beta alpha psi presentation

www.Blended-Families.com/estateplanning360.991.9558

Yours, Mine and Ours: Estate Planning

for Blended Families

L. Paul Hood, Jr.

Beta Alpha Psi PresentationFebruary 7, 2013

©2012 Emily Bouchard and L. Paul Hood, Jr.

2www.Blended-Families.com/estateplanning360.991.9558

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.

Yours, Mine and Ours: Estate Planning for Blended Families



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:

[email protected]@mso.umt.edu



mailto:[email protected]



• 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!



http://www.ultimateestateplanner.com/


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




In this presentation, we’ll address the 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




In this presentation, we’ll address the 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




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/Files/BlendedFamilies.pdf



http://prtl.uhcl.edu/portal/page/portal/SOE/Programs/COUNSELING_MS/Counseling_Resources/Files/BlendedFamilies.pdf




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.


©2012 Emily Bouchard and L. Paul Hood, Jr..


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.




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




Key Considerations towards Working Effectively with Blended Families:

• Business and ethical issues, especially regarding Conflict of Interest

• Joint or Separate representation




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

• 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




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




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




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.




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 partnerWe stress that any past relationship potentially taints you-

technicalities rarely help those attempting to use them as a shield




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




• 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




• 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




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




• 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




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.




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




• 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




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




Issues around the family home and living arrangements




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




• 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




• 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




• 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




• 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




• 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




• 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




• 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”




• 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




Closely Held Family Business Issues




The Closely Held Family Business:• General Challenges to address in planning: non-

diversification; management succession planning; earning livelihood

• Specific Challenges with Blended Family Dynamics: separate property; buy-sell agreements; letter of acknowledgment; living off company after owner-partner 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




• 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




• 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




• 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 non-owner 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




• 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




• 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




• 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




• 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




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




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.




• 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?




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




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




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




The Tangible personal property landmine




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.”




• 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




• 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




Powers of Attorney/Advance Care Directive Issues

in the Blended Family




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




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




• 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




• 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




Issues around the funeral and burial/cremation

in the blended family context




• 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




• 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




Lifetime Estate Planning Options for the Blended Family Couple




• 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




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




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




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




Family limited entities (FLPs and LLCs)(cont.)• 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




Family limited entities (FLPs and LLCs)(cont.)• 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




Family limited entities (FLPs and LLCs)(cont.)• 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




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






• 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


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




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




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




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




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




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




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)




Lifetime QTIP Trusts (cont.)• For these reasons, lifetime QTIP trusts should

only be considered by spouses who have a long-term, 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




Lifetime QTIP Trusts (cont.)• 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




Lifetime QTIP Trusts (cont.)• 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




Lifetime QTIP Trusts (cont.)• 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




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




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




Life insurance and life insurance trusts (cont.)• 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




Life insurance and life insurance trusts (cont.)• 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




Life insurance and life insurance trusts (cont.)• Many blended family clients begin believing that they

can appoint a child from each of them as co-trustees, 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




Powers of appointment




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”




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.




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




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




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




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




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




Tax apportionment issues, including not waiving of reimbursement of

QTIP in the will or trust




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




Tax apportionment issues, including not waiving of 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




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




Tax apportionment issues, including not waiving of reimbursement of QTIP in the will (cont.)• 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




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




Tax apportionment issues, including not waiving of reimbursement of QTIP in the will• 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!




Tax apportionment issues, including not waiving of reimbursement of QTIP in the will (cont.)• 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





• 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




Tax apportionment issues, including not waiving of reimbursement of QTIP in the will (cont.)• 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”





• 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)




Tax apportionment issues, including not waiving of reimbursement of QTIP in the will (cont.)• 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




Tax apportionment issues, including not waiving of reimbursement of QTIP in the will (cont.)• 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




QTIP Elections




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




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?




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




QTIP elections (cont.)• 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




QTIP elections (cont.)• 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!!!




QTIP Elections (cont.)• 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.




QTIP Elections (cont.)• 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)




l QTIP Elections (cont.)• 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.):• 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




QTIP Elections (cont.)• 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.):• 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




QTIP Elections (cont.)• 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




QTIP Elections (cont.)• 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




• 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: [email protected] [email protected]





beta alpha psi presentation

Self Improvement

blended family estate

area of blended families

blended family couples

blended family system

blended family statistics

emily bouchard

paul hood

coauthor of estate planning