The number of blended families is increasing, as more than 1,300 form every day. In these types of families, one or both spouses have children from previous relationships and they may have children together. Working with blended families will be a common scenario for you as an estate planning attorney (if it is not already), and each family’s plan will be different. The goals of individual family members may be at odds, as not all blended will look like an episode of The Brady Bunch or Modern Family.
Fortunately, you can employ some best practices to fulfill your ethical obligations and keep members of the family as informed and satisfied as possible. Read on to learn more about how to help blended families during the three main stages of estate planning.
Stage 1: Client Consult
When you meet with clients who are members of a blended family, you should first discuss the ethical issues that may come into play. Addressing these issues immediately will reduce the possibility of family infighting or a malpractice lawsuit.
It is important that clients from a blended family be aware of conflicts of interest. According to the American Bar Association’s Model Rules of Professional Conduct Rule 1.7, a conflict of interest involves a client representation harming another client or “a significant risk that the representation of one or more clients will be materially limited by the lawyer's responsibilities to another client.”
By having your clients sign conflict of interest disclosure and waiver forms, you can eliminate potential problems. You should also check your state’s rules for other obligations regarding conflict of interest.
Client confidentiality is another important issue to address with blended families. According to Model Rule 1.6(a), “a lawyer shall not reveal information relating to the representation of a client unless the client gives informed consent.”
You can ask clients to sign a confidentiality disclosure and waiver, but keep in mind that informed consent involves explaining matters thoroughly (sliding a piece of paper across the desk and saying, “sign here” would not be considered “informing” your client).
In addition, if your client has a caregiver or adult child present during a meeting, you should ask your client to sign a Consent to the Presence of Others form. This can help avoid problems relating to the presumption of undue influence.
Stage 2: Drafting
Remember, no single planning vehicle will work for every blended family. After your consultation, you should have a handle on the family’s unique dynamics and concerns. Consider these dynamics and concerns when designing and drafting the estate plan.
You may find that it is appropriate to involve family law counsel. For example, spouses in a blended family may have ongoing obligations to former partners or children from previous relationships. Additionally, there may be separate and community property issues if clients own property or live (or used to live) in a community property state. It is important to understand and clarify these issues so you can be sure that the plan you create best serves your clients and your estate planning recommendations do not run contrary to ongoing obligations.
The following are some estate planning structures that you can use for blended families:
- Joint pour-over trusts, which can hold the spouses’ shared assets in a joint trust with separate trusts to hold their separate assets
- Bypass trusts to benefit the children of the first decedent spouse
- Unitrust provisions, which give beneficiaries an annual fixed percentage of the value of the trust assets
- qualified terminable interest property (QTIP) trusts, which allow assets to be included in the surviving spouse’s estate, thereby allowing a basis adjustment on the death of the surviving spouse
Note that with a QTIP trust, the surviving spouse benefits from the trust assets during their life, but does not control the final disposition of the trust assets upon their death, so the leftover assets are protected for other beneficiaries.
Here are some other considerations when planning for blended families:
- Clients who want to protect their assets after their death from their surviving spouse’s future spouse may need remarriage protections
- Different trusts may require different trustees and fiduciaries depending on who the beneficiaries are (e.g., a client may appropriately choose a former spouse to be trustee of a trust that benefits their shared child, but that former spouse is likely not a good choice to be a fiduciary for a child from a different relationship)
- For QTIP trusts, it may be appropriate to discourage invasion of the principal to maximize the leftover funds likely to be available for beneficiaries (although this decision must be balanced with the needs of the surviving spouse)
- A valid election must be made on Form 706 for a QTIP trust upon the first spouse’s death
Stage 3: Administration
When dealing with postdeath administration of a blended family’s estate plan, managing emotions and complicated relationships is a common obstacle. One of the biggest legal challenges is determining who is entitled to what information and when they are entitled to it.
A trustee owes fiduciary duties to the beneficiaries of the trust. In addition, you, as the attorney advising the trustee, owe fiduciary duties to your trustee-client. The exact nature of these duties may vary slightly by jurisdiction, but generally, fiduciaries have duties to inform and communicate and of loyalty. In addition, the attorney-client relationship generally involves a duty of confidentiality. Depending on specific jurisdictional rules, the attorney advising the trustee-client may also have duties to the estate and/or beneficiaries, which may fall under the doctrine of fiduciary exception to the attorney-client privilege.
It is important to be clear from the start with your trustee-client about the responsibilities and duties that the trustee has and the responsibilities and duties that you as the attorney have regarding the trust administration. You must clearly delineate (in both verbal and written communications) those things that are your responsibility as the attorney and those tasks that belong to the trustee-client. You should also discuss and document in writing any fiduciary exceptions that may impact your relationship as attorney and client. Clear communications from the start can help avoid a host of problems during the administration.
Learn More About Estate Planning for Blended Families
Discover many more useful tips on helping blended families by watching the on-demand webinar “Protecting the Brady Bunch: Planning Strategies & Counseling for Blended Families,” presented by WealthCounsel member Becky Cholewka, an Arizona-based estate planner. Becky shares her experiences from her daily work with these types of clients and presents several helpful hypothetical situations. Click here to watch the webinar.