Caren Chesler - Resume and Articles

May 2010 issue

Wills Torn Asunder

Second marriages can quickly turn the execution of an estate plan into a bitter court battle.

By CAREN CHESLER

There once was a man who married a woman much younger than him. They were married just one year when he died. Within days of his funeral, his grieving widow had a dumpster parked outside their home and she threw into it all the china, silverware and mementos associated with the man’s first wife and children. The problem was, the children of that marriage were still very much alive and would have wanted some of it.

“There was nothing in the estate documents that said, ‘I leave all my heirlooms to my children.’ And there was a daughter who would have loved to have had the china,” says Carol O’Neill, vice president in the wealth management group at Mechanics Bank in Walnut Creek, Calif. “She got her piece. The children got their piece. But it was the personal property I remember so vividly.”

There’s nothing that brings contention to the execution of a will like a second marriage. Sometimes second spouses take money for themselves and their own kids at the expense of their spouse’s first children. Sometimes, it’s the first spouse’s children who go through all kinds of machinations to make sure their stepmother or stepfather, and their kids, get nothing from the estate.

“Second marriages are a very common area of discord,” says George Meng, an estate attorney based in Upper Marlboro, Md.

Meng says the common scenario is that the husband has, say, three kids from his first marriage. He then gets divorced and remarries someone with whom he has no children. He’ll put a large portion of his estate into a trust that generates income off of which his second wife will live until she passes. The assets inside the trust will then go to the children from his first marriage.

But life is never that simple. Sometimes the second wife didn’t get along with the first wife’s children, or the children don’t believe the second wife should get anything from their father’s estate. And the battles over the estate begin.

“Sometimes this stuff gets to the point where there are actually physical threats or violence,” Meng says.

Estate planning professionals agree on one thing: Second marriages are one of the most challenging, confrontational, emotional situations they have to deal with, and the less planning done before the first spouse dies, the worse the situation will be.

Take the husband who leaves everything to his second wife because she says she would make sure his children were taken care of, and his wife simply reneges.

“She says the heck with this, I can do what I want, and she leaves everything to her own kids. That happens repeatedly,” says Patti Spencer, an estate attorney based in Lancaster, Pa. “The children have absolutely no recourse, and that’s very hard for them to swallow.”

Peggy Hoyt of Hoyt & Bryan LLC, family wealth and legacy counselors based in Oviedo, Fla., says she had one client who litigated against her stepmother for years because the stepmother was named as the successor trustee, and the woman wouldn’t share any of the money with her stepchildren. She paid it all out to herself.

“I think it’s more common than most people realize,” Hoyt says.

While trusts are hugely popular and are great estate-planning tools, they’re not foolproof, Hoyt says.

“Unlike wills, they require no court supervision. So where there’s no formal court supervision, there can be a lot of abuse,” she says.

As in a divorce, the battles that ensue when an estate plan is challenged can whittle an inheritance away to nothing, as the family is forced to pay out hundreds of thousands of dollars in legal fees. To avoid that, estate planners say clients should be very specific about where they want their assets to travel after they die. And if possible, place those assets there themselves, so there’s no question about their intent.

“Sharing the estate plan with all of the beneficiaries is something I always advise. You will find very quickly if they approve or disapprove, and you can make the adjustments,” says Dan Walker, president of Farmers and Merchants Bank in Long Beach, Calif.

With a second marriage, he says, there’s almost always a party who disapproves. Even if everyone used to get along, the children can turn against the stepparent when their real parent passes away, Walker says.

Some stepparents deserve that animosity because they have a sense of entitlement, Walker says. They are far more interested in their own well-being and retirement funds than with protecting the children of their spouse, he says.

“When they start acting like that, it immediately causes a battle for the assets,” Walker says. “You see the same thing among siblings, when the parents die and one of three children feels they are entitled to more than the others.”

That’s why it’s vitally important to have a clear estate plan delineated. Walker knew of one woman who was on her third marriage, and within a week of her husband’s death, all of his assets flowed into her checking account. There was no estate plan and nothing the children could do, and the wife saw no reason to remedy the situation.

“From a financial standpoint, she did very well,” Walker says.

But the key isn’t just to have a plan. It’s to have one that works. John Fraker, an attorney with Ainer & Fraker, an estate-planning firm in Saratoga, Calif., says he had a case in which a man with 23 properties went to a so-called “trust mill” on the advice of his CPA to set up a rudimentary trust. The trust was supposed to leave four properties to his second wife. The rest were to be evenly divided among his children and sister. But a trust is an empty vessel until it’s funded, and the properties were never titled in such a way that would land them in the trust. The result was that all 23 properties—which the man owned in joint tenancy with his second wife—went to his second wife because she was the surviving tenant. Fraker says when the wife met with her attorney and asked “How much do I need to give to the kids and sister?” her lawyer replied, “Nothing. This is 100% yours.”

“Obviously, the kids and sister were furious,” Fraker says. “They hired us to litigate against the joint tenancy transfer, and to get the assets back into the trust.”

Fraker says the kids got a lucky break. In happier times, the family was all together one day and someone videotaped the gathering and caught the father on tape making an offhanded comment about how he wanted all of his assets to be divided among his wife, children and sister. The admission was compelling because it was made casually and did not appear forced or coerced.

In the end, the wife acknowledged she knew her husband’s real intent: He wanted his estate to be split evenly among his family members. As a result, 18 of the 23 properties were placed in the trust. But by that point, there was so much rage between the children and their stepmother, the lawyers were negotiating anger rather than assets.

“That case went on for three to three-and-a-half years, and we won the judgment in the first year. The rest of the time was just screaming,” Fraker says.

A good estate plan must address everything—particularly assets that are notoriously controversial once the patriarch has passed on, such as a family business. It’s not uncommon for the husband to leave the business to his second wife so that she can live off of the profits while she’s still alive. He may then leave the day-to-day oversight to his children. But because the wife has no familial ties to the business, she may want to sell it. At the very least, she may not want to plow any more money into it.

“It’s a recipe for disaster,” says O’Neill at Mechanics Bank. “The child running the business is going to want to keep plowing the profits back into the business while the surviving spouse is going to want a certain income stream to live on.”

O’Neill says a husband, in this case, should simply purchase a life insurance policy and have his wife live off the income of that. He could then leave the business to the child who is operating it.

But stepparents haven’t cornered the market on greed. Sometimes it’s the stepchildren, who may not have thought much of their stepparent, that can be the problem. O’Neill’s firm is sometimes brought in as a corporate trustee after a family member was overseeing the trust, unsuccessfully. Sometimes the problem is that the stepparent was using the trust’s funds to maintain an opulent lifestyle. Other times, it’s because the children were made trustees and, fearing the assets would dwindle away to nothing, put their stepparent on a tight leash.

O’Neill recalls one instance in which the son was made trustee, and he told the stepmother she had to move out of the home in which she lived with his father and into a smaller house because, he asserted, she didn’t need so much space. When she refused, he cut her allowance so she couldn’t afford the upkeep on the property. At 81, she was going to have to start doing her own gardening. She was also going to be forced to sell some of her own assets in order to cover her living expenses—costs that were supposed to have been covered by income from the trust.

“We’re not talking about a gold digger here. This woman was married to his father for 25 to 30 years,” O’Neill says.

Having a good plan also means telling your family about it. Spencer says she knew of a man and a woman who got married, but because it was a second marriage, they hammered out a prenuptial agreement in which each of them would set up a trust that contained the assets they brought to the marriage. The surviving spouse would live off the income generated by those trusts, and when they died, the trusts’ assets would revert back to their respective children, essentially returning the property each of them owned before the marriage to their own children.

At least that was the plan. But unbeknownst to the wife of 17 years, the husband took all of his assets—his life insurance policy, his house, everything—and put them in joint tenancy with his children. The result was that when he died, the assets did not go through any will or trust but rather passed directly to the surviving tenants, who were his children. The wife wound up suing, and the estate ended up in litigation.

“The wife didn’t know until he died that he’d changed the title on everything,” Spencer says. “That’s a failed estate plan. When you do a plan and you end up in court a couple of weeks after the funeral, that’s a failure.”

Spencer says the husband apparently regretted signing the prenup and feared he hadn’t made enough provisions for his children. The children are then in the position of having to wait until their stepmother dies before they get their inheritance. Some don’t like that, Spencer says.

“Often the motivation for the estate plan comes from the children because they see the scenario where the stepmother or stepfather gets all the assets and forgets about them,” he says.

If divvying up the assets of a second marriage weren’t difficult enough, it gets even more nettlesome in community property states such as California. In community property states, there’s a spouse’s “separate property” and there’s the “community property,” and while a deceased spouse can give their separate property to anyone tshe wants her—like her kids from her first marriage—she can only control half the community property. The surviving spouse controls the other half.

“State law says you can dispose of your half of the community property however you want but you can’t control your spouse’s half,” says Scott Grossman, an estate attorney in Riverside, Calif.

Does the asset distribution always end in tears when a second marriage is involved? Not always, but often, Grossman says.

“Money changes people, in my experience. I can tell you I’m seeing more of these cases as we get to the generation that didn’t frown on divorce and remarriage,” Grossman says.