Developing an estate plan that is satisfactory to all parties is challenging enough when family members are divided over the rights to assets. Those divisions can grow by an order of magnitude, advisors say, when family members are not related by birth but by a marriage between a biological parent and a step-parent.
“In blended families, there is a natural reluctance among members to put their arms around estate planning issues because of the potential for conflict,” says Dick Ferris, an estate planning attorney and partner at Ferris & Associates, Williamsburg, Va. “They don’t know how to get issues resolved. So they give up.”
However unpleasant the issues, the potential for acrimony–indeed, open warfare in probate court–is many times greater after the death of a spouse. That’s true, sources say, even in cases where family members seemingly enjoy amicable relations. Often, bad blood among half-siblings or between a step-parent and step-children lies hidden while both spouses are alive, only to surface when estate assets are distributed after death–to the detriment of one or several survivors.
Example: Children of a first marriage are disinherited because the deceased parent, having failed to set aside funds for their benefit, effectively leaves control of the estate to the widowed spouse of the second marriage. A common result: The surviving step-parent enjoys income on the estate while alive and, upon death, bequests the estate to his or her biological children–again leaving the children of the first marriage in the lurch.
The degree of rancor generally grows, advisors say, the closer in age the surviving spouse is to children of the first marriage. When the feuding parties are approximately the same age or, in extreme cases, when the step-parent is actually the youngest among them–witness the Anna Nicole Smith case–the children may conclude they’ll never live to inherit the deceased parent’s assets.
To be sure, it’s not always the surviving step-parent who acquires the lion’s share of the wealth. Dean Hedeker, a financial planner and president of Dean R. Hedeker Ltd., Deerfield, Ill., cites the case of a deceased business owner who passed on the family restaurant to a second wife and 3 adult sons. Because the sons collectively owned 75% of the establishment, they were able to deny the wife of cash flow on which she depended for income.
Hedeker observers that the wife’s situation could easily have been addressed had her husband implemented an estate plan and a buy-sell contract providing for an agreed price and cash, funded with life insurance, with which the sons could have purchased the wife’s 25% interest. But he cautions that when ill feelings exist between family members, having an estate plan is no guarantee of an equitable result.
“For the most part, clients follow my recommendations and understand that problems will be resolved by getting everyone together,” he says. “But you always come across these ‘I don’t believe’ situations. In one instance, the husband wanted to write a plan that would disinherit his spouse–which you can do in Illinois–and pass everything down to the kids.”
Whether the grandkids ultimately inherit the wealth is an open question. Scott Keffer, president and founder of Wealth Transfer Solutions, Pittsburgh, Pa., says divorce among adult children can also undermine efforts to keep family assets within the bloodline.
“There is at least a 50% chance that a divorce will occur among your children and grandchildren,” says Keffer. “[Clients] have to take care to protect against this as well as the other 3 predators of wealth: estate taxes, litigation and bad personal decisions.”
Family feuds over inheritance are becoming increasingly common, experts say, in large measure because of the growth of blended families. Advisors interviewed by National Underwriter estimate that these families account for between 25% and 50% of their practices. Nationwide, at least one-third of all new marriages involve divorced or widowed parents with children under 18 living in the home, according to the Stepfamily Association of America.
How can parents ensure that family assets pass on to children before entering a second marriage? One option, sources say, is for the intended newlyweds to enter into a prenuptial agreement that separates their financial assets. That will protect against claims by either spouse on the other’s assets in the event of divorce; and, at death, insure that personal assets pass to each spouse’s respective children or other intended beneficiaries.
When these agreements are concluded, other issues can arise. Often, the prenups run counter to other estate planning documents, such as wills, living trusts and life insurance policies, particularly with regard to the stated beneficiaries. Thus, when conducting fact-finders, advisors need to review these documents for potential conflicts.