Wednesday, January 1, 2020
Christopher L. Carns Partner — Prevost, Shaff, Mason & Carns, PLLC
FALL 2019 ISSUE: PROBATE & ESTATE PLANNING Infographic
Blended families bring unique challenges to estate planning. In the article below, Christopher L. Carns explains methods to prepare your estate when you have a blended family. Christopher L. Carns practices estate planning and probate law in Plano, Texas. With the high incidence of divorce and remarriage, blended families are becoming the new norm. Unlike the traditional family, there are many aspects of a blended family that require careful and honest evaluation, including how to blend finances and estate planning, especially when one (or both) spouses bring significant assets to the new relationship. The following are some of the biggest challenges faced by blended families during estate planning: Balance—One of the most significant challenges faced by blended families is balancing the desire to provide for a surviving spouse during his or her lifetime with the desire to provide for children during their lifetimes. This challenge is further heightened when the new spouse and the children of the previous marriage are close in age, or when there is a large disparity in the net worth of the respective spouses.
There are a few approaches most frequently used to address this challenge. The first and most obvious approach that many pursue is to split their estate into percentages between the surviving spouse and the children, e.g., 2/3 to the surviving spouse and 1/3 to the children. The purpose of this approach is to ensure that the children are provided for upon the passing of their parent while the surviving spouse is ensured security and resources for his or her care and support as well. This approach may also include shifting percentages based on the number of years of marriage to essentially provide a “vesting schedule” for the marriage, which better and more dynamically matches the realities of the estate plan with the time the spouses have invested in the marriage.¹
Another approach to address the challenge of balancing the desire to provide for a surviving spouse as well as any children is to create separate Trusts, or an Irrevocable Life Insurance Trust (a trust that owns life insurance on the life of the spouse and receives its proceeds upon his or her death) for the benefit of the spouse’s children from a previous marriage. This provides another vehicle to accept assets, either during life or upon death, that benefits the spouse’s children from a previous marriage at his or her passing, while leaving the remainder of the estate available for the care and support of the surviving spouse.
Avoiding the Will/Trust Contest—Avoiding a costly, emotionally draining Will or Trust contest (i.e., dispute over the Will or Trust) is one of the greatest challenges in estate planning for blended families. Without an effective plan in place, your estate may be the subject of a long battle that significantly reduces your estate’s value and places those you love at odds. This is a common occurrence that all too often pits your new spouse against your children.
To avoid or reduce the risk of a Will or Trust contest, especially if one or more of the parties are terminally ill, at an advanced age, or otherwise significantly ill or frail, it is advisable to confirm that the spouse has legal capacity to execute a Will—meaning that they are competent. This can be done by having the affected spouse(s) visit his or her primary care physician or neurologist on or about the time of the signing of the Will or Trust to have the physician execute a form letter acknowledging that the affected spouse(s) has the capacity required to execute a Will. The letter will include the elements of “capacity” as defined by Texas law.² Capacity is one of two of the most common grounds for challenging a Will or Trust contest in Texas.
The other most common ground to contest a Will or Trust in Texas is undue influence.³ This occurs when someone effectively substitutes their desires for the person making the Will, and the estate’s disposition (the manner in which property of an estate is disposed of) would not have occurred but for the outside influence of that party, e.g., the new spouse or the children. This potential issue is largely avoided or mitigated by the spouses using separate attorneys to handle each of their estate planning, and by the spouses (and their respective children) not being present at the meetings with their respective attorneys or the signing of the estate planning documents. This way, the spouses are not present to unfairly influence one another.
While this may seem cumbersome and more costly, it is certainly much less expensive and less difficult than a Will or Trust contest. In addition, if there is a significant disparity between the net worth of the spouses, a single attorney may be ethically prohibited (or at a minimum, quite challenged) from properly and adequately representing both spouses.⁴
You should also strongly consider making a gift of relative significance to both your surviving spouse and children at your passing in order to ensure that both have “skin in the game” if they decide to contest the Will or Trust. This gift should be coupled with a “no contest” clause in your estate planning documents that will result in forfeiture of the contesting party’s inheritance should they decide to contest your estate planning.
Unintended Disposition—If you pass away without a Will or fully funded Trust in place, your probate assets will pass under the Texas laws of intestacy.⁵ These laws will result in a disposition of your estate that may surprise your new spouse and leave him or her without sufficient assets to care for themselves during their lifetime. Of equal importance, it will most likely result in a disposition of your estate that is not in accordance with your wishes. For example, if you pass away when you are married to a subsequent spouse and have children only of a prior marriage, your assets will pass under the Texas laws of intestacy, or default inheritance laws, as follows:⁶
Community property, which includes the parties’ homestead (the real estate owned by the parties in which they primarily reside), will be owned 1/2 by the surviving spouse and 1/2 by the children of the deceased’s prior spouse.
The surviving spouse will retain his or her 1/2 community property interest in the homestead and the right to live in the homestead for his or her life (this is called a “life estate”). The children of the deceased spouse would own the deceased spouse’s 1/2 community property interest in the homestead. The surviving spouse could not sell the homestead without the consent of the children of the first spouse and would be required to split the proceeds of the sale with them in accordance with their interest in the property.
The deceased spouse’s separate personal property is owned 1/3 by the surviving spouse and 2/3 by the children.
The deceased spouse’s separate real property (land and improvements) is owned 100% by the children subject to the surviving spouse’s life estate (right to live in or occupy the property during life) in the real property.
Therefore, it is imperative that spouses in a blended family situation execute and implement a formal estate plan rather than relying on the default inheritance laws.
Beneficiary Designations—Many assets are merely “creatures of contract,” meaning these assets pass pursuant to the terms of the underlying account agreement and are also often called “non-probate assets.” For example, life insurance, qualified assets (e.g., 401(k) and IRA), and standard checking and savings accounts all pass by beneficiary designations on the account or by rights of survivorship (e.g., if you own an account jointly with another person and they die, you own the entire account at their death because you survived them). These assets are not governed by or disposed of under the Will. As a result, you must ensure that your overall estate plan (e.g., 2/3 to surviving spouse and 1/3 to children) is reflected in the beneficiary designations on these assets. In addition, some assets may be more beneficial to leave in their entirety to the surviving spouse for tax or other planning reasons or advantages. So, all of these factors should be taken into consideration when coordinating these non-probate assets with your estate planning documents.
Ensuring that your beneficiary designations align with your overall wishes and provide the appropriate balance between your new spouse and your children is a significant challenge that requires effective coordination and careful planning. If you forget to properly coordinate these designations, it can greatly undermine the disposition of your estate.
Like coordinating family holidays for blended families, estate planning for blended families can be quite challenging, but rewarding if done with the proper care. The issues outlined in this article require honest, candid conversations with your spouse. You should seek counsel from an estate planning attorney and tax professional to ensure that you navigate these difficult waters in the most effective and beneficial way to protect and provide for your surviving spouse and children while maintaining family harmony upon your passing.
Sources ¹ For example, the estate of the first spouse gives 2/3 to the surviving spouse until the spouses have been married 10 years. At that time, the percentage to the surviving spouse increases to 3/4 and once married for 20 years, the percentage further increases to 4/5 to the surviving spouse, etc. ² Testamentary capacity requires that the individual possess: (i) sufficient ability to understand the business in which he is engaged; (ii) sufficient ability to understand the effect of his act in making the will; (iii) the capacity to know the objects of his bounty; (iv) the capacity to understand the general nature and extent of his property; and (v) memory sufficient to collect in his mind the elements of the business to be transacted, and to hold them long enough to perceive, at least their obvious relation to each other, and to be able to form a reasonable judgment as to them. See Prather v. McClelland, 13 S.W. 543, 546 (Tex. 1890). ³ To establish undue influence, a party must show the following: “(1) the existence and exertion of an influence; (2) the effective operation of such influence so as to subvert or overpower the mind of the testator at the time of the execution of the testament; and (3) the execution of a testament which the maker thereof would not have executed but for such influence.” Rothermel v. Duncan, 369 S.W.2d 917, 922 (Tex. 1963). ⁴ In general, a lawyer shall not represent a person if the representation of that person: (1) involves a substantially related matter in which that person's interests are materially and directly adverse to the interests of another client of the lawyer or the lawyer's firm. Tex. Disciplinary Rules Prof’l Conduct R. 1.06(b)(1), reprinted in Tex. Gov’t Code Ann., tit. 2, subtit. G, app. A (Vernon Supp. 1995) (Tex. State Bar R. art X § 9). ⁵ Tex. Est. Code Ann. § 201.001 (2014), et seq. ⁶ Id.