The family tree today looks much different than it did 50 years ago. Divorce and remarriage have caused new branches to take root and extend in different directions. Stepchildren are everywhere!
There have been other changes, as well. Consider the increased prevalence of medically assisted procreation, and of acknowledgment of children born out of wedlock. There are also more “dynamic adoptions” (grandparents raising their grandchildren owing to unstable family circumstances). Gay family members are coming out of the closet in increased numbers, and many of them are forming family units complete with children. Compounding these changes is the fact that people are living longer than they did 100 years ago.
The two family trees shown here demonstrate the changes in the institution of “family” over the last half-century. This new paradigm has dramatically affected estate planning concepts. Many family business owners are concerned about the effect of estate taxes, but tax considerations are not the only complicating factor. The “simple will” is going the way of the dinosaur. It is unrealistic to expect a form-driven document to be anything but a disaster.
Estate planning implications
Estate planning today means giving attention to three or more generations of the family on a simultaneous basis. Today’s family is more like a “group” than a “unit.”
Multiple marriages tend to create multiple “sets of children.” Complexity increases when both spouses have shared children with more than one partner—which may, or may not, include the current spouse. Stepparents and stepchildren are now typically part of the estate planning equation. Children living in the home often have labels such as “his,” “hers,” “ours” or “somebody’s else’s.” Medically assisted procreation, of course, could have a wide range of ramifications. Families and their estate planning professionals must evaluate such situations on a case-by-case basis.
Estate planning professionals often hear the following statements from their clients. Comments like these raise a red flag.
• “We have agreed to leave everything outright to each other. The surviving spouse will leave it equally to all of our combined children.”
• “I love my wife’s [husband’s] children like my own.”
• “My children are already well-provided for by the half of my assets I had to give to their mother [father] in our divorce.”
• “His [her] ex-wife’s [ex-husband’s] family is wealthy and will take good care of those children.”
• “I am scared to give [or leave] assets to my children from my prior marriage because my ex-wife [ex-husband] will talk them out of their money.”
• “I want to keep my assets in the bloodline because my father/grandfather would want it that way.”
• “I don’t want to include adopted children in my estate plan unless I have a chance to know them.”
• “Stepchildren aren’t my grandchildren.”
• “… born in wedlock.”
• “…natural-born children.”
The ‘evil stepmother’ myth
The “evil stepmother” immortalized by the Grimm brothers and, later, by Walt Disney infected many generations with unnecessary prejudice. Family psychologists and therapists have begun to recognize the prevalence of stepfamily situations. Several excellent books have been written on this topic, including Stepfamilies, by James H. Bray and John Kelly (Random House, 1999) and Becoming a Stepfamily, by Patricia L. Papernow (Jossey-Bass, 1993).
Relationships within a stepfamily are very subjective, qualitative, delicate, ambiguous and changing in nature. They include forced relationships, as well as relationships filled with genuine love and affection.
Age differentials between stepparents and stepchildren can be important factors. A combination of stepchildren and “our” children can have serious repercussions within the relationship matrix. The death, incapacity or divorce of the biological parent will likely have serious repercussions in the ongoing stepparent-stepchild relationship.
The standard will and trust phrase, “If any child of mine is not survived by children or other issue …,” will automatically disenfranchise stepchildren, regardless of the nature and quality of the relationship. This is often undesirable —and it’s often unintentional. In any event, it is worthy of discussion.
The trust trap
Trusts are frequently used to preserve and protect financial resources for the surviving spouse before substantial distributions are made among the children. Increased longevity, however, suggests that this typical pattern may be inappropriate. Rich widows tend to live to a ripe old age. This can postpone financial benefits for children until they are much too old to appreciate the financial windfall. This is an especially glaring problem when substantial financial resources are available for shared enjoyment among two or more generations of the family simultaneously. Estate planners are often guilty of allowing estate tax considerations to drive the plan.
Consider the planning complexities associated with stepparents and stepchildren. In many cases, financial resources are preserved for a surviving spouse, and assets are not distributed to children from a prior marriage until after that spouse has died. This may not make sense, however, if the surviving spouse is not substantially older than such children. In addition, there is an inherent conflict of interest between the surviving spouse as lifetime income beneficiary and the children of a prior marriage as remainder beneficiaries. Estate planners and clients should consider better alternatives.
• Life insurance policies can provide “excess funds” that can be distributed to children of a prior marriage so they will not have to wait for a stepparent’s death.
• Making children of a prior marriage beneficiaries of a portion of qualified retirement plans might be an attractive alternative.
Go ahead and face the tough decision of dividing financial assets between and among the surviving spouse and the children from a prior marriage or relationship. Do not be tempted to allow estate tax issues to derail an otherwise perfectly logical plan of action. Don’t be so sensitive about equal sharing with children of the current marriage—it can’t be done.
The timing and value of different assets will thwart plans of this nature. Control over asset distributions will change over time. Priorities will also change. Relationships between a surviving stepparent and stepchildren will likely change after death of the common denominator spouse-parent.
Advisers’ changing roles
Increasingly, estate planners are called upon to exercise multidisciplinary skill sets associated with sociology, behavioral science and psychology. Trusted advisers must be sensitive to family relationships and have an appreciation for family system dynamics.
Estate planning should be holistic and should encompass a process of communication within the family group. Assessment, evaluation and interviews with appropriate family members must be a part of the overall planning process. There is no excuse for the intentional, or unintentional, focus on mechanical and technical aspects of wills, trusts and document drafting. This often leads to the subliminal avoidance of the real issues, hidden agendas and future disasters.
Teamwork with qualified sociologists, behavioral scientists and psychologists is recommended in many cases. The existence of important “soft-side issues” cannot be denied in cases of multiple marriages, multiple sets of children and other special family dynamics.
Dealing with these issues will bring the estate planner into the den, kitchen, bedroom and closet. But that is where important decision-making is done.
Points to consider
There are many species of family trees. The definition of a nurturing and healthy family has been broadly expanded. Estate planning must have broader parameters to include a wide variety of circumstances and possibilities.
• Standard document provisions do not fit dynamic family circumstances. This is now the norm rather than the exception.
• In the most cases, family relationships are more important than estate tax considerations.
• Inherent and natural conflicts of interest associated with multiple marriage situations must be identified and discussed.
• The “all to spouse in trust or outright” will form is often a poor choice.
• Extra life insurance can be a relatively inexpensive planning option that can have remarkable benefits for the family.
• Unique and complex planning tools, such as charitable trusts and asset protection trusts, can provide differing financial benefits for various members of a family.
• Equal money does not define equal love.
• Stepchildren are people, too.
• No, the surviving spouse is not automatically entitled to receive everything.
• Special planning is required in the case of gay families (or gay family members).
• Longevity is an important factor in the estate planning process.
• Mental incompetence and undue influence are significant dangers to consider.
Estate planning for the dynamic family is a craft, an art, an expertise and a necessity. Sharing family wealth cannot be addressed with canned documents. Issues associated with death and relationships require a focus that goes beyond tax planning.
Joe M. Goodman is an attorney, a CPA with Personal Financial Specialist designation and a family business consultant with the Nashville office of law firm Adams and Reese LLP (firstname.lastname@example.org).
Copyright 2012 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permssion from the publisher. For reprint information, contact email@example.com.