January 29, 2014

Issues with Estate Planning for Blended Families

The dynamics of estate planning for a blended family is a bit more complicated than for a nuclear family. Second marriages and step-children add a potential combustible variable into the equation. This is not to say that all situations involving a blended family are volatile. I have represented clients with blended families where there was no hostility whatsoever. Still, the possibility of potential conflict down the line is apparent.

A common scenario where this volatility can come into fruition is with the selection of a trustee when the first spouse passes away. 

For example, assume Hal and Wendy, a married couple, each had a child from a prior marriage. Hal had a son named Sam and Wendy had a daughter named Donna. Hal and Wendy agreed that 1/2 of the community property would go to their natural child and the other half would go to the surviving spouse. Hence if Hal passed away first, his portion of the community property would go to his son Sam and if Wendy passed away first, her portion of the community property would go to her daughter Donna. 

Since Sam and Donna were each minors when Hal and Wendy wrote their trust, they were both 8, the couple decided it would be best to hold the property in trust until they reached the age of 25. The couple wanted to avoid the necessity of a guardianship and did not trust the child with a large inheritance at an early age. So in 1997 the couple wrote a trust with an estate planning attorney per their desires and named the surviving spouse as the trustee of the other child's trust. A few years later, 2000, Hal passed away in a tragic hot air balloon accident.

Whereas Hal passed away first, Wendy allocated 1/2 of the community property to a trust benefiting Sam and the other 1/2 was allocated to the survivor's trust for Wendy's benefit. Wendy had secretly harbored strong resentment towards Sam because she believed that Sam was a spoiled child who consistently disobeyed his father. Furthermore, Wendy despised Sam's biological mother because she believed that Hal was a "loser" for initiating a divorce from her years earlier. Hence, she believed in exacting a measure of revenge against Sam by complying with the terms of the trust, albeit in a spiteful manner to agitate him. For instance, Wendy would require that Sam correspond with her strictly through certified mail as opposed to email or a phone call, always billed for every action she did on behalf of Sam's trust and waited until the last-second to make a distribution.  

Sam was naturally displeased with the actions of Wendy but because she was the trustee, Sam was disinterested in filing suit to have her removed. Sam knew that Wendy could utilize trust assets to defend a lawsuit against her. Even though a petition for removal had merit, Sam did not want to risk it. 

When 2014 rolled around, Sam turned 25 and Wendy terminated the trust and gave him the balance of the trust estate. Sam, obviously bitter about Wendy's conduct, acknowledged receipt of the money and vowed never to speak to Wendy again.

One solution to this problem is to name a professional fiduciary as the trustee. Thereby a professional fiduciary, instead of Wendy, would be named trustee of Sam's trust. A professional trustee is a licensed third-party neutral who has expertise in handling trusts. While they may be costly, $125 an hour and up is the typical rate, there is value in removing combative parties from the scenario. In other words, an ounce of prevention is worth a pound of cure.