Page 26 - Senior Times South Central Michigan - January 2018 - 25-01
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Page 26
Senior Times - January 2018
My Kids, Your Kids,
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His Kids, Her Kids
By: Douglas G. Chalgian, CELA
Why Second Marriages Make Estate Planning A Challenge.
Estate planning is about two things: (1) What happens to my stuff when I die? and (2) Who makes decisions for me if I am alive but unable to make deci- sions for myself? Both of these issues are dramatically more complicated in blended family situations.
Passing Assets
The biggest challenge in providing for the transfer of wealth at the death
of people involved in families where the children of one spouse are not the children of the other spouse are the pro- visions in the plan that provide for the needs of the surviving spouse.
A common situation might be a man who has substantial wealth and marries a woman who is less financially comfort- able. Each of them has children from prior relationships, and they may or may not have children together. He wants to provide for her if he dies first, but wants to be assured that what isn’t used for her needs during her life will go to his chil- dren at her death. Sounds simple, but the devil is in the details. Consider:
What rights will she have in the prop- erty he leaves in trust for her? Does she get only the income from the estate after he dies? Will that be enough for her to maintain the quality of life that he and she both expect her to enjoy? If the trust is drafted to allow her to have something more than income, what exactly are the standards that will allow for the “inva- sion of principal” and who will decide when those standards are met?
If there is an invasion of principal provision, who will decide when that standard is met? A family member trust- ee, such as one of his children, puts her in the very awkward position of asking for money from children of her deceased spouse, who also stand to get whatever is left when she dies. Sound like an invitation for conflicts? You’re right.
A better answer may be a professional trustee – like a bank – not that appoint- ing a professional will avoid conflicts, but only that it will take the decision out of the hands of the parties involved.
On occasion, these issues may be addressed by a “uni-trust” concept.
That is, rather than giving the surviving spouse a right to income only, or a right to income plus the invasion of principal, give her a fixed percentage of the trust each year. Of course, even with a uni- trust in place, the annual distributions may not be sufficient to meet everyone’s expectations, and there may need to be an “escape clause” to allow for addi- tional distributions of principal, which potentially leads right back to the same problem of what standard applies and who will decide if it is met.
In some situations, another option could be to simply leave a portion of the estate to the surviving spouse without restrictions, and the rest to the children (or vice versa). A client may say, “I want my children to receive one million dol- lars; after that everything can go to my surviving spouse.” That certainly makes the planning easier, and, depending on the age and health of the parent/spouse, may be accomplished simply by pur- chasing a one million dollar life insur- ance policy and dedicating that policy
to the children. Of course, not everyone feels as comfortable with the idea that their surviving spouse could leave what they worked for to that spouse’s chil- dren, or worse, to another person they subsequently become involved with or even marry.
These scenarios do not even factor in the federal estate tax (a.k.a. “death tax”) considerations that may be involved
for individuals with substantial wealth. Planning for high-net-worth clients with second marriages becomes even more difficult as a result of the favorable treat- ment the death tax gives to the surviving spouse.
Another important variable is whether the individuals involved had a prenuptial agreement. Michigan law allows a surviving spouse to demand certain payments from the estate of their deceased spouse, regardless of whether they are provided for in the estate plan.
A prenuptial agreement (or even a postnuptial agreement) will typically waive these rights. Otherwise, these rights come in two varieties: (1) allow- ances, which can be asserted regardless of whether the deceased spouse used a will-based or trust-based estate plan, and (2) a so-called “forced share,” which can only be asserted in Michigan at this time against will-based estate plans, and not against trust-based plans (provided of course that the trust is “fully funded”).
As I said: it gets complicated.
Surrogate Decision Making
Then there’s that second important issue: who can make decisions for me if I become unable to make decisions for myself?
In Michigan, decisions about medical care for a person unable to make deci- sions for themselves are typically made by the person appointed as the “patient advocate” (sometimes called “medical power of attorney”); and decisions about finances for incompetent adults are made by the person they appoint under a durable financial power of attorney, and/ or their nominated successor trustee.
Whether an individual would rather have their spouse or children involved in either or both of these areas of decision- making will be a function of the quality of their relationships, the length of the marriage, and other variables. In families where divides exist between a second spouse and the children from a prior relationship, a great deal of distrust can arise when the parent/spouse becomes incompetent. Disputes may arise regard- ing such things as:
Should the incompetent adult be kept in their home? At what cost? Should family members be paid to provide that care?
If they are put in an institutional care setting, should that be in a place con- venient for the spouse or the children? How will it be paid for? Will there be restrictions on who can visit? And, should assets be moved around to allow for eligibility for government assistance?
Structuring documents that allow for multiple parties to be involved may only make matters worse, and force the issues into court sooner or later.
Regardless of how the plan is drafted, disputes about these issues often end up in court. Petitions for the appointment
or removal of guardians and conserva- tors are not uncommon in blended fam- ily situations where the parent/spouse becomes incompetent. Without proper documents and written expressions, the spouse often has the upper hand in such cases.
The Beaver Cleaver world is behind us. Blended families are more the rule than the exception. Planning for these situations is especially challenging for estate planning lawyers, and even the best-laid plans do not necessarily avoid litigation upon death or incapacity. Good documents can, however, limit the scope of the conflicts and penalize parties who behave badly.
And finally, don’t be fooled into thinking this can’t happen to you. If experience has taught me anything, it
is that the dynamics between a surviv- ing spouse and children of a deceased or incompetent parent/spouse who are not children of the surviving spouse are rarely friendly – even if they appear that way while everyone is alive and healthy.
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