Private Wealth

April 1, 2008

Expect the Unexpected


Surviving spouses and their advisors face the challenges of grief, fear and the sudden responsibility of managing a sizable fortune.

Cheryl Menken thought she knew everything about her husband, Morris. She knew he cheated on his first wife. She knew how he got caught. (They were in a car accident and Morris broke his leg.) And she knew that when he became terminally ill at 67, he wanted to remain in denial about his illness and continue to work for as long as he could. It wasn’t until after Morris died that Menken realized how much she didn’t know, particularly about their marital finances. She knew he had amassed at least $4 million and that some of it was invested with the Carlyle Group, but she couldn’t even access those accounts because he never gave her the passcode.

“My role was to pretend he wasn’t sick as best I could. So for two years, I saw him die, and I didn’t ask him about our finances,” Menken says. “I tried to keep abreast of where things were, but it was almost impossible.”

Reeling with grief, Menken says she staggered around for a while after Morris died, unclear about her future. She reached out to her husband’s advisor at Morgan Stanley, but she was away, so she decided to go with someone else. She contacted one of her husband’s former business associates, and he suggested she contact James “Buddy” Thomas Jr., a CFP with Superior Planning, an investment advisory in La Jolla, Calif. Thomas was writing a book on widows at the time. That was four years ago. Menken still speaks to Thomas every Monday, whether she needs financial advice or not.

“When you’re in grief, you can’t think,” Menken says. “It doesn’t matter how much money you have. If you don’t know what you’re doing, it’s traumatizing.”

Menken’s story is not unique. Advisors to the ultra-wealthy say no matter how much—or how little—one plans for death, they’ve learned to expect the unexpected. Widows can get depressed and fail to pay their bills. Children behave badly. Friends and relatives want money. And before long, the best laid estate plans go awry. Thomas says he spent almost a year with one of his clients, formulating a plan for the day his son would take over his international importing business. When the father died, Thomas met with the man’s wife and son and the boy looked sullen. When the mother asked him what was wrong, he said he liked being a salesman. He didn’t want to be a CEO. They wound up selling the business for a substantial profit, and the son now works for the new owner as a salesman.

“He wanted out. She wanted out. So we shifted gears and sold the business,” Thomas says. “When you’re working with a widow, you don’t know where things are going to go. So you just sit back and let things unfold.”

Thomas would know. He’s made a business out of serving widows. He can reel off the statistics: Some 80% of surviving spouses are women. Their average age is 56. They generally outlive their husbands by about 14 years. Thomas says the hardest part is that they must file their estate tax return within nine months, a laborious and costly process that requires every asset and piece of property to be appraised, all at a time when the widow is dizzy with grief. And that grieving period can last about 18 months. Thomas says he had one client who lost her shoes and finally found them a day-and-a-half later in the microwave. Another client says she was on a ladder dusting a shelf and suddenly found herself on the floor, and she had no idea how she got there.

While he’s seen children want to flee from the family business, Thomas says the more common scenario is for them to try to run things—whether it’s the family finances or the widow’s life. Some think they’re helping. Others want more control over their inheritance. Thomas says the first widow he worked with in California had allowed her husband, a retired real estate developer, to control all of the couple’s finances. While she ran a boutique, her husband sat in the backroom and played with their investments— until one day he got indigestion, was rushed to the hospital and died. Her son immediately wanted to swoop in and take over where his father had left off.

“I’m afraid he’ll smother me,” she told Thomas. “This woman’s ideas about what she needed to be happy were different from her son’s ideas.”

Thomas says he came up with a financial plan for her, and when they were finished, she clutched that plan in her hand and began to cry. She’d never taken control of her own financial destiny, he says.

The hardest part is that
they must file their estate tax within nine months,
a laborious and costly process.

The way children behave in the wake of a parent’s death is perhaps the biggest wild card for a surviving spouse. “Oftentimes, they don’t have the same agenda,” says Ken Anderson of Kochis Fitz/Quintile, a multifamily office based in Los Angeles and San Francisco. Thomas agrees, remembering one client whose three sons immediately took control of her husband’s income producing properties when he died. Soon after, one of the sons suggested that his mother move out of the family home into a condominium because the upkeep would be too difficult for her to manage alone. As it happened, the son had just proposed to his girlfriend and wanted the house for himself.

“If [a child has] got a type A personality, they will try to take the lead and that can create some interesting family dynamics,” says Anderson, going on to mention a family that fell prey to the investment aspirations of its eldest son. He seized the reigns of the family finances as soon as his father was buried, fired some of his father’s advisors and began investing the money himself. Rumor has it that the son’s track record has fallen short of expectations.

“That’s one of the reasons wealthy families have trustees, and oftentimes, that trustee is not a family member,” Thomas says. “If we, as planners, can position ourselves as advisors to the trustees, we can sit on the sidelines and say when the emperor has no clothes. That’s when we really bring value.”

Yet another client found herself in the middle of feuding sons. Acting as the ring leader, one son took charge of his mother’s accounts and made arrangements to buy her home from her at a deep discount to market value. When his brothers realized that the sale would destroy years of capital appreciation and create unanticipated tax consequences, they intervened.

But children aren’t the only ones to display surprising, and often unacceptable, behavior. Sometimes business partners will put pressure on the surviving spouse to do things that didn’t pass muster with the decedent when he or she was alive. One widow, Anderson recalls, was approached by her husband’s former partner with a business deal and told, “It’s the least you could do for me after all I did for your late husband...”

Wealthy survivors can be a great antidote for a failing deal or business venture. “I’ve seen business partners tell the widow of their former partner ‘Your husband would have done it. And if you don’t put the money in, the business will go under,’” Anderson says.

People come out of the woodwork asking for money, and it’s not just relatives and close associates. Grieving widows are approached by schools, hospitals, even religious organizations. It’s open season, as friends, family and fundraisers seize the opportunity to ask for money. One advisor likened them to parasites. Problems arise when you’ve got a surviving spouse who is not comfortable saying, ‘No.’ It’s worse when the parent actually likes the attention. Sometimes, the children will want to protect their parent, while the parent actually enjoys being courted.

Menken says she’s given money to her deceased husband’s ex-wife, his daughters, and a cousin of hers who says she needed it to start a new business. Even her housekeeper hit her up for money. “It’s annoying now. It’s a lesson [widows] should be taught,” Menken says. “I know some women who give all their money away.”

Alyssa Moeder, a private wealth advisor with Merrill Lynch & Co., says she tells her clients to send those requests her way. “I tell them, ‘Let me be the bad guy,’” Moeder says.

But Moeder says being a messenger is just the tip of the iceberg when dealing with widows. It goes well beyond investing, she says. Some just stop paying their bills because they don’t want to open their mail. “When this all first happens, people are not themselves. Even people who are financially sophisticated find they can’t focus on administrative matters,” Moeder says. “They can’t get their head around the little things, like should they tell the landscaper to stop coming?”

But calling the landscaper or paying bills is the least of it. An advisor’s greatest challenge, when the matriarch or patriarch dies, is dealing with the family dynamics. For instance, a woman can be close with her in-laws while her husband is alive, but once her husband dies, that relationship changes. Sometimes there’s a falling out. Other times, the in-laws simply drift away. That’s fine except when an in-law is trustee on part of the estate. Moeder says she advised one family where the husband made his brother trustee of his children’s estate. Once the husband died, the family’s relationship with his brother grew more distant. Yet all requests for money still had to go through him. Initially, it wasn’t a problem. But after about a year, the brother wasn’t really involved with the family much anymore, and it made everyone uncomfortable each time they had to approach him for a distribution from the trust.

“He wasn’t familiar with what the kids were doing. He just wasn’t involved with them anymore. And it’s something they’ll have to deal with for the life of the trust,” Moeder says.

People need to understand that when their spouse is gone, the relationships between family members may change, Moeder says. The circumstances that exist when a plan is created, may not be relevant a few years down the road. And some of that heartache can be avoided if those considerations are made at the outset, Moeder says.

The number one concern of most widows, whether the size of the estate is $2 million or $20 million, is “Am I going to go broke?” It’s especially true for young widows with young children. Advisors say it’s a logical question, given that many suddenly find themselves with a windfall, from life insurance, or stock options or employment benefits, and yet the primary breadwinner is gone. They simply have no concept about how long that pile of cash will last.

“The bag lady thing comes up again and again,” says Linda Fitz of Kochis Fitz/Quintile, mainly from the big spenders. “And I don’t mean they’re spending $100,000. They’re spending much more.”

Indeed, advisors say some clients need to do a better job managing their expenditures or their money will not last—though advisors are sometimes loath to say that to their clients. They prefer to express the message more practically and diplomatically, with statements such as, “If you continue to spend at this rate, you will run out of money at age X.”

But even those widows who are not spending wantonly become concerned with whether the money will last as they see their bank balances dropping from costs that are beyond their control. For the first time in their lives, some are seeing how much it costs to run a household. They’re writing checks for property taxes and landscaping bills at a time when they’re also having to pay advisors, accountants and attorneys to sort out their estate—and those fees can run about $400 to $500 an hour.

“They may have us doing their returns, they may have an estate planning lawyer, people who are on hourly fees. They’re suddenly doing a lot of things that are creating a lot of high bills, and you see this sticker shock,” Fitz says. It’s here where Fitz says she sees a distinction between the wealthy and the ultra-wealthy. Those who have, say, $5 million to $10 million, shudder at having to pay those hefty fees, whereas those whose fortunes exceed, say, $20 million, are far more accustomed to them.

Women aren’t the only ones left reeling from grief and unable to get their financial bearings. Claudia Shilo, a CFP and CPA with Ballentine, Finn, & Co. in Wolfeboro, N.H., says she advises a male client who lost his wife in his mid 60s. He was a successful businessman, but his wife, a home- maker, was the one who managed their day-to-day investments and worked with their brokers. Extremely distraught, he was unable to assume any financial responsibilities and would cry at the sheer mention of his wife’s name. The firm eventually referred him to a psychologist, and that was how he began to deal with the loss, Shilo says.

Sometimes it’s not so much that an estate plan is put in place and the unexpected happens. Sometimes, it’s death, itself, that can be the surprise—especially when it happens to someone young. Shilo says one woman came to her firm several months after her husband died of a heart attack at age 50. She had been referred by her estate attorney who was concerned about her investments. She had never paid any attention to the family finances, and was extremely distrustful of everyone around her, including her husband’s former investment advisors. Shilo’s firm took on the challenge of educating the woman while trying to gain her trust and get up to speed on the family’s portfolio.

“They had done essentially no estate planning prior to his death. The notion that he would die at such a young age was really never considered,” Shilo says. “I would say it took a year to a year-and-a-half before she felt things were under control.”

Shilo had another client with a substantial tech-based fortune who was diagnosed with terminal cancer while he was in his mid-40s. They had a year and a half to put his financial affairs in order. Knowing his wife’s habits, he put spendthrift provisions in place so that his estate wouldn’t be spent down too quickly. Although the precautions were instrumental in keeping the estate intact, his widow is living a much different lifestyle than she did when her husband was alive, and it’s been a constant struggle for the trustees to deal with all of the additional requests for money.

“Fast forward seven years, and this woman has since [been dating] an artist and has spent a large portion of her husband’s estate,” Shilo says. “We had contemplated that, but we really didn’t think it would happen.”

Advisors try to anticipate the worst that can happen, but it’s impossible to accurately predict how surviving spouses will live their lives or what their children will do. Shilo says that while her firm has helped numerous clients face difficult and unexpected situations, sometimes the clouds do have silver linings. “The children pull together in ways you never thought they would, and they become a much more close-knit family,” Shilo says. “Things can happen unexpectedly in good ways as well.”


Copyright © 2007 Charter Financial Publishing Network