Modesto estate planning council presentation

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.

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

“Second marriage is the
triumph of hope over
experience.” Samuel
Johnson
2


• 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


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

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

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

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

• 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


• 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

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

Key Considerations towards Working
Effectively with Blended Families:
• Business and ethical issues, especially
regarding Conflict of Interest
• Joint or Separate representation
• This is a time when zealous representation
actually may harm the couple’s relationship
• Avoid “zero sum game” negotiations-look for
win-win solutions

Conflict of Interest: This issue is much more
vexing when it involves a blended family couple
• You have to take into account that
approximately 60% of second marriages fail—
and the number is even worse-approximately
74%-for third marriages
• The problem with conflicts of interest is that
they almost always look worse in hindsight
after time has elapsed than at the time of
engagement

Conflict of Interest (cont.):
• Conflicts of interest are not confined to the
lawyers but to other estate planning
professionals too
• Conflicts of interest are bad business even if
they aren’t ethical problems
• Let’s look at the conflicts of interest rules for
lawyers, since they are very well developed
• However, similar risks attend to the nonlawyers in this area too


REMINDER:
• The Rules of Professional Conduct
(“RPC”) for lawyers essentially restrict a
lawyer from representing people who
are at odds with one another or who
have issues that are in conflict with each
other

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

• A “concurrent conflict of interest” is one where
the representation of a client will be “directly
adverse” to another client OR (and this is a big
“or”) there is a “significant risk” that the
simultaneous representation will be “materially
limited” by the lawyer’s responsibilities to
another client, a former client or a third person
or by a personal interest of the lawyer”
• Can’t clients simply waive a conflict of interest in
writing, you ask?

]

• Rule 1.0(e) defines “informed consent” and requires
the lawyer to communicate “adequate information
and explanation” about the “material risks” and
“reasonably available alternatives” *emphasis
added]
• The official comments to Rule 1.7 (which, while not a
formal part of the rule, clearly should be taken into
account in its interpretation) provide that the
conflict must be “consentable,” so some aren’t
• Guess what? Consentable is a circumstantial test
under the comments-that’s not much help!

What types of routine “conflicts of interest”
between blended family couples could come up,
you ask?
• Classification of property as separate, jointly
owned or as community property
• What about advice regarding severing joint
tenancies to allow for funding of a credit shelter
trust?
• Waiver of spousal rights in a retirement plan
• Advising about the applicability of a possible
spousal election

Routine conflicts issues in blended family
couples (cont.):
• QTIP trust terms
• Types of legacies and restrictions on legacies
(trust v. outright) to spouses in general
• Wealth disparities or economic dependence
between the partners
• Interpretation of a marriage contract or
property agreement, including whether the
agreement would withstand attack


• There are some very conservative lawyers who
simply won’t represent a couple in a blended
family and will only represent one partner
• Shouldn’t the proper focus be on what is best
for the client?
• I maintain that the answer to that question is a
resounding “yes!”
• I maintain that looking out for the client actually
is in the estate planner’s long-term best interest
too

What are the benefits to the clients of joint
representation?
• Cost savings (only one set of estate
planners)
• Efficiency and synergies of effort
• Joint representation could used to better
the communication between the partners
• Being treated as partners, not adversaries

What are the benefits to the clients of separate
representation?
• Undivided attention and loyalty of the estate
planner
• Total freedom to say what the client feels and
wants to have done in his or her estate planning
• Lower chance of estate plan challenges, but it
doesn’t eliminate challenges by a surviving
partner or that partner’s children

Potential signposts of the possible need for
separate representation of a blended family
couple, despite what they say that they want:
• Where one partner is childless (the partners
usually have different loyalties)
• Where one partner does all of the talking or
seems to exert control over the other
• Short length of the relationship
• Number of past relationships
• Significant age disparity between the partners

Potential signposts of the possible need for
separate representation of a blended family
couple (cont.)
• Significant disparity in wealth or income
between the partners
• Economic dependence of one partner on the
other that is used against them
• Existence of a pre-nuptial agreement
• Information held by one partner is off-limits
to the other partner, e.g., a secret, etc.

• The bottom line: Practice defensively because
blended family estate planning can be
treacherous waters where storms can come
up instantly and without warning
• Nevertheless, trying to work within the family
system usually is best where the decision is
made to represent the couple
• Recognize that the clients have some tough
choices to make and act accordingly


Case Study:
Harry, age 62, and Marge, age
48, married for 16 years and
with a prenuptial
agreement, come to see you
about their estate planning
26


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

Children (cont.):

• Harry, Jr. is COO of the family business, having
succeeded his father, is very successful and being
groomed as Harry’s successor, and there is a funded
buy-sell agreement in place in which Harry, Jr. will
purchase the stock from Harry’s estate
• Steve is a “free lance writer” and frustrated artist
who lives with Harry and Marge, over Marge’s
vehement objection, as she sees him as lazy and not
contributing
• Anna is in pre-med at Stanford with a 4.0 GPA, who
also lives with Harry and Marge when she’s not at
school, with Harry’s blessing, who loves her, having
lived with her since she was three
28


Children (cont.):
• Neither Harry, Jr. nor Steve care for Marge at
all, believing her to be a gold digger, especially
given that she used to work for Harry as his
personal assistant, and view Tom as less than
a half-brother
• Anna loves Harry, and Harry actually
considered adopting her. Anna adores Tom
and thinks of him as her brother.
29


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


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


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


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


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


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


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


• 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


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


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


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


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


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


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


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


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


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


Questions:
• How might you simultaneously
address the couple’s separate
concerns and get them to sign their
estate planning documents?

47


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


Consider another simple family business
example:
• Pete owns the majority interest in a closely
held business, Pete’s, Inc. Prior to marrying
Rita, Pete gifted some shares in Pete’s, Inc. to
his son, Steve, who is being groomed to run
and own Pete’s, Inc. and who works in the
business, but Pete retained control


Consider a simple family business
example (cont.):
• Pete and Steve have a buy-sell agreement in place
wherein Pete’s estate will sell his shares to Steve,
and Steve owns life insurance on Pete’s life to pay
the sales price
• The couple live on Pete’s substantial salary. Pete’s
estate plan at present will hold his estate in a
QTIP trust for Rita and Steve, who don’t really
know or trust each other.


Questions:
• Who should serve as Pete’s executor?
• Who should serve as trustee of Pete’s QTIP
trust?
• Does Steve have a conflict of interest in
serving as either executor or as trustee of the
QTIP trust?


Questions:
• Does Rita have a conflict of interest in serving as
either executor or as trustee of the QTIP trust?
• If either has a conflict, do you solve it by
suggesting that they serve as co-fiduciaries?
• How might you solve the dilemma between the
desires of the income beneficiary of the QTIP
trust for income maximization and the principal
beneficiary’s desire for growth?

Who should serve as Pete’s executor?
• Clearly, Steve would have a conflict in serving as his
dad’s executor, since he would be on both ends of the
buy-sell transaction and thus could manipulate the
deal to his benefit
• On the other hand, Rita as executor could cause
friction in the buy-sell transaction and even endanger
Steve’s at-will employment prior to the sale since she
and Steve neither know nor trust one another
• This is a situation that cries out for a third party
executor, even if only for this transaction

Who should serve as trustee of Pete’s QTIP trust?
• Clearly, both Rita and Steve would have a conflict
in serving as trustee of the QTIP trust, since there
would be a substantial difference in investment
philosophy—Rita favoring income and Steve
favoring growth
• This again is a situation that calls for an
independent third party trustee or a unitrust
arrangement that would effectively go into effect
after the sale of the stock by the estate

Could you solve the problem by making Steve and Rita 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

How might you solve the dilemma between the desires
of the income beneficiary of the QTIP trust for income
maximization and the principal beneficiary’s desire
for growth?
• One might think about a unitrust, given that the stock
is to be sold pursuant to the buy-sell agreement,
thereby diversifying the asset mix and obviating the
drawback of a periodic valuation, which would be
required with a private unitrust, although the terms
would have to be the greater of trust income or the
unitrust amount if QTIP treatment is desired


Powers of attorney issues -modifications
often are necessary to your regular forms
for a blended family couple
• The power of attorney should not permit
an agent partner to significantly alter the
principal’s estate plan; likewise, the
powers of an agent child should be
similarly restricted

Powers of attorney issues -modifications often are
necessary to your regular forms for a blended family
couple
• The limitations might need to be both affirmative and
negative (negative) e.g., restricting beneficiary changes
and gifts that are not in accord with the principal’s estate
plan; (affirmative) requiring continuation of annual gifts,
etc.
• In order to dispel uncertainty, which can lead to
litigation, the power of attorney should expressly require
the agent to give the children of the principal access to
financial and medical information, or to the partner, if a
child is the agent

Powers of attorney issues (cont.):
• Should limit giving away precious family heirlooms (e.g.,
silverware, china and pictures)
• Limit changing beneficiary designations
• Limit changing distribution provisions in IRAs and
retirement plans
• Should automatically terminate on separation or divorce
• Should limit the exercise of powers of appointment
• Should not waive any accountings, and in fact should
probably require periodic accountings by the agent
• Should affirmatively and broadly restrict self-dealing

Post-death allocations of assets within the client’s estate
or trust
• There are actually two issues in the allocations of assets
in an estate or trust:
• What amounts are allocated between the
various legatees or beneficiaries; and
• Whether a QTIP election will be made, and, if so,
what assets will be QTIP’d
• I feel that both of these issues should always be decided
by an independent third party fiduciary in a blended
family context

Post-death allocations of assets within the client’s estate or
trust (cont.)
• Only an independent third party fiduciary can be “above
the fray” when allocating assets between the credit
shelter and QTIP trusts
• If you can’t get an independent third party fiduciary to
make those calls, one group is going to be unhappy with
the calls
• Even if the family won’t go for an independent third
party fulltime fiduciary, the situation cries out for a
special trustee to make these calls

Post-death allocations of assets within the client’s estate
or trust (cont.)
• You should consider some “fairly representative” (Rev.
Proc. 64-19) language that directs the executor to fund
the trusts with assets or cash, or both, and to value all
assets at their fair market values determined as of the
dates of their respective transfers so that each transfer
shares proportionately in the appreciation or
depreciation of assets between the date of the
decedent’s death and the date of transfers, particularly
where a “pick and choose” funding formula is used

Post-death allocations of assets within the
client’s estate or trust (cont.)
• You should include guidance about
considering the income tax consequences of
funding and of the assets themselves in the
instrument
• Appraisals of subjectively valued assets are a
must, especially for interested trustees!!!

Post-death allocations of assets within the client’s
estate or trust (cont.)
• If you can’t convince a client to select an
independent third party as trustee or executor, you
could give significant guidance in the documents on
how the asset allocations should be made
• While you would generally give the independent
third party fiduciary a blanket indemnification and
hold harmless right, you should reduce that right to
make it clear that their decisions are subject to
review for compliance with their fiduciary duty

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

Post-death allocations of assets within the client’s estate or trust
(cont.)
• I typically modified the indemnification language to permit
liability for breach of the duty of loyalty and impartiality due
to conflict of interest in that regard. I think that they have it
any way, but I liked to put it in there to remind them of what
they’re supposed to be doing and how they’re supposed to go
about doing it
• Consider language like: My Executor's decisions with respect
to allocations of assets between sub-trusts established
hereunder all be final, binding and conclusive on all parties in
interest, and my Executor shall have no liability as a result of
such decisions except for a breach of fiduciary duty or the
duties of impartiality or loyalty


Estate tax apportionment issues
• Blended families can present some real
challenges for estate tax apportionment
• Don’t just assume that the client will want to
defer the estate tax as long as they can
through the marital deduction
• At the first death, it would be highly unusual
in a blended family to waive recovery of the
estate tax attributable to the property that
was QTIP’d in the first estate


Estate tax apportionment issues (cont.)
• I’ve seen lots of situations where the client
wanted to treat his or her spouse the same as the
children, even if it means paying more in estate
tax
• The differentials in estate tax and what each
“side” nets can be large in situations where the
donor wants to treat the “sides” the same
• Document the client’s intention very well,
because that differential could make you (or your
e&o carrier) a prime target


• 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


• 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


• If taxes come out of the children’s share instead,
Beatrice will take $25 million, Al’s children will
take $18,042,000 and $6,958,000 will go to estate
taxes
• In this example, then, there is a negative swing of
$5,352,307 in what Beatrice takes, a positive
swing of $1,605,692.50 in what Al’s children take,
and an additional $3,746,614.50 in estate taxes
paid, just depending upon how the estate taxes
are apportioned!


Questions?
Paul can be reached at 504.452.7574 or
406.243.6274 and
paul@paulhoodservices.com or
paul.hood@mso.umt.edu

72

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