PUBLISHED JUNE 12, 2023
As a child, I grew up watching Leave It to Beaver with Ward and June Cleaver, Wally, Theodore (the Beaver) and Eddie Haskell. The estate planning goals and challenges for families like the Cleavers are often less complex than those of the blended family today. More often, all assets are left to the surviving spouse with few, if any, restrictions.
There was little or no concern that Ward or June would disinherit the children after the first spouse’s death. At the death of the surviving spouse, the kids (Wally and Theodore) would receive their respective shares of the trust estate, perhaps at appropriate ages when they were financially mature enough to manage the wealth. There was little concern then about long-term divorce or asset protection.
Increasingly, today’s family more closely resembles Jay Pritchett’s family on the TV series Modern Family. Jay has two grown children (Claire and Mitchell) and four grandchildren (Haley, Alex, Luke and Lily). Jay also has a stepson, Manny, with his second wife, Gloria. Manny lives with Gloria and Jay. The Cleaver family estate plan would not work for the Pritchett family.
How would Jay know that his kids would inherit after his death? Could Gloria change the beneficiaries after Jay’s death? How could Gloria be sure that Manny is provided for? Claire works in Jay’s business, while Mitchell is a practicing attorney. Should Claire receive the business and Mitchell receive other assets or insurance proceeds to balance the inheritance? Both Claire and Mitchell are married and have children. As discussed below, the estate planning issues between Claire’s and Mitchell’s families are also different.
The estate planning needs and concerns for the Cleavers were very different than those that would face a family like the Pritchetts. The estate planning needs and concerns of the modern blended family very often lead to an emotional journey while finding a solution. Here are some tips and solutions.
Identify goals, concerns and heirs.
The first goal is to avoid probate and to clearly identify your desired heirs or beneficiaries. What concerns do you have regarding their ability to handle money? Are you concerned about divorce or lawsuit protections? What are their needs? Probate alone subjects your estate and family to higher costs, time delays and the public nature of a formal court proceeding. Heirs, names, inheritances, assets and values are public information. A $2 million estate can easily cost $70,000 to $100,000 or more in fees and costs.
Failure to identify your heirs or beneficiaries and their needs is particularly problematic for a blended family. The failure will cause reliance upon the probate code in the state of residence. The probate code is far less likely to identify the desired heirs or beneficiaries of a blended family. Planning should also address who is authorized in the event of incapacity to make medical decisions. The failure to do so can result in an undesired family member with the authority to make those decisions.
Use a trust in order to avoid probate.
A recent client tragically lost her husband, who handled all of the finances for the family. All assets were held in the husband’s name. As a result, the probate code in California limited the stated beneficiaries or heirs as one-third for the surviving spouse and two-thirds for the children, including one minor child. This was a tremendous shock for an already grieving family. The surviving spouse felt that she was a 50% owner of the combined assets with her husband. She expected to receive control and ownership of all of the assets upon his death, not just one-third. Having assets go directly to the children in this case was problematic.
As a result of COVID-19, many court calendars remain delayed, requiring a wait of four to five months or more for a hearing. While that seems to be improving in many counties, delays remain an issue. Before these delays, a routine probate could often take one year or more to complete. That is a long time for families to wait for characterization of assets. The solution: use a trust and not a will.
Know the difference between community and separate property.
In many states, including California, property for marital couples is characterized as community property (jointly owned) or separate (owned separately by one spouse). There is a separate interstate succession plan in the probate code for each type of property. Note that this is based on the recorded title of the property in the absence of a premarital (or post-marital) agreement. Care should be taken by both spouses to take title to property, assets and accounts in an appropriate manner.
The characterization of property can affect rights to income and responsibility for debts, calculation of income tax basis at a death and the allocation of assets at divorce. If separate assets are mixed with community assets, then the separate asset may lose its separate character.
In simplest terms, thought should be given about long-term goals in the event of a death. Jay Pritchett may wish that some assets be distributed to his children at his death, even if Gloria is alive, since Gloria is closer in age to Jay’s children.
The community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas and Washington. Consideration of separate and community property is important for people living in those states or if they lived there in the past. Property rights established in a community property state can still have consequences for those moving to states that do not establish community property rights.
How to provide for the surviving spouse and the deceased spouse’s children.
Jay may also want to be sure that Gloria is taken care of financially. He may wish to provide for Gloria during her life, but restrict her from changing the beneficiaries so that the remainder of his estate goes to his children. Jay may also be concerned about the level or amount of support he provides Gloria if she remarries after his death. He may address this possibility or establish limits in the trust.
For the traditional family, you will more commonly see all assets going to the surviving spouse with few, if any, restrictions. The surviving spouse provides for the kids at his or her death under the provisions of a joint trust. Even then, many couples fear the effect of the surviving spouse’s remarriage or the susceptibility to undue influence by others in old age or poor health. Many families will “lock in” the distribution or allocation to their kids upon the surviving spouse’s death.
This is done by providing for the deceased spouse’s assets being retained in the trust (or a portion). The trust provides for all of the income to go to the spouse and discretionary distributions of principal. The trustee’s discretion can be limited, such as for health, education, maintenance and support (HEMS). The surviving spouse may not change the beneficiaries. A qualified terminable interest trust (QTIP) provision is suggested to permit this trust to qualify for the marital deduction for estate tax purposes.
Use a premarital agreement.
For holders of substantial separate property, a premarital agreement and a separate property trust are recommended to preserve the separate property character, and to protect property from claims from the new spouse or his or her family at death. This approach also makes challenge less likely because separate and community assets and beneficiaries are not mixed or commingled together.
Separate or joint trusts?
A good premarital agreement will also establish rights to income and responsibility for debts during marriage. This can provide asset protection to benefit both spouses. If one spouse is in a risky profession, this may help protect the other spouse from any related liability or lawsuits.
If separate assets are not as substantial, then a joint trust can be used and retain the separate property character. However, you may have difficulty funding separate investment and bank accounts for separate property in a joint trust due to bank policies, restrictions or perspectives.
Selection of trustees.
In a blended family, couples often seek to have representatives from both family groups as trustees or decision makers. That is, one of Jay’s kids would serve with someone from Gloria’s family. This sounds good, but there is the potential for deadlock if one side says “yes” and the other says “no.”
In the event of a deadlock, each co-trustee retains a lawyer, which can result in very substantial fees. The trust may also retain an attorney. One solution is to use an independent tiebreaker. Each side pleads their case, and the tiebreaker makes a King Solomon-type, or reasonable, decision to resolve the dispute.
Co-trustees can also be problematic from a practical perspective. Typically, both trustees need to sign each bank or financial instrument due to bank policy. Finding time can be challenging without having to coordinate with someone else who may live in a different time zone.
A better approach may be a professional fiduciary who is not beholden to or who does not favor either side. This often cuts through any emotional baggage being carried by either side of the family.
Jay may consider utilizing specific assets for different beneficiaries or groups of beneficiaries, for example:
- Life insurance. Either for Gloria or for Jay’s kids at his death. That way, Jay’s kids are not “waiting for Gloria to die.”
- Family business. To family members working in the business, such as in Claire’s case, the challenge here is that often the estate’s value may be disproportionately found in the business. Again, insurance may be a good equalizer.
- Distributing certain assets/investments at a spouse’s death. If there’s an age difference like that between Jay and Gloria, this would prevent the kids in a modern blended family from watching a “stepmother” enjoy their father’s assets and feeling left out or forgotten.
- Retirement funds. A separate IRA inheritance or legacy trust could be established with a Nevada domicile for Jay’s children. This structure would help avoid California tax and would “stretch” on a deferred-tax basis for many years.
These are just a few thoughts regarding estate planning for the modern blended family like the Pritchetts. The first step is a clear understanding of the assets being planned for both as the type of the asset and also its separate or community property character. The next step is to explore the goals of both Jay and Gloria in order to obtain the best results for the whole family.
https://www.kiplinger.com/retirement/estate-planning-leave-it-to-beaver-vs-modern-family
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