Estate Planning Lessons from the Rich and Famous

Despite the jokes on late night TV, the continuing saga of Anna Nicole Smith and the pending birth of Vice President Cheney’s sixth grandchild by a lesbian daughter point out that “Paternity” can affect any family and any estate plan. Without passing judgment on some modern beliefs or lifestyles, estate planning must now take into account such future family possibilities as gay unions, cross culture or same sex adoptions, sperm banks, stem cell research and children born or raised outside conventional marriages.

“Paternity” means the acknowledgment of a parental relationship. Paternity can be a very serious estate planning matter when that acknowledgment is disputed or when it involves an heir that is not what the parents or grandparents may have expected.

Following are some general rules of paternity that apply in most states:

1. A husband is presumed to be the father of the children born to their wife;

2. Children are provided certain limited inheritance and support rights, but only until they attain the age of majority;

3. Both biological and adoptive parents are free to exclude or disinherit all or some of their children (subject to Rule # 2 above);

4. If a written and valid estate plan does not exist, the state law of a decedent’s legal residence governs the order of inheritance (known as “intestate succession”). The intestate succession laws of most states provide that all born or adopted lineal descendants are the rightful heirs of the decedent; and

5. A written and valid estate plan can exclude or place conditions on inheritance by both known and unknown heirs, provided no law is broken and the estate plan does not violate “public policy”. Your guess is as good as mine as to what laws may exist or what public policy will be in the future.

Following are examples of circumstances that exist in many families and where ignoring paternity or the difference among heirs could have unintended results:

FAMILY BELIEFS:

John and Mary are active members of their church and have bestowed the same beliefs on their only child, Jim. John and Mary’s estate plan provides for outright distribution to Jim, or if deceased, to three grandchildren born during son’s Jim’s prior marriage. One of the grandchildren has recently renounced the family and joined a satanic cult. To make matters worse, son Jim has been diagnosed with a terminal illness.

THE “MISSING” GRANDCHILD:

Walt and Sarah have three sons and six grandchildren. Unfortunately, the oldest son’s marriage ended when he was sent to prison for stock fraud and the daughter in law was awarded sole custody of their only child. The daughter in law has since moved out of state and refuses to allow Walt and Sarah any contact with this grandchild. Walt and Sarah has typical Wills that divide their estate equally among their three sons, “per stirpes” (which means to the surviving children of any deceased son).

THE “IMPAIRED” HEIR:

Thanks to the family business, Widow Sally and both of her daughters (see Mary and Sarah above) are very wealthy. On the advice of her estate planning attorney, Sarah has created “generation skipping” trusts that provide for some direct distributions to each of her current or after born grandchildren in order to reduce or at least delay the amount of estate taxes to be paid in the future. Besides the one great grandchild who has recently joined the satanic cult and another great grandchild who is estranged from the family, there is a family history of substance abuse and mental disorders.

As these examples show, parents and especially grandparents may need to create special safeguards such some heirs need to be treated differently than other heirs. In addition to dealing with known circumstances, parents and grandchildren may need to also address the possibility of unknown circumstances as both scientific and social changes continue in our society.

Following are some of various recommendations that the families described above may want to consider in their estate plans:

1. Rather than providing for equal division and outright distribution, some heirs are better protected by extended trust arrangements managed by am independent Trustee. If circumstances later change and the same heirs gain maturity or stability in their lives, then the Trustee can be authorized to “loosen the reins”.

2. Despite instructions to make distribution at a certain age, it may be appropriate to permit a Trustee to delay or modify the form of that distribution should an heir then be afflicted with a medical condition or be under threat of a legal attachment by creditors.

3. Some future heirs may benefit from a “carrot and stick” form of distribution that ties the amount they will receive to the amount fair earning through gainful employment.

4. In those cases where an independent Trustee has been designated, one or more “Trust Protectors” should also be designated. Such Trust Protectors are typically family members or close friends not burdened with the duties of Trustees but who have the authority to mediate disputes, approve or disapprove distributions or select a substitute independent Trustee in the future.

5. As a final recommendation, grandparent should consider giving their own children the limited ability to modify those shares of an estate that will be or maybe payable to grandchildren. If properly drafted, this limited power has no tax consequences, but does enable a family to look further into the future.

On final bit of advice – if you intent to exclude someone as a beneficiary of a Will or Trust, language along the following lines is appropriate: In providing for the foregoing division and distribution of my estate, I have in mind my son, Harry, but for whom I expressly chose to make no provision under this Will. Leaving a token $1 can create headaches for those responsible to administer the estate, by the same token, failing to mention a person who has been listed as a previous beneficiary or would normally be a beneficiary could raise concerns about over sight, competence, or undue influence.