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How to Protect Clients’ Assets From Blended-Family Feuds

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Trust and estate attorney Michael Hackard Trust and estate attorney Michael Hackard.

Mega-estates of fabled billionaires are far from the only inheritances subject to ugly family feuds. Indeed, litigation over family riches is more common than imagined in particular, nasty collisions between stepmothers and stepchildren, where the deceased husband suffered diminished cognitive capacity.

Veteran estate and trust attorney Michael Hackard has represented both sides, and in an interview with ThinkAdvisor, he discusses how financial advisors can help avert such emotional, vengeful battles.

The lawyer’s new book, “The Wolf at the Door: Undue Influence and Elder Financial Abuse” (Hackard Global Media), illuminates the way tensions in blended families can lead to hideous inheritance disputes. Net profits from the book’s sales will be donated to the Alzheimer’s Foundation of America.

About half of Hackard’s recent disputed estate cases have involved litigation between stepmothers and their stepchildren. In contrast, such actions concerning stepfathers are only a small fraction of those, he says.

Blended families of biological offspring and stepchildren frequently become enmeshed in such overwrought estate fights, though litigation also frequently occurs when one spouse typically the stepmother has no genetic children.

Cognitive decline or other vulnerability of the asset-controlling parent because of severe physical illness, isolation, abandonment fears, or other conditions set the stage for undue financial influence exerted by a family member or caregiver. For example, deathbed asset transfers are common.

ThinkAdvisor recently interviewed Hackard, founder of Hackard Law, speaking from his office near Sacramento, California. Among other takeaways: the protocol he developed for investigating undue influence in the presence of cognitive impairment and his take on the Financial Industry Regulatory Authority’s new rule addressing financial exploitation. Here are excerpts from our conversation:

THINKADVISOR: You write about “the dementia gambit”  enabling someone to take control of a family’s fortune by undue influence and an act that’s common in heated stepmother-stepchildren disputes. Why are they “gambits”?

MICHAEL HACKARD: The wrongdoer, or the undue influencer, thinks the gamble is worth it because the elder doesn’t have [mental] capacity or is vulnerable for some other reason. They feel they’ll never get caught, so they have a “finders-keepers” attitude.  There’s almost a confidence level that they’re not going to be challenged.

To what extent do your cases involve litigation between a stepmother and her stepchildren?

I see a high incidence. In fact, my largest cases – eight-figure cases — are stepmother cases. Oftentimes there’s a dementia element to the decedent’s [condition] and certainly a vulnerability element. One percent of people age 65 have dementia; and by the time you get up to age 85, 30%-45% of all people have it.

You say that often, an adult child will claim, “My stepmother took all my father’s assets while he was in the hospital!”

Deathbed transfers [of assets] are pretty common because of the [ill] person’s vulnerability. Right now, I have a Russian bride case where that claim has been made.  Some states have laws that are helpful to the [estate] challenger because it’s considered that the stepmother – or stepfather – has breached a fiduciary obligation they owed to their spouse not to take advantage of them.

Why is there so much conflict between stepmothers and stepchildren over the husband’s estate?

If the stepmother has no genetic children, the tendency is that she wants all the assets for her benefit. I’ve seen many times that even though the father named his genetic children as remainder beneficiaries behind the stepmother, the stepmother goes through whatever assets remain for her own benefit. Maybe she remarries and takes three trips around the world every year and has houses all over the place.

What if the stepmother has genetic children?

It’s axiomatic that people favor their genetic children [over stepchildren]. So when the husband dies, generally the stepmother favors her genetic children.

Sounds like a scene where all hell could break loose.

It does because it doesn’t take long to see that the stepmother will favor her own children, and that feels like a betrayal to the father’s genetic children.

What can complicate the situation further?

A dependent child that’s a substance abuser who lives in the parents’ house, has no job and survives off their income often will tell the [incapacitated] elder parent, “If you don’t leave everything to me, I’m moving out and you’ll have no one to take care of you and will have to go to the old people’s home.” We get this one a lot.

What other complications can there be in stepparent marriages that trigger estate disputes?

There’s probably a higher percentage of no-contact children in stepparent marriages. No-contact children get disinherited by a [more] significant percentage [than others].

Is there anything a financial advisor can do to help clients avoid such legal disputes?

To start with, they should do estate planning. Some trusts are set up so that at the first [spouse’s] death, half the decedent’s trust becomes irrevocable; the other half, the survivor’s trust, is usually revocable. But what often happens is that at the first death, the trust doesn’t get funded because the decedent left his spouse, the stepmother, with full control over all assets at his death and she retains power over them.

Surprising that happens often!

Yes, it happens with some regularity. I have a case right now in which when the husband passed away, and half their combined assets of $6 million in securities were supposed to be in an irrevocable trust, the remaining assets to be in a survivor’s trust that could be revoked changed [but wasn’t funded].

Can a financial advisor help to avoid estates battles down the road when a man with children from a previous relationship marries a woman with or without children?

They could create a mutually irrevocable trust that designates the beneficiaries, such as the children. That locks it in.

What might not work as well?

I’ve seen situations where a genetic child of the father is designated the trustee, but there’s competition among the children after the father’s death.

How else can a financial advisor help?

At the first death, they can encourage the client to seek knowledgeable counsel. If it’s done right, there’ll be two accounts: one that has a separate tax identification number that’s the irrevocable part of the estate and a tax ID number for a survivor’s trust, which would be the Social Security number of the survivor.

Anything else an FA can do?

Sometimes, while the father is still alive, the advisor will bring in a mediator so that the spouses can talk things through and try to come up with a plan.

Should the advisor suggest a meeting with the father and his children so they’re aware of the plan?

Usually the father isn’t going to want his children in on a meeting. It’s pretty rare.

At what point does the FA usually get involved in the estate disputes?

If [our client], for example, is challenging the trust, both sides need to know how much money is in the accounts the advisor manages, so we have to subpoena those documents. It’s not a comfortable situation for the financial advisor.

Where else does the advisor come in?

Once there’s a settlement as is the case over 95% of the time arrangements have to be made, and the financial advisor will do an allocation of the assets between the parties. The challenger would have their own financial representative in that situation.

Suppose a financial advisor has seen signs of cognitive decline in the father or in any other client what should they do?

FINRA has a new rule, which went into effect on Feb. 5,  allowing the advisor to put a [temporary] freeze on the account if it looks like someone else is trying to take money out. The rule also requires the advisor to ask the client for the name of a family member or other trusted person, so that if they see cognitive decline or signs of financial [exploitation], they can reach out to them.

What do you think of that rule?

It’s good because it gives some legal backing to the financial advisor when there’s suspicion raised.

You write that “a lifetime of planning [certainly] shouldn’t be overturned to the undue influencer” a relative or other person who “takes advantage of an ailing person” or of [anyone] that has vulnerability. But what can the advisor do?

Be aware of red flags. A financial advisor will often have the estate plan for the client on file. For the most part, it would remain fairly stable over the years. But if the [husband] becomes vulnerable and suddenly it’s [changed so that] everything goes to the Russian bride or everything is set up to go to the spouse and her genetic children and not [anything] to his children, those are certainly red flags.

When is undue influence most likely to occur?

When the elder is at Stage Two or Three on the Clinical Dementia rating scale; that is, when there’s a [moderate-to-] severe deficit in short-term memory. Often a person will show lack of ability to balance their checkbook, to get dressed every day, to buy their own groceries, and they’ll repeat the same question over and over.

You’ve developed an investigative protocol for undue influence situations in which there’s cognitive decline. Please explain.

The idea is to develop a timeline to focus on when the wrongdoing occurred. We first determine what the estate plan called for when the parent [for example] had full [mental] capacity. Then we [probe] to determine the person’s condition from that point. The [son or daughter] may say, “We noticed my mother wasn’t doing well when she was getting lost while driving. Then, her caretaker wouldn’t let us in the house or talk with her on the phone. Then, we found out that the trust was changed on [date] and the caretaker got all the money.

What do you do next?

We subpoena all medical records for about five years back; and almost 90% of the time we have a psychiatrist, or else a psychologist, review those documents and give us an internal report. If possible, we’ll look at depositions in any other legal proceedings; and we’ll also talk to friends of the decedent to get some insight, such as: “She got lost four times before she gave up her driver’s license.”

Then what do you investigate?

Contradictory accounts by family, friends and caretakers. The wrongdoer is always going to maintain that the person was of perfectly sound mind almost up till the day they died. But that’s usually not hard to figure out or challenge because the main issue in undue influence is vulnerability.

How do you determine that?

Someone can have full capacity but be very vulnerable because, for example, they’re hospitalized in an ICU or are very isolated and or have fears of abandonment. The issue of whether an influencer knew or should have known of the person’s vulnerability is a critical factor. Vulnerability isn’t hard to determine.

Do you talk with the decedent’s financial advisor too?

Yes. We try to see if we can get some insight as to deathbed [asset] transfers or attempted near-death transfers. It could be the decedent himself who called and said, “I want to put [name] on this account for me.” That’s done all the time; but, nevertheless, it can raise the duty of inquiry: “Why do you want to do this? Who is this person? Are you sure you want to put all of your account in their name with you?”

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