Is Your Estate Plan Infected with an UnHad Conversation?

A recent article in Marketwatch, an online financial affairs publication, highlights an all too frequent problem for baby-boomers and their estate plans. It’s called the “subsequent marriage” aspect of the plan.

Estate planning in its best days comes with complications. In the typical case the couple arrives at the estate lawyer’s office (or today “on screen”). A plan is built around one spouse dying before the other with “all to the survivor” and then “to our children in equal shares.” But wait. One child has done exceedingly well while the other kid has struggled financially. One kid skated through college on scholarship while the other consumed $200,000 in savings before leaving college 12 credits shy of a baccalaureate degree. And in these crazy days, the kid without the degree is Bill Gates and the kid who scored the scholarship is the one with $40,000 of consumer debt and struggles to hold a $45,000 job.

There is no right answer to the matter but at least they are both your kids. Let’s assume you thrash that out and come to a resolution which is spelled out in joint wills. Then you head to Cancun for a few days. You think you can still parasail, but it doesn’t work like it did 30 years ago and you return home in a coffin. Not a problem, at least from an estate point of view. All assets to your widow and then to the kids as you decided in the lawyers office.

Alas, your widow is not constrained by your “plans.” She has the legal right to march back into the estate lawyer’s office after your funeral and say: “You know, I want my wealthy child’s share to go to my sister’s kids so they can go to college.”  A fervent lover of pets, she can give it all to the local shelter or her sorority. As one now sitting in life’s mezzanine seats, ain’t nothing you can do about it now.

So, what can you do? Put it in a trust where trustees will be charged with distributing such sums as are needed to provide for the “care, comfort, and maintenance” of the surviving spouse for life and then onward to the children or their heirs. An irrevocable trust is just that. The problems are that you will pay a corporate trustee a hefty fee to “manage” the money and its distribution. Also, understand that corporate trustees are not quite as attentive to how your surviving spouse spends as you might have been had you not resumed parasailing.

As Marketwatch notes, the other big issue is the matter of subsequent marriage. We saw this firsthand a couple years ago in a case where the second marriage had gone on for 50 years. Sadly, husband began to lose his marbles. About the same time, he  decided that he needed to give each of his four kids from his first marriage a power of attorney by which each of the children could independently transact on his behalf. These kids agreed on one topic. They hated their step-mother. She had destroyed their lives half a century ago when she “stole” their father from their mother. They had grown up and achieved success in their own right, but the anger of 1970 had never subsided. In their haste to make certain that stepmom didn’t not “steal” from what was to be their inheritance, they moved money like crazy; even draining a pre-tax retirement account such that there was going to be a huge and unnecessary income tax bill. The husband had always told wife that he was leaving his investment assets to his kids from marriage No. 1 but that his hefty 401K and the jointly held house would provide for her comfortably once he died. Now the 401K was being drained. The only means to address the crisis was with proceedings for divorce and guardianship. In a word, it was crazy in a setting where one would hope that after 50 years of marriage a couple could wind down peacefully.

When you have kids from a former marriage or relationship, the estate discussion needs to focus on whether your kids from marriage No. 1 are to be treated the same as those from the marriage you are now in. We all like to think, “My spouse loves them both the same.” Perhaps true. But the death of a spouse often unleashes resentments that have languished for decades and your surviving spouse may be under immense pressure from different families members to do “what’s right” instead of what was intended when you drafted those simple wills. And, as we just noted, a power of attorney is a device that do immense destruction to an estate plan.

There are no easy answers to this. In a perfect world you would have a trust managed by “sensible family members who will do the right thing.” But the days when we all stayed in and around the hamlet in which we were born have long disappeared. And, who really wants to act as a trustee among warring factions of the family when there are beaches in Cancun and 5,200 cable television channels to watch.