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Estate planning for the modern family

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It turns out classic TV families like the Brady Bunch and the Partridge Family were ahead of their time—their hairstyles and two-tone, hip-hugging pants notwithstanding. Indeed, Brady-like blended families and Partridge-like single-parent households, as well as other so-called non-traditional family units, now outnumber “traditional” husband-and-wife households. Married husband-and-wife couples represented 48 percent of American households in 2010, down from 52 percent in 2000 and 78 percent in 1950, according to U.S. Census Bureau data.

Yet laws and policies across the U.S. have largely failed to keep pace with shifting family structures. That means advisors who work with non-traditional families—and these days, whose client base doesn’t include a sizable share of them?—must take extra care (and oftentimes, extra steps) when it comes to key estate planning matters.  In certain situations, such as with unmarried couples, failing to do so could result in partners losing control over their own destiny in terms of medical care, disposition of assets, etc., while subjecting them, their assets and surviving family members and heirs to laws that don’t always treat them favorably relative to their “traditional” counterparts.

“Estate planning for what I call a modern family, one that’s blended or has unmarried partners, for example, might require you to handle things like the will, powers of attorney and beneficiary designations differently than you otherwise would,” says L. Paul Hood, Jr., director of planned giving at the University of Toledo Foundation and co-author of“The Tools & Techniques of Estate Planning for Modern Families.”

Distinctions in how federal and state laws treat couples based on their marital status are one reason estate planning for non-traditional families “may require a lot of work-around strategies,” says Stuart H. Armstrong II, CFP, CLU, ChFC, of Centinel Financial Group in Needham Heights, Mass.

Still, even when extra steps are required, the fundamental underlying estate planning principles hold true whatever the family configuration, asserts Hamilton Poynor, CLU, AEP, a partner and advisor with Reliance Financial Group in Birmingham, Ala. “There are three choices when it comes to distributing estates at death: number one, family; number two, charity; and number three, government. As an advisor, we want to understand the objectives of the client. Once that is clear, we can help them prioritize those objectives so they can implement a plan that gets the job done and can be managed for the long term.”

Here’s a look at some of the proven estate planning strategies and workarounds advisors who work extensively with non-traditional families are relying on to help their Brady- and Partridge-type clients maintain control of their own destinies—and assets. single parent familyThe scenario plays out all too often with unmarried couples: The unexpected strikes —injury, illness, death—and because of holes in their estate planning strategies and/or documents, major decisions about the stricken person’s health, financial assets and children land not in the hands of the surviving partner, but with the probate court or people who may not have the couple’s best interests in mind.

At the root of many such situations is a “strong bias against unmarried couples” in certain state and federal laws, says Hood, whereby the family right of intestacy that applies when passing assets between married partners doesn’t necessarily apply to unmarried couples, whether same-sex or opposite-sex.

By default, under many state laws, assets will pass not to the other partner when one partner dies, but rather to a relative or relatives of the deceased, unless estate planning documents clearly specify otherwise, he explains.

This is just one reason advisors such as Armstrong who work with unmarried couples (he’s an accredited domestic partner advisor, or ADPA) are using estate planning techniques to work around that bias. It starts by putting an unmarried couple’s wishes in writing.

It’s critical, for example, that estate planning legal documents explicitly specify the rights and powers a surviving partner will have in the event the other partner dies. Otherwise, adds Hood, unmarried partners are essentially “strangers” in the eyes of the law, even if they’ve been together for decades.

This applies to such estate planning documents as:

• a will (and the naming of an executor who’s responsible for ensuring that terms of the will are met).

power of attorney (to manage legal and financial matters).

• a health care proxy/medical power of attorney for one partner to make health care/medical decisions for a partner who loses (temporarily or permanently) the ability to make decisions him- or herself, and

• an advanced health care directive (living will) to guide the health care proxy and health care providers with treatment and end-of-life decisions. multi-generational family“I’ve seen situations with unmarried couples where one partner is essentially frozen out of making health care decisions for the other partner because of privacy laws that say they have no legal relationship to the other partner,” notes Hood. “That is a big problem.”

The transfer of assets such as those residing in a retirement account can present similar problems for unmarried couples, making it critical that partners who want those assets to pass directly to each other name one another as primary beneficiaries on 401(k)s, IRAs and other holdings like annuities, life insurance contracts, etc.

Another particularly effective workaround employs life insurance to address a tax code bias in which the estate(s) of an unmarried couple may be taxed at a higher rate than that of a married couple when assets pass to the surviving partner.

“A life insurance policy can help restore that lost value,” says Armstrong, by supplying proceeds to defray the additional estate tax levy.

Given the prevailing high estate tax thresholds, such a maneuver typically makes sense for high-net-worth unmarried couples, he notes. Oftentimes, for the sake of estate tax efficiency, it also makes sense to house the life insurance policy inside a vehicle such as an irrevocable life insurance trust.

Because policies governing the marital status of same-sex couples differ from state to state and are seemingly in constant flux, it’s important for these couples and their advisors to pay close attention to their tax status in an estate planning context, Armstrong says.

For example, while federal law may recognize them as legally married and therefore their estate planning documents as legally sound,  if laws in the state in which they reside don’t recognize their marriage as legal, their tax status and their estate plan—including wealth-transfer vehicles such as a trust—may be undermined.

That can be reason enough for a same-sex married couple to maintain  legal residence in a state where their marital status is recognized, he says. blended familyBlended Families, Mind-Bending Issues

Blended families present their own unique estate planning challenges, some involving potentially unsavory and very un-Brady-like family dynamics. “They’re my most difficult and challenging [estate planning] clients,” says Hood.

Empty-nesters who each bring adult children into a marriage. Families in which only one spouse brings a child (or children) into the marriage. These are just a couple of the non-traditional household configurations around which conflict—and sticky estate planning situations—may develop. “There’s inherent tension in situations like these,” Hood says, “and an element of distrust.”

“Focusing on how to equalize and treat fairly can be challenging with blended families,” echoes Poynor. “What is equal is not necessarily fair, and what is fair is not necessarily equal. It takes a lot of discussion and sometimes compromise to solve blended family issues.”

Hood says he’s seen plenty of instances where blended families end up in court because the agent handling the execution of an estate plan, such as a spouse with stepchildren or a child of one spouse (stepchild to the other), “cuts the other side of the a family out of a will.” One way to help blended families stay above the fray is for them to give agent status to someone other than a spouse or family member, suggests Hood. “I encourage some clients to designate a third party as agent, then to limit the agent’s ability to make significant changes to the estate plan, and to require the agent to be accountable to the entire family, not just to the principal beneficiary.” This gives family members a say in the process, he explains.

As with unmarried couples, life insurance can be a useful estate planning tool for blended families, particularly as a means to distribute assets to beneficiaries equitably. In that context, says Poynor, life insurance “is one of the most economical ways to distribute future wealth. It allows clients to preserve other assets that may have more specific family meaning to other beneficiaries.” For example, a family can use proceeds from a life insurance policy so they don’t have to liquidate a family business or a family home in order to raise proceeds to equalize an estate.

Trying to reconcile multiple beneficiary interests can also complicate matters. “What if you have a situation where the surviving spouse wants to maximize income [from the assets in an estate], but other beneficiaries [such as adult children] want to maximize growth” of assets of an estate?” asks Hood. “These distinct investment priorities have to be addressed.”

The unique estate planning issues confronting non-traditional families and their advisors “are just legion,” he acknowledges.  And given the legal, financial and emotional complexities, solutions don’t always come easily.