Beta alpha psi presentation

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

Estate Planning for Blended Families

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.
360.991.9558

2


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

360.991.9558

3


• 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!
360.991.9558

4


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
360.991.9558

5


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

360.991.9558

6


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
360.991.9558

7


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

360.991.9558

8


.

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.

360.991.9558

9


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.

360.991.9558

10


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
360.991.9558

11


Key Considerations towards Working Effectively
with Blended Families:
• Business and ethical issues, especially
regarding Conflict of Interest
• Joint or Separate representation

360.991.9558

12


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
360.991.9558

13


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
360.991.9558

14


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
360.991.9558

15


• 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

360.991.9558

16


• 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
360.991.9558

17


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
360.991.9558

18


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
360.991.9558

19


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.
360.991.9558

20


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
360.991.9558

21


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

360.991.9558

22


• 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
360.991.9558

23


• 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

360.991.9558

24


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
360.991.9558

25


• 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
360.991.9558

26


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.

360.991.9558

27


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

360.991.9558

28


• 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
360.991.9558

29


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
360.991.9558

30


Issues around the family home
and living arrangements

360.991.9558

31


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
360.991.9558

32


• 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
360.991.9558

33


• 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
360.991.9558

34


• 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
360.991.9558

35


• 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
360.991.9558

36


• 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
360.991.9558

37


• 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
360.991.9558

38


• 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‖
360.991.9558

39


• 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
360.991.9558

40


Closely Held Family Business Issues

360.991.9558

41


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
360.991.9558

42


• 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
360.991.9558

43


• 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
360.991.9558

44


• 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
360.991.9558

45


• 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

360.991.9558

46


• 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
360.991.9558

47


• 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
360.991.9558

48


• 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

360.991.9558

49


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
360.991.9558

50


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.
360.991.9558

51


• 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?
360.991.9558

52


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
360.991.9558

53


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
360.991.9558

54


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
360.991.9558

55


The Tangible personal property landmine

360.991.9558

56


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.‖

360.991.9558

57


• 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
360.991.9558

58


• 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

360.991.9558

59


Powers of Attorney/Advance Care
Directive Issues
in the Blended Family

360.991.9558

60


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

360.991.9558

61


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
360.991.9558

62


• 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
360.991.9558

63


• 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

360.991.9558

64


Issues around the funeral and
burial/cremation
in the blended family context

360.991.9558

65


• 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

360.991.9558

66


• 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

360.991.9558

67


Lifetime Estate Planning Options for
the Blended Family Couple

360.991.9558

68


• 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

360.991.9558

69


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
360.991.9558

70


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
360.991.9558

71


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
360.991.9558

72


• 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
360.991.9558

73


• 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
360.991.9558

74


• 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
360.991.9558

75


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
360.991.9558

76


• 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
360.991.9558

77


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

360.991.9558

78


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
360.991.9558

79


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
360.991.9558

80


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
360.991.9558

81


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
360.991.9558

82


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
360.991.9558

83


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)
360.991.9558

84


• 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
360.991.9558

85


• 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
360.991.9558

86


• 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
360.991.9558

87


• 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
360.991.9558

88


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
360.991.9558

89


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

360.991.9558

90


• 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
360.991.9558

91


• 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
360.991.9558

92


• 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
360.991.9558

93


Powers of appointment

360.991.9558

94


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‖
360.991.9558

95


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.
360.991.9558

96


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
360.991.9558

97


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
360.991.9558

98


Post-death allocations of assets
within the client’s estate or trust

360.991.9558

99


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
360.991.9558

100


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
360.991.9558

101


• 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
360.991.9558

102


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!!!
360.991.9558

103


• 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
360.991.9558

104


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.
360.991.9558

105


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
360.991.9558

106


Tax apportionment issues, including
not waiving of reimbursement of
QTIP in the will or trust

360.991.9558

107


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
360.991.9558

108


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
360.991.9558

109


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
360.991.9558

110


• 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
360.991.9558

111


• 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
360.991.9558

112


• 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!
360.991.9558

113


• 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
360.991.9558

114


• 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
360.991.9558

115


• 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‖
360.991.9558

116


• 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)
360.991.9558

117


• 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

360.991.9558

118


• 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
360.991.9558

119


QTIP Elections

360.991.9558

120


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
360.991.9558

121


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?
360.991.9558

122


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
360.991.9558

123


• 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
360.991.9558

124


• 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!!!
360.991.9558

125


• 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.

360.991.9558

126


• 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)
360.991.9558

127


l QTIP Elections (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
360.991.9558

128


• 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

360.991.9558

129


• 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
360.991.9558

130


• 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

360.991.9558

131


• 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
360.991.9558

132

Beta alpha psi presentation

Recommended

Recommended

More Related Content

Viewers also liked

Viewers also liked (15)

Similar to Beta alpha psi presentation

Similar to Beta alpha psi presentation (20)

Recently uploaded

Recently uploaded (20)

Beta alpha psi presentation

Editor's Notes