How to Protect Clients’ Assets From Blended-Family Feuds

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?