marriage contract or property agreement also frequently provides relative to living expenses www.Blended-Families.com/estateplanning 360.991.9558 38
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. • It is not unusual for the couple to only be living off of the income of one partner. This is a situation that calls for some serious discussion about how well the wealthier partner wants his or her partner to live if he or she dies first • There are some serious emotional and psychological fears on the part of the poorer partner—worry about being left ―with a tin cup‖ www.Blended-Families.com/estateplanning 360.991.9558 39
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. • Will the lifestyle change? How much income will the wealthier partner want his or her partner to have if he or she dies first? Clearly, the surviving partner will want to retain the same standard of living. However, these are serious questions that must be answered and implemented in the estate plan • The situation is somewhat exacerbated if the couple is living off of the salary of a partner, which obviously will go away if that partner dies first. How will this income be replaced if the earning partner dies first? How much salary should be replaced? These are all questions that estate planners must address, and we admit that there aren’t any easy answers www.Blended-Families.com/estateplanning 360.991.9558 40
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. Closely Held Family Business Issues www.Blended-Families.com/estateplanning 360.991.9558 41
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. The Closely Held Family Business: • General Challenges to address in planning: nondiversification; management succession planning; earning livelihood • Specific Challenges with Blended Family Dynamics: separate property; buy-sell agreements; letter of acknowledgment; living off company after ownerpartner dies; disparate ownership; yours, mine and ours in and out of business • Employment Agreements: how ―steps‖ may need each other; need for planning and preparing • Pros and Cons of Keeping or Selling Business • Blended Family Business Example www.Blended-Families.com/estateplanning 360.991.9558 42
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. • The closely held business interest always is a challenging estate planning asset, irrespective of whether or not it is owned by a blended family partner because of: • The frequent non-diversification that these assets tend to be inside of an estate • The fact that there are frequently business management succession issues that cloud the estate planning issue—especially if children are involved • The issue is further complicated if the owner partner is earning his or her livelihood from the entity www.Blended-Families.com/estateplanning 360.991.9558 43
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. • The complexities of closely held business estate planning are magnified exponentially when a blended family partner owns or co-owns an interest • The issues can differ somewhat depending upon when the interest is acquired • However, in blended family couples, we see much more separate property in closely held business interests, even in common law states, because partners usually bring these interests into the union www.Blended-Families.com/estateplanning 360.991.9558 44
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. • It is good practice to have a buy-sell agreement for all closely held business interests—in blended family couples, it is really a necessity • Owner partners should have non-owner partners sign at least an acknowledgment of the existence of a buy-sell agreement • It generally is wise for owner partners who are married to non-owner partners to have the nonowner partners be parties to the buy-sell agreement and provide for continuing ownership and control in the owner partner upon dissolution of the marriage whether during life or at death www.Blended-Families.com/estateplanning 360.991.9558 45
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. • Family business issues can confound and complicate any estate planning. However, in blended families, these issues magnify exponentially, especially if the couple is living off of the family business. Suppose one partner owns a closely held business. If the owning partner dies first, the other partner may need to continue to live off of the company after the owning partner dies • Issues become even more complicated if one partner owns most, and the other partner owns some, and one partner has children from a prior marriage in the business, and his or her partner’s offspring with them are also interested in working in and owning part of the business too www.Blended-Families.com/estateplanning 360.991.9558 46
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. • Estate planners tend to approach estate planning from a stance of how to protect assets, and also how to protect people. You may want to consider the use of employment agreements and ―golden handcuff‖ arrangements, if for no other reason than to keep the children working for the business, particularly if the children don’t get along with the non-parent partner www.Blended-Families.com/estateplanning 360.991.9558 47
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. • Usually, if relations between the children and the surviving partner (i.e., their stepparent) are strained, the parties don’t realize that they actually may need each other. • If, for instance, the stepmother is put in charge of the business as trustee of the decedent’s trust that owns the business interest, and, if she was not involved in the business during her partner’s lifetime, she will need the children who work in the business and who have experience in the business. Likewise, the children who work in the business need their stepmother, who is now their boss, whether they like it or not—this can be a situation that forces the groups to work together www.Blended-Families.com/estateplanning 360.991.9558 48
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. • We’ve seen blended family businesses run the gamut from remaining successful to financial ruin after the death of an owning partner. The latter seems to happen more often when no comprehensive estate- and business-succession planning were done. Estate planners need to seriously and independently evaluate potential successors as the boss and advise clients accordingly • Quite frequently, children either aren’t yet ready to run the business if the parents die in the immediate future, or the children are not boss material. However, the surviving partner also may not be competent as the boss either, especially if he or she has never been involved in the business or has no business experience www.Blended-Families.com/estateplanning 360.991.9558 49
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. For a client who is the sole owner of a family business, as ponder how to protect both his or her partner and his or her children who are working in the business, consider that you have an even tougher situation to ponder: Should you sell the company during your lifetime? • Many businesses are best sold during the owner’s lifetime because the business is more valuable with the owner still around to assist the new owners if need be. Many owners choose not to sell while they are alive, hoping that their legacy will live on and be furthered by the family and continue to sustain and support the family. Another reason they choose not to sell is because their identity is so intertwined with being the originator, owner, and leader of the business and they cannot imagine what they would do without that role www.Blended-Families.com/estateplanning 360.991.9558 50
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. Consider a simple example: Pete owns the majority interest in a closely held business. Prior to marrying Rita, Pete gifted some shares to his son, Steve, who is being groomed to run and own the business and who works in the business, but Pete retained control—and 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. www.Blended-Families.com/estateplanning 360.991.9558 51
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. • 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? • 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? www.Blended-Families.com/estateplanning 360.991.9558 52
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. 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 transaction and even endanger Steve’s at-will employment prior to the sale since she and Steve neither know nor trust one another, so this is a situation that cries out for a third party executor, even if only for this transaction www.Blended-Families.com/estateplanning 360.991.9558 53
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. 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, so 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 www.Blended-Families.com/estateplanning 360.991.9558 54
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. 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 www.Blended-Families.com/estateplanning 360.991.9558 55
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. The Tangible personal property landmine www.Blended-Families.com/estateplanning 360.991.9558 56
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. Tangible personal property issues are difficult because quite often they seem irrational because the fight is often over little real financial value Nevertheless, there are strong psychological reasons why belongings are associated with deceased people The 20th century philosopher Jean-Paul Sartre wrote ―I am what I have.‖ www.Blended-Families.com/estateplanning 360.991.9558 57
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. • While most partners leave all tangible personal property to each other in single union situations, in our experience, tangible personal property issues and fights occur with such frequency in blended family couples that these issues must be hammered out in advance-and it could be negligence to fail to point this out to the partners since these post-death fights are so foreseeable • Pay particularly close attention to family heirlooms and memorabilia, especially where a partner received that property upon the death of a prior partner or passed down from a partner’s ascendants www.Blended-Families.com/estateplanning 360.991.9558 58
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. • Perhaps the best advice we can give with respect to tangible personal property is for the client to manually give that property to its intended recipient during lifetime and end all doubt over intent, but this isn’t always possible • When the client can’t or won’t do that, exhort them to provide detailed descriptions of the items and the names of the intended recipients to include in the will or revocable trust www.Blended-Families.com/estateplanning 360.991.9558 59
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. Powers of Attorney/Advance Care Directive Issues in the Blended Family www.Blended-Families.com/estateplanning 360.991.9558 60
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. 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 • 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 www.Blended-Families.com/estateplanning 360.991.9558 61
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. 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 www.Blended-Families.com/estateplanning 360.991.9558 62
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. • Advance care directives, also known as health care powers of attorney, but quite often advance care directives also include living wills if they aren’t a stand-alone document, are very important, particularly to our blended family couples who aren’t legally married because of a patient’s privacy rights • We’ve seen unmarried partners who didn’t have this planning in place shut out of the medical loop and not even permitted to be in ICU with their partner even though no one knows more about the patient’s intent than their partner www.Blended-Families.com/estateplanning 360.991.9558 63
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. • Estate planners have to be cautious when working with advance care directives in blended family situations because of the emotions that families often have in a time of crisis • It often is a good idea to include the partner’s children in the information loop even if they aren’t involved in the decision making process • The advance health care directive can stipulate who is to receive medical information other than merely the agent www.Blended-Families.com/estateplanning 360.991.9558 64
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. Issues around the funeral and burial/cremation in the blended family context www.Blended-Families.com/estateplanning 360.991.9558 65
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. • Funeral services/rituals and burial/inurnment are real hot button issues that necessarily occur shortly after death, and these issues can be downright caustic in blended families, which will get administration of the estate or trust off to a very poor start • We strongly suggest heading it off by counseling your clients about their wishes concerning these matters www.Blended-Families.com/estateplanning 360.991.9558 66
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. • We strongly recommend that clients take care of their death arrangements in advance • Moreover, in blended families particularly, we suggest that blended family clients be proactive and to even dictate in writing who they want to be invited to their funerals and to even consider writing their own obituaries because we’ve seen some real hateful, horrible and regrettable things get included in or deleted from obituaries www.Blended-Families.com/estateplanning 360.991.9558 67
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. Lifetime Estate Planning Options for the Blended Family Couple www.Blended-Families.com/estateplanning 360.991.9558 68
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. • There are two statistics that estate planners must keep in mind when considering irrevocable lifetime estate planning advice for blended family couple clients: • 60% of second unions end in splits; 74% of third unions fail • The average length of second unions is approximately seven years www.Blended-Families.com/estateplanning 360.991.9558 69
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. Family limited entities (FLPs and LLCs): • Family limited entities can be very valuable parts of the estate plan in that they permit separation of enjoyment and control, which appeals to many clients, not to mention the valuation discounts that can be achieved • Unfortunately, in our experience, these entities are overused and fail to account for family dynamics: some families make very poor partners with each other www.Blended-Families.com/estateplanning 360.991.9558 70
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. Family limited entities (FLPs and LLCs)(cont.) • In blended families, I rarely advised clients to form family entities where there would be a mixing of the children of the partners unless the children are comfortable with being partners with each other, and hopefully have demonstrated some degree of competence in working together in owning and managing something together already www.Blended-Families.com/estateplanning 360.991.9558 71
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. Family limited entities (FLPs, LLCs, etc.)(cont.) • Some parents with the means to do so will create a family foundation during lifetime to give all of the children in their lives (whatever their ages) a chance to work together and build competence before putting them into a family entity • However, if the parents continue to run the show and wield most of the power and control, then their initial intention is lost and the children do not get the chance to truly see what they can accomplish together (or to determine without a doubt that they cannot work together). In this instance, it usually is ill-advised to shove them into an entity www.Blended-Families.com/estateplanning 360.991.9558 72
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. Family limited entities (FLPs and LLCs)(cont.) • In families that have ―yours, mine and ours‖ children, I usually advised either separate entities for each set of children, or that the entity interests be held in separate trusts because we find that the ―ours‖ children often get caught between the other two sets of children, who often resent the ―ours‖ children and who sometimes don’t view them as real siblings www.Blended-Families.com/estateplanning 360.991.9558 73
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. Family limited entities (FLPs and LLCs)(cont.) • It is critical for the parents to communicate with the children prior to setting up an entity ostensibly to have them work together so that you can get their input and buy-in • Otherwise, they may feel put-upon or forced and, while the parent probably won’t hear about it (as they will not want to appear ungrateful), the children could have resentment that would likely be played out amongst each other at the time of death of the parent www.Blended-Families.com/estateplanning 360.991.9558 74
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. Family limited entities (FLPs and LLCs)(cont.) • Where the partners also have children together, likewise, the same admonition applies • An unfortunate occurrence we see all too often in blended families is that in this scenario, the ―ours‖ children frequently are shunned by both sets of separate children, who see their half-siblings as treated differently, and there is perceived favoritism www.Blended-Families.com/estateplanning 360.991.9558 75
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. Sales to intentionally defective grantor trusts: • For blended families, sales to intentionally defective grantor trusts must be very carefully designed, even more so than for other families • The trustee of the purchasing irrevocable trust must be an independent third party because the beneficiaries might be comprised of children from both partners as well as possibly a partner www.Blended-Families.com/estateplanning 360.991.9558 76
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. • This is where it will be imperative to coordinate the selection of an executor (or successor trustee of a living trust) of the selling partner’s estate, which will be a creditor until the note is paid off, with the selection of the trustee of the purchasing irrevocable trust, which is the debtor, so that there is not friction after the selling partner’s death if the note is not paid off by then www.Blended-Families.com/estateplanning 360.991.9558 77
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. Remainder Purchase Marital Trusts: • This is an irrevocable trust under which the spouse has an income or annuity interest for a term of years or life, and the remaindermen (e.g., children of the grantor) purchase their interest for its actuarial fair market value • It can be considered as an alternative to the lifetime QTIP trust, a QPRT or a GRAT www.Blended-Families.com/estateplanning 360.991.9558 78
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. Remainder Purchase Marital Trusts (cont.) • The marital deduction is available for the spouse’s interest. The terminable interest rule does not apply, and thus no QTIP election is necessary, because the remaindermen’s interest did not pass from the grantor as a gift but rather was purchased by them for full fair market value via the exception • Upon expiration of the spouse’s interest, nothing will be includable in her estate. This is a happy result in any circumstance, and particularly so in a possible subsequent marriage situation www.Blended-Families.com/estateplanning 360.991.9558 79
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. Remainder Purchase Marital Trusts (cont.) • The arrangement would appear to be saved from adverse consequences under IRC Sec. 2702(c)(2) by reason of the fact that the spouse acquires her interest by gift. Here, members of the same family (spouse and children) have acquired interests in the same transaction (creation of the trust) • Accordingly, the person acquiring the term interest (the spouse) will be treated as having acquired all the trust property and transferred to the remaindermen their interests in return for the consideration paid by the remaindermen www.Blended-Families.com/estateplanning 360.991.9558 80
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. Remainder purchase marital trusts (cont.) • Since the spouse’s life estate is not a qualified interest, the result would be a gift by the spouse of the entire value of her life estate, limited, however by the consideration furnished by her. Reg. §25.2702-4(c). Since in this case, the spouse has furnished no consideration, having received the interest by gift, her gift to the remaindermen is zero www.Blended-Families.com/estateplanning 360.991.9558 81
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. Lifetime QTIP trusts: • I have worked with couples where one partner didn’t have enough wealth to even use up the estate-tax exemption if that partner died first, while the other partner had significant wealth and a taxable estate • While the wealthier partner would like to save his or her heirs some estate tax, he or she usually will object to simply giving the other partner significant wealth to equalize their estates. This is much truer in blended family relationships www.Blended-Families.com/estateplanning 360.991.9558 82
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. Lifetime QTIP trusts (cont.) • There are several requirements for a lifetime QTIP trust, which are similar to the general testamentary QTIP rules • Lifetime income right • Property must pass from the donor spouse • No one other than the donee spouse can have any right to the trust property during the donee spouse’s life www.Blended-Families.com/estateplanning 360.991.9558 83
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. Lifetime QTIP Trusts (cont.) • The other partner must be given all of the trust income for that partner’s lifetime, even if they divorce • It also requires the filing of a gift-tax return (Form 709) and a special election on that return to be timely filed. PLR 201109012, revoking PLR 201025021; IRC Sec. 2523(f)(4) • Failure to timely file the Form 709 and make the election is malpractice. See, e.g., Neilson Estate v. U.S., No. 99-1298 (D.C. Santa Fe Div. N.M. 2001) www.Blended-Families.com/estateplanning 360.991.9558 84
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. Lifetime QTIP Trusts (cont.) • For these reasons, lifetime QTIP trusts should only be considered by spouses who have a longterm, solid relationship • However, the lifetime QTIP trust can be designed to cause wealth to be taxed in the other partner’s estate, thereby using up that other partner’s estate-tax exemption, but still allow the wealthier partner to control where that property goes after the other partner’s death www.Blended-Families.com/estateplanning 360.991.9558 85
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. Lifetime QTIP Trusts (cont.) • This technique could save a significant amount of federal estate tax for the wealthier partner’s heirs, while allowing the wealthier partner to direct where the trust assets will go on the death of the other partner. This technique is particularly popular in married blended family relationship • This technique is frequently used to exhaust the poorer spouse’s lifetime exemption. See, e.g., PLR 9731009 www.Blended-Families.com/estateplanning 360.991.9558 86
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. Lifetime QTIP Trusts (cont.) • Some people suggest that the lifetime QTIP trust be set up as a grantor trust for income tax purposes so that the richer spouse is responsible for the income tax, which can be advantageous from a transfer tax standpoint, the so-called ―tax burn,‖ which sounds great in theory • We advise extreme caution when considering the tax burn in the blended family couple lifetime QTIP trust: can you imagine having to explain to your wealthier client that she’ll have to pay the income tax on the income that is going to her ex-husband for the rest of his life? Good luck with that conversation www.Blended-Families.com/estateplanning 360.991.9558 87
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. Lifetime QTIP Trusts (cont.) • We strongly advise building in an exit strategy in the trust document that would ―turn off‖ grantor trust status as to the grantor, should the couple divorce • This tool could involve the use of a trust protector but will differ on the provision used to create grantor trust status for income tax purposes status in the first place www.Blended-Families.com/estateplanning 360.991.9558 88
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. Life insurance and life insurance trusts • In second-to-die life insurance, the partners are not the beneficiaries, the children usually are, or a life insurance trust • In estate planning for blended families, a properly structured second-to-die life insurance policy can assist in the payment of the estate tax not only on the surviving partner’s estate, but also on the amount of estate tax that was deferred from the estate of the first partner to die through the marital deduction, at least in estates of married partners • Again, there is no deferred federal estate tax to worry about for unmarried partners since deferral through the marital deduction is not available www.Blended-Families.com/estateplanning 360.991.9558 89
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. Life insurance and life insurance trusts (cont.) • Moreover, if the premium on a second-to-die life insurance policy is designed around the US gift tax annual exclusion gifts of both insured partners ($13,000 per donee in 2012), there usually is a problem at the death of the first partner to die because the deceased partner loses his or her US gift tax annual exclusion gift right at death • This usually means that the surviving partner will have to supply all of the premiums with only one set of annual exclusion gifts to cover them, which requires the surviving partner to use his or her lifetime gift tax exemption, and when that is exhausted, start paying gift taxes www.Blended-Families.com/estateplanning 360.991.9558 90
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. Life insurance and life insurance trusts (cont.) • In a blended family situation, a surviving partner who has children of his or her own may balk at essentially giving the children of the deceased partner annual exclusion gifts to pay the annual premiums or, worse yet, paying gift tax for the privilege of making gifts to his or her stepchildren. As you can well imagine, that usually doesn’t go over very well and usually doesn’t happen www.Blended-Families.com/estateplanning 360.991.9558 91
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. Life insurance and life insurance trusts (cont.) • In blended families, life insurance trusts can be very useful, even for nontaxable estates. For example, a life insurance trust can be arranged to create an income stream for a surviving partner, with the principal going to children of the insured at the surviving partner’s death • Likewise, a life insurance trust can be used to leave a significant sum to your children, freeing you to take care of your partner with your other property. It is critical that you select a third party as a trustee of a life insurance trust, especially for blended families www.Blended-Families.com/estateplanning 360.991.9558 92
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. Life insurance and life insurance trusts (cont.) • Many blended family clients begin believing that they can appoint a child from each of them as cotrustees, but we strongly advise against it unless those two children have worked well together in the past • Usually, a financial institution will decline to serve as trustee of a trust that holds nothing but a life insurance policy (although a financial institution may agree to serve after the insured’s death if the policy was large enough to satisfy the bank’s minimum requirements), so a suitable third-party trustee should be found www.Blended-Families.com/estateplanning 360.991.9558 93
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. Powers of appointment www.Blended-Families.com/estateplanning 360.991.9558 94
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. Powers of appointment • A power of appointment can be a dangerous thing because if it is unlimited, the holder of that power could effectively rewrite an estate plan, which is not what the vast majority of blended family couple clients • As Professor Ed Halbach always says, the power to appoint also is the power to ―disappoint‖ www.Blended-Families.com/estateplanning 360.991.9558 95
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. Powers of appointment (cont.) • Powers of appointment in blended families are almost always carefully crafted special or limited powers of appointment, particularly where the surviving partner is the one who is given the power of appointment to vary the shares of the partner’s children. This is where the ―power to disappoint‖ can ―encourage‖ children to take care of and to at least be civil to their stepparent after the client is gone. www.Blended-Families.com/estateplanning 360.991.9558 96
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. Powers of appointment (cont.) • You would be wise to discuss with your clients the degree of flexibility they want their estates to have. This is an important decision, especially when considering the ages of their children now and going forward--as their needs and capacities will shift as they grow • Have your client think about what they want for their children and what they hope their estates will provide for their children if either of them were to pass away unexpectedly today www.Blended-Families.com/estateplanning 360.991.9558 97
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. Powers of appointment (cont.). • Would your clients want their children’s access and support to shift based on benchmarks in their lives other than age (e.g., graduation, marriage, birth of first child)? • Giving the surviving partner a limited power to appoint between the other partner’s children can work well if the surviving partner has a preexisting relationship with the children • But it can also be a form of blackmail, so caution is advised www.Blended-Families.com/estateplanning 360.991.9558 98
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. Post-death allocations of assets within the client’s estate or trust www.Blended-Families.com/estateplanning 360.991.9558 99
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. 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 • We feel that both of these issues should always be decided by an independent third party fiduciary in a blended family context www.Blended-Families.com/estateplanning 360.991.9558 100
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. 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 www.Blended-Families.com/estateplanning 360.991.9558 101
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. 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 www.Blended-Families.com/estateplanning 360.991.9558 102
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. 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!!! www.Blended-Families.com/estateplanning 360.991.9558 103
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. 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 www.Blended-Families.com/estateplanning 360.991.9558 104
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. 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. www.Blended-Families.com/estateplanning 360.991.9558 105
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. 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 www.Blended-Families.com/estateplanning 360.991.9558 106
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. Tax apportionment issues, including not waiving of reimbursement of QTIP in the will or trust www.Blended-Families.com/estateplanning 360.991.9558 107
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. Tax apportionment issues, including not waiving of reimbursement of QTIP in the will • This is often included in the so-called boilerplate legalese in the document • It might be the most important provision in that document, particularly for the blended family. If you don’t address estate-tax apportionment in the client’s will or trust, the state provides default estate-tax apportionment rules, and you should know them www.Blended-Families.com/estateplanning 360.991.9558 108
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. Tax apportionment issues, including not waiving of reimbursement of QTIP in the will (cont.) • This is where many blended family estate plans make mistakes • It is as important to know who gets saddled with the taxes and expenses of administration as who gets what property • It is not unusual for a blended family partner to divide his or her estate in fractions between the surviving partner and his or her children www.Blended-Families.com/estateplanning 360.991.9558 109
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. Tax apportionment issues, including not waiving of reimbursement of QTIP in the will (cont.) • This means that your client must describe his or her intentions to you relative to estate-tax apportionment. You also can and should provide for whose share is charged with the expenses of administering the estate or trust, since those expenses can be significant • Again, client intent is critical here www.Blended-Families.com/estateplanning 360.991.9558 110
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. Tax apportionment issues, including not waiving of reimbursement of QTIP in the will (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 www.Blended-Families.com/estateplanning 360.991.9558 111
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. Tax apportionment issues, including not waiving of reimbursement of QTIP in the will • 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 www.Blended-Families.com/estateplanning 360.991.9558 112
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. Tax apportionment issues, including not waiving of reimbursement of QTIP in the will • 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! www.Blended-Families.com/estateplanning 360.991.9558 113
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. Tax apportionment issues, including not waiving of reimbursement of QTIP in the will (cont.) • In our example from the previous slides, after making some assumptions about tax rates and exemption amounts, there could be a significant multi-million dollar swing in what the wife and children would receive: the children will likely both fight the wife and pursue your E&O carrier for that kind of change • In large estates such as this one, the use of examples with real numbers in the documents themselves (as well as in the explanations) is helpful and can provide ample CYA after a death www.Blended-Families.com/estateplanning 360.991.9558 114
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. Tax apportionment issues, including not waiving of reimbursement of QTIP in the will (cont.) • At the second death, the issue becomes how the estate tax is apportioned between the share fictitiously included in the estate pursuant to IRC Sec. 2044 (the QTIP’d share) and the remainder of the surviving spouse’s estate • While the estate tax is a ―flat‖ tax, this issue isn’t as important because the apportionment is on a marginal basis • However, if pre-2001 law returns, it will matter a lot www.Blended-Families.com/estateplanning 360.991.9558 115
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. Tax apportionment issues, including not waiving of reimbursement of QTIP in the will (cont.) • At the second death, typically in a blended family married couple, the survivor’s documents do not waive reimbursement of the estate tax in the survivor’s estate caused by the fictitious inclusion of the QTIP’d property value in the survivor’s taxable estate • Because waiver is so prevalent in single relationship estate plans, caution is advised, particularly in this day and age of ―cut and paste‖ www.Blended-Families.com/estateplanning 360.991.9558 116
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. Tax apportionment issues, including not waiving of reimbursement of QTIP in the will (cont.) • Given the ―knee-jerk‖ default drafting in single marriage/shared children waiving reimbursement under IRC Sec. 2207A, it is critical to make sure that surviving spouse expressly does not so waive in all of their documents (will and living trust) • Otherwise a malpractice action could result, as in Creighton Univ. v. Kleinfeld, 919 F. Supp. 142 (E.D.Cal. 1995) www.Blended-Families.com/estateplanning 360.991.9558 117
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. Tax apportionment issues, including not waiving of reimbursement of QTIP in the will (cont.) • In blended families, it is not unusual for people to choose higher estate taxes over giving the surviving spouse more and their children less • Get clients to sign off on this www.Blended-Families.com/estateplanning 360.991.9558 118
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. Tax apportionment issues, including not waiving of reimbursement of QTIP in the will (cont.) • If your client is able to communicate effectively with his or her blended family members about your thoughts related to this and why this seems the only possible solution, there may be a possibility that they could all decided on something together that might surprise the client www.Blended-Families.com/estateplanning 360.991.9558 119
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. QTIP Elections www.Blended-Families.com/estateplanning 360.991.9558 120
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. QTIP Elections • When the estate of a first spouse to die makes a QTIP election, the value of the property over which the QTIP election was made is included in the estate of the surviving spouse under IRC Sec. 2044 even though the surviving spouse had no direct ownership or control over that property in the classical sense of estate inclusion principles www.Blended-Families.com/estateplanning 360.991.9558 121
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. QTIP Elections (cont.) • This is why we refer to it as ―fictitious inclusion,‖ but it is nonetheless inclusion all the same, and estate tax will be paid on it • The issues in QTIP elections in blended families are: • Will there be any QTIP election made? • Who will make the QTIP election call? • Who will decide what property is QTIP’d? www.Blended-Families.com/estateplanning 360.991.9558 122
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. QTIP elections (cont.) • In my opinion, all three of those issues should be determined by an independent third party fiduciary in order to take away the emotional and self-interest aspects • The same is highly recommended as to who decides on the investments in a ―traditional‖ (i.e, non-annuity trust or non-unitrust) QTIP trust; an independent third party should make those calls www.Blended-Families.com/estateplanning 360.991.9558 123
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. QTIP elections (cont.) • If you can’t get the client to select an independent third party fiduciary to make this call, consider building in significant guidance for them in the document • 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 www.Blended-Families.com/estateplanning 360.991.9558 124
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. QTIP elections (cont.) • I typically modified the indemnification language to permit liability for breach of fiduciary duty due to conflict of interest in that regard • I think that they have it any way, but I like 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 • Appraisals of subjectively valued assets are a must, especially for interested trustees!!! www.Blended-Families.com/estateplanning 360.991.9558 125
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. QTIP Elections (cont.) • With respect to whether or not a partial, whole or no QTIP election is to be made, you would consider a number of factors, including: • First, you would consider the potential size of the surviving spouse’s estate and the then current and reasonably expected federal estate tax laws. If that estate isn’t going to be taxable anyway even with a QTIP election, then you’d probably make the election. www.Blended-Families.com/estateplanning 360.991.9558 126
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. QTIP Elections (cont.) • With respect to whether or not a partial, whole or no QTIP election is to be made, you would consider a number of factors, including (cont.): • Second, you would take the surviving spouse’s estimated remaining life expectancy • Third, you would consider any other tax credits and deductions available to the decedent’s estate or to the surviving spouse's estate (including, but not limited to, the availability of a credit for previously taxed property and the applicable credit amount) www.Blended-Families.com/estateplanning 360.991.9558 127
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. l QTIP Elections (cont.) • With respect to whether or not a partial, whole or no QTIP election is to be made, you would consider a number of factors, including (cont.): • Fourth, you would consider the value of the other assets automatically qualifying for the marital deduction, since the value of those assets may reduce the size of the QTIP election that is necessary to zero out the estate tax in the decedent’s estate • Fifth, you would take into account to the extent the QTIP election is not made, the surviving spouse’s access to the income from the assets that would have otherwise been used for the payment of estate taxes www.Blended-Families.com/estateplanning 360.991.9558 128
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. QTIP Elections (cont.) • With respect to whether or not a partial, whole or no QTIP election is to be made, you would consider a number of factors, including (cont.): • Sixth, you would factor in the liquidity of the deceased spouse’s estate, since estate tax can’t be paid in the deceased spouse’s estate if there is insufficient cash to pay the estate tax • Finally, you would add a catch-all ―any other factors my Executrix may deem relevant‖ provision to cover unexpected factors that may crop up between the time of drafting of the document and the decedent’s death www.Blended-Families.com/estateplanning 360.991.9558 129
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. QTIP Elections (cont.) • Indemnification of the trustee/executor • Typically with an unrelated executor or trustee, you would absolutely indemnify the executor from any and all liability for making decisions on either the QTIP election or the asset allocation. However, if you have an interested party making those calls, you probably want to modify them to make it clear that their decisions are subject to review for compliance with their fiduciary duties • I typically modified the indemnification to permit liability for breach of fiduciary duty or for breach of the duty of loyalty and impartiality in that regard. I think that they have that liability anyway, 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 www.Blended-Families.com/estateplanning 360.991.9558 130
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. QTIP Elections (cont.) • Indemnification of the trustee/executor • Consider language such as: [My Executor's/The Trustee’s] decision to make or not to make a QTIP election (either in whole or in part) shall be final, binding and conclusive on all parties in interest, and [my Executor/The Trustee] shall have no liability as a result of such decision except for a breach of the duties of impartiality and loyalty www.Blended-Families.com/estateplanning 360.991.9558 131
  • Yours, Mine and Ours: Estate Planning for Blended Families ©2012 Emily Bouchard and L. Paul Hood, Jr. • In conclusion, estate planning for blended family couples present some of the most challenging issues for estate planners, so caution is advised • Questions? • Please e-mail: paul@paulhoodservices.com Or paul.hood@mso.umt.edu www.Blended-Families.com/estateplanning 360.991.9558 132