September 07, 2012
In-Laws As Outlaws
By CAREN CHESLER
New York attorney Jeffrey Asher had a client who was going to bequeath his daughter $100 million. The man was so worried his daughter's future husband would go after her money, he made a prenuptial agreement a precondition to her receiving the inheritance. It didn't matter that his daughter was only six years old at the time.
"Very wealthy clients with young children are particularly concerned with giving their children too much money outright, for fear that their future spouses might try and take advantage of the wealth," says Asher, a partner with Robinson Brog Leinwand Greene Genovese & Gluck P.C. in New York City.
In this case, the client created a trust for his daughter that would begin paying her a modest amount of income at 18, with payments stepping up a bit when she turned 25. She was also supposed to receive automatic disbursements of a percentage of the assets in the trust at certain ages, such as 25% of the assets at 40, another 25% at 50, etc. Concerned that people would know she had a big check coming at age 40, the father feared somebody would marry the daughter, wait until she reached that age and then divorce her. So he had his attorney craft a plan where she would receive the automatic disbursements only if her fiancé signed a prenuptial agreement. If he refused, the girl would receive monthly income checks of only about $10,000 for the rest of her life. The remainder of the assets would remain in trust and either go to her children or to charity.
Asher's client is not unusual. These days, it's the rule and not the exception to leave nothing to the in-laws and in fact go out of one's way to bypass them, estate planners say. Many wealthy families either require their children to obtain pre- or post-nuptial agreements, or they structure trusts that shield the inheritance from their children's spouses.
It wasn't always that way, says Howard Safer, CEO of Argent Trust Co., a trust company in Nashville, Tenn. There was a time when a son- or daughter-in-law was almost considered family. The longer they were around, the more likely the estate documents were changed to include them. But while divorce rates have fallen a lot since the 1970s, the probability of a first marriage lasting 20 years is still just 50%, according to the Centers for Disease Control and Prevention. Those who generated the wealth don't want to see their hard-earned money go to their child's former spouse-or worse, the former spouse's new husband or wife.
"Most people are skeptical these days because of the 50%-plus failed marriages. We've seen [marriages] that didn't even last a week," Safer says.
Safer says he knew of one young man who married a woman 10 years his senior. Everyone in the family thought she was after his wealth, so when he got married, his parents persuaded him to put his assets into an asset protection trust. Under the rules of the trust, if something happened to him in the first five years of the marriage, the money would go to his sister. The wife agreed to the arrangement, figuring she could certainly last five years. But the young man became so unhappy, in his marriage and life in general, he killed himself after four-and-three-quarter years, Safer says.
"He was so unhappy, we suspect, with the realization that his marriage was not what it should be," Safer says.
Blood Runs Thick
Rich Arzaga, a financial planner in San Ramon, Calif., advises a couple in their mid-80s who are cattle ranchers and are leaving their $55 million estate to their four children, though they have split it inequitably: 50% will go to the son who ran their ranch empire and the remainder will be split among their other three children. While all three children are divorced-one was divorced three times-the son who is to receive the bulk of the estate is still married. Even though that son's wife has run a very profitable real estate portfolio for the parents, negotiating money-making ventures like having windmills and radio antennas installed on land they weren't even using, they plan on leaving her nothing, Arzaga says.
"The daughter-in-law works her butt off on the family's behalf, taking care of the land and negotiating contracts, but blood really runs thicker," Arzaga says.
How does the daughter-in-law feel about that? "She doesn't know," Arzaga says. Nor does her husband.
While sometimes in-laws are left out of the will because the patriarch wants the wealth to remain in the family, other times it's because the parents fear the in-law's profession or spending habits will leave their child open to creditor claims. Clint A. Costa, an estate attorney with Harrison & Held LLP in Chicago, says he has a client whose daughter-in-law is an obstetrician/gynecologist. Given the high cost of medical malpractice insurance, she doesn't carry as much coverage as the parents would like, so they put their son's inheritance into a trust and made the trustee an unaffiliated third party. If the daughter-in-law is sued, creditors can't make a claim on the inheritance, given that the daughter-in-law has no interest in it. "OB/GYNs carry huge medical malpractice issues. The parents probably wouldn't have been as worried if the daughter-in-law was in family practice," Costa says.
One of the most common vehicles used for protecting the family wealth from an in-law is a qualified terminable interest property trust, or Qtip, which allows the children to get the income generated by the family assets, while the assets themselves go to the grandchildren. The child can be named as a trustee to govern everyday investment decisions, but he or she wouldn't necessarily have total control because an independent third party can be named as co-trustee with veto power on all major distributions. That way, should the in-law want $100,000 to start a new business, it would not be solely up to the spouse to release the money. The independent co-trustee would first have to determine whether the distribution was appropriate.
Asher says he often helps his clients cut their children's spouses out of the will, but he doesn't always think it's the right thing to do-particularly when the child is in a good, healthy marriage, and the in-law helped provide for the family or raised the children. Rightly or wrongly, in-laws expect that when their spouse receives an inheritance it will go toward the marital unit, just like any other kind of income the spouse might receive.
"Maybe it's greedy for the spouse to expect that, or to resent the change in lifestyle that will happen when they don't get it, but when it's been a long marriage, and there were no issues or distrust, where the spouse is considered a daughter or son, I personally believe they should be able to share the inheritance," Asher says.
Putting Marriages At Risk
Also, cutting out the in-laws out of fear that a couple could split can be a self-fulfilling prophecy. It's not likely to break up a good marriage, but it can certainly cause tension, particularly when parents require their children to obtain pre- or post-nuptial agreements, estate planners note.
"I guess they don't trust their own kids' judgment," says George Cassar Jr., an estate attorney in Southfield, Mich. "But we've definitely seen situations where forcing the kids to obtain a pre- or post-nup agreement caused the relationship between the son and the daughter-in-law and the parents to fall apart."
Cassar says he had one client, a successful doctor from Pakistan, who wanted his son to marry a Pakistani woman, but the son refused and married an American. The father was so displeased that when he helped the children buy a house, he refused to allow the daughter's name to be put on the deed. His feelings about the daughter-in-law caused so much friction that she severely restricted how often the grandparents could visit their grandchildren. These days, that's about once or twice a year, even though the grandparents live just 20 minutes away.
"We get a lot of this, especially in the Arabic and Indian communities," Cassar says. "They want their children to marry in their culture. And if they don't, the older generations get pretty upset."
Keeping a child's inheritance away from his or her spouse is not always easy. Once assets are used for marital expenses, like a house, or food or a child's tuition, they are considered to have been commingled and thus become marital assets, meaning the in-law may get half of them in the case of a divorce.
"Commingling is a very, very common litigation issue, whether it comes up in divorces or in post-death litigation," says L. Paul Hood Jr., a former practicing estate attorney and co-author of Estate Planning for the Blended Family.
The problem is, in trying to safeguard an inheritance, the parents may set so many conditions that it disrupts the marriage, when a couple is supposed to be pooling their resources to build a life together, says Emily Bouchard, a managing partner at the Wealth Legacy Group in San Diego.
"A husband may not even have the freedom to buy a home with his wife's name on it," Bouchard says.
Bouchard worked with a couple that had been married for more than 20 years and had four children. The husband's father, who'd made a lot of money, always treated the wife like an outsider. She was made to sign a prenuptial agreement, she was left out of the will, and in the end-and unbeknownst to her until recently-her name wasn't even on the deed of her family house because trust money was used to purchase it. When she found out, she was devastated, Bouchard says.
"She felt like she was not getting credit for raising the children or contributing to the household," Bouchard says. "And it was poisonous to the couple's relationship."
In extreme cases, parents will be so desperate to cut their in-laws out that they cut their children out of the will and leave the money in trust to their grandchildren. If the grandchildren are minors, they will have a third-party trustee oversee the assets. The trust documents may say a certain percentage of the money, say $5,000, can be removed each month, but anything over that would require consent of the independent trustee. But these situations are rare, says Donald DeLong, a partner at Brickley DeLong P.C., a CPA firm in Grand Rapids, Mich. DeLong says just 5%, or about a dozen of the estate plans he's done in the last 27 years, have looked like that.
"They want to make sure the gold digger doesn't get her hands on it," he says. "But it's rare because essentially what they're doing, by cutting out their in-laws, is hurting their own children. Their children don't get the true enjoyment of their property."
Sometimes, the parents are being unnecessarily paranoid. Everett Sussman, an estate attorney in Shelton, Conn., says he recently worked with a matriarch who said she loved her son dearly but, as she put it, "He married an idiot." She feared if her son got divorced, his ex-wife would remarry instantly, and she was concerned her money would not reach her grandchildren.
"I know of nothing the daughter-in-law has done that's evil or criminal. The mother just doesn't trust her," Sussman says. "But she was not going to trust anybody. No one is going to be good enough for her boy."
To that end, the mother created a trust that gave some of her $2.2 million estate to the son and his sister and the rest to the grandchildren through a generation-skipping trust. The daughter, who was a stewardess, was put in charge of the money while the son, who was actually in financial management, was given only limited power over his assets. That way, the son's wife could not get at his portion.
"The son can say, 'Hey, Sis, I need $20,000 for my kids' college tuition.' But if he's in the middle of a messy divorce, the sister can say, 'You're not getting a dime of this,'" Sussman says. "It's like having the use of a company car. You can have use of it while you need it, but you can't go out and sell it."
DeLong says in about half of the cases he's seen, the parents were unnecessarily paranoid. In the other half, they had reason to be suspicious. It raises red flags for him, for instance, when the head of the family lies dying in a nursing home and it's the in-law who is asking questions about financial matters, from the more innocent questions, like "Do you know where the bank or brokerage statements are kept," to the more obvious, like "Isn't it true that you can't cut out an in-law?"
"Sometimes, they're more subtle. They may ask, 'Are you going to be the one handling the probate? Can my husband or wife hire their own lawyer?'" DeLong says. "The guise is they want to be able to figure it all out, and it can be an innocent question, but the tone of voice and the body language can indicate whether it's innocent or greed-oriented."
On one occasion, an in-law approached him at a funeral and pulled him aside and asked, "How much is my spouse going to get?"
"That's only happened once, but once is enough," DeLong says.