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Modesto estate planning council presentation

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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
  • 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
  • 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
  • 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
  • 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
  • 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
  • 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
  • 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
  • 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
  • Transcript

    • 1. Blended Family Estate Planning: the Intersection of the Head and the Heart Stanislaus County Estate Planning Council November 8, 2012 L. Paul Hood, Jr. © 2012 Emily Bouchard and L. Paul Hood, Jr.
    • 2. Blended Family Estate Planning: the Intersection of the Head and the Heart “Second marriage is the triumph of hope over experience.” Samuel Johnson 2
    • 3. Blended Family Estate Planning: the Intersection of the Head and the Heart • 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 (SelfCounsel Press 2012), which is available at the major on-line booksellers’ websites 3
    • 4. Blended Family Estate Planning: the Intersection of the Head and the Heart 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 4
    • 5. Blended Family Estate Planning: the Intersection of the Head and the Heart 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 5
    • 6. Blended Family Estate Planning: the Intersection of the Head and the Heart 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 6
    • 7. Blended Family Estate Planning: the Intersection of the Head and the Heart 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 7
    • 8. Blended Family Estate Planning: the Intersection of the Head and the Heart • 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. 8
    • 9. Blended Family Estate Planning: the Intersection of the Head and the Heart • 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 9
    • 10. Blended Family Estate Planning: the Intersection of the Head and the Heart 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/Ble ndedFamilies.pdf 10
    • 11. Blended Family Estate Planning: the Intersection of the Head and the Heart 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
    • 12. Blended Family Estate Planning: the Intersection of the Head and the Heart 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
    • 13. Blended Family Estate Planning: the Intersection of the Head and the Heart 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 nonlawyers in this area too
    • 14. Blended Family Estate Planning: the Intersection of the Head and the Heart 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
    • 15. Blended Family Estate Planning: the Intersection of the Head and the Heart • 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]
    • 16. Blended Family Estate Planning: the Intersection of the Head and the Heart • 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? ]
    • 17. Blended Family Estate Planning: the Intersection of the Head and the Heart • 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!
    • 18. Blended Family Estate Planning: the Intersection of the Head and the Heart 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
    • 19. Blended Family Estate Planning: the Intersection of the Head and the Heart 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
    • 20. Blended Family Estate Planning: the Intersection of the Head and the Heart • 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
    • 21. Blended Family Estate Planning: the Intersection of the Head and the Heart 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
    • 22. Blended Family Estate Planning: the Intersection of the Head and the Heart 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
    • 23. Blended Family Estate Planning: the Intersection of the Head and the Heart 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
    • 24. Blended Family Estate Planning: the Intersection of the Head and the Heart 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.
    • 25. Blended Family Estate Planning: the Intersection of the Head and the Heart • 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
    • 26. Blended Family Estate Planning: the Intersection of the Head and the Heart 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 26
    • 27. Blended Family Estate Planning: the Intersection of the Head and the Heart 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 27
    • 28. Blended Family Estate Planning: the Intersection of the Head and the Heart 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
    • 29. Blended Family Estate Planning: the Intersection of the Head and the Heart 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. 29
    • 30. Blended Family Estate Planning: the Intersection of the Head and the Heart 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 30
    • 31. Blended Family Estate Planning: the Intersection of the Head and the Heart 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 31
    • 32. Blended Family Estate Planning: the Intersection of the Head and the Heart 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) 32 • Debts: $0
    • 33. Blended Family Estate Planning: the Intersection of the Head and the Heart 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 33
    • 34. Blended Family Estate Planning: the Intersection of the Head and the Heart 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 34
    • 35. Blended Family Estate Planning: the Intersection of the Head and the Heart 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 35
    • 36. Blended Family Estate Planning: the Intersection of the Head and the Heart 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 36
    • 37. Blended Family Estate Planning: the Intersection of the Head and the Heart 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 37
    • 38. Blended Family Estate Planning: the Intersection of the Head and the Heart 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 38
    • 39. Blended Family Estate Planning: the Intersection of the Head and the Heart 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? 39
    • 40. Blended Family Estate Planning: the Intersection of the Head and the Heart 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? 40
    • 41. Blended Family Estate Planning: the Intersection of the Head and the Heart 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 41
    • 42. Blended Family Estate Planning: the Intersection of the Head and the Heart 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? 42
    • 43. Blended Family Estate Planning: the Intersection of the Head and the Heart 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? 43
    • 44. Blended Family Estate Planning: the Intersection of the Head and the Heart 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? 44
    • 45. Blended Family Estate Planning: the Intersection of the Head and the Heart Questions: • What would you recommend relative to planning for their primary residence? • What issues might they face in any planning with their primary residence? 45
    • 46. Blended Family Estate Planning: the Intersection of the Head and the Heart 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? 46
    • 47. Blended Family Estate Planning: the Intersection of the Head and the Heart Questions: • How might you simultaneously address the couple’s separate concerns and get them to sign their estate planning documents? 47
    • 48. Blended Family Estate Planning: the Intersection of the Head and the Heart Questions (cont.): • What issues lurk under the water for property powers of attorney for the couple? • How about for health care powers of attorney? 48
    • 49. Blended Family Estate Planning: the Intersection of the Head and the Heart 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
    • 50. Blended Family Estate Planning: the Intersection of the Head and the Heart 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.
    • 51. Blended Family Estate Planning: the Intersection of the Head and the Heart 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?
    • 52. Blended Family Estate Planning: the Intersection of the Head and the Heart 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?
    • 53. Blended Family Estate Planning: the Intersection of the Head and the Heart 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
    • 54. Blended Family Estate Planning: the Intersection of the Head and the Heart 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
    • 55. Blended Family Estate Planning: the Intersection of the Head and the Heart Could you solve the problem by making Steve and Rita cotrustees 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 steprelations 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
    • 56. Blended Family Estate Planning: the Intersection of the Head and the Heart 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
    • 57. Blended Family Estate Planning: the Intersection of the Head and the Heart 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
    • 58. Blended Family Estate Planning: the Intersection of the Head and the Heart 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
    • 59. Blended Family Estate Planning: the Intersection of the Head and the Heart 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
    • 60. Blended Family Estate Planning: the Intersection of the Head and the Heart 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
    • 61. Blended Family Estate Planning: the Intersection of the Head and the Heart 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
    • 62. Blended Family Estate Planning: the Intersection of the Head and the Heart 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
    • 63. Blended Family Estate Planning: the Intersection of the Head and the Heart 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!!!
    • 64. Blended Family Estate Planning: the Intersection of the Head and the Heart 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
    • 65. Blended Family Estate Planning: the Intersection of the Head and the Heart 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.
    • 66. Blended Family Estate Planning: the Intersection of the Head and the Heart 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
    • 67. Blended Family Estate Planning: the Intersection of the Head and the Heart 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
    • 68. Blended Family Estate Planning: the Intersection of the Head and the Heart 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
    • 69. Blended Family Estate Planning: the Intersection of the Head and the Heart 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
    • 70. Blended Family Estate Planning: the Intersection of the Head and the Heart 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
    • 71. Blended Family Estate Planning: the Intersection of the Head and the Heart 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!
    • 72. Blended Family Estate Planning: the Intersection of the Head and the Heart Questions? Paul can be reached at 504.452.7574 or 406.243.6274 and paul@paulhoodservices.com or paul.hood@mso.umt.edu 72

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