Help clients address the “what ifs” before the “I dos.”
Tying the knot. Settling down. Getting hitched. Taking the plunge. Regardless of what you call it, getting married is one of life’s great events. For estate planners, the marriage of a client or a client’s family member traditionally meant one thing: the preparation of a prenuptial agreement (prenup). But, within the estate-planning world, there’s a shift taking place. Planners are moving away from the typical financially focused, quantitative estate plan toward a more comprehensive, qualitative planning process that acknowledges how important healthy family relationships are to sustaining a family’s wealth long-term.1 Many call it the “human capital” factor, and when it comes to a new marriage in the family, making an upfront investment into the new relationship can reap a great return down the line.
Adding a person to a family through marriage can be a great blessing, but as many people unfortunately find out, it can also be a challenge. For families with great wealth, the consequences of not proactively planning for the addition of a new family member can be especially costly. Estate planners, therefore, must be prepared to guide clients through the issues that will inevitably emerge as a result of a marriage in the family. From wedding planning and prenups to the assimilation or “onboarding” of in-laws into the family, a good estate planner will be equipped to help clients address all of the “what ifs” before the “I dos.”
Weddings and Engagements
In the United States, wedding planning is a $55 billion industry.2 The average wedding costs $35,329, and for high-net-worth (HNW) families, wedding expenses can reach much higher.3 Taking into account the sheer cost of the event, it makes sense to include an estate planner in the process. And, while some estate planners may not mind being asked to tag along for a cake testing, an estate planner’s role will obviously differ greatly from that of a professional wedding planner. The ultimate goal of a wedding planner is to design the perfect event down to the very last detail. An estate planner, however, should strive to help maintain the stability of the family throughout the planning process because long after the rings have been exchanged, relationships will be the glue holding the family together.
One of the most important things an estate planner can do is provide an objective voice of reason. Stress tends to bring out the worst in people, and planning a wedding is often as stressful as it is exciting. Parents may find themselves having to choose between practicing financial prudence or providing a child with the wedding of his dreams. Moreover, there can also be added pressure involved when dealing with the future in-laws. Are both families of equal means? Does one side have significantly greater wealth than the other? Who will pay for what? And, who gets to call the shots? Even under the most amicable of conditions, these questions are difficult—and often uncomfortable—to discuss.
Traditionally, the groom’s parents pay for the rehearsal dinner and the honeymoon, with the bride’s parents paying for everything else. Some Orthodox Jewish families practice the FLOP rule: the groom’s side pays for flowers, liquor, orchestra and photography. Regardless of traditional norms, it’s becoming increasingly common for the two families to split costs evenly, and with adults marrying at a later age, many brides and grooms have the means to pay for some, if not all, of the wedding themselves. This more modern approach, however, can lead to tension over decision-making authority. Some may be tempted to follow the other golden rule: he who has the gold rules. Estate planners should be there to remind clients that although it might be easy to approach the issue like a business negotiation, the rules for wedding planning are different and, with the stability of a family hanging in the balance, the stakes are much higher. When it comes to weddings, even the most trivial of decisions can become a catalyst for relationship-damaging disagreements. To successfully protect a family’s human capital, an estate planner must be able to help identify and diffuse hot-button issues before they begin to cause friction.
One frequently disputed aspect of a wedding is the invitation list. Because the budget and the chosen venue typically dictate the number of invitations allowed, the real problems tend to emerge after the number is set. For example, 400 people may sound like a large wedding until you break down the numbers. If the bride gets 200 (which equates to 100 couples), then once you account for invitations to family and invitations to friends of the bride (and their guests), the parents of the bride may actually be left with a small number of invitations to divide among their personal friends, which can be a tremendous source of angst as parents must explain to friends and colleagues why there isn’t room for them at a wedding that will have 400 attendees. These types of issues can strain the relationship between parents and child, and estate planners can assist by facilitating open and productive communication. In some cases, the parents may simply need to be reminded that the wedding is ultimately about the child and his future spouse, but such advice is typically better received if it comes from a trusted, objective family advisor and not from the child himself.
That pendulum, however, can swing too far in the other direction, and estate planners should be able to determine when a client’s child is causing the planning to spin out of control. In fact, one of the most profound principles a planner can impress upon clients is not to allow the wedding to become bigger than the marriage. Helping clients keep the wedding in perspective can reduce strain on relationships and prevent the planning from going significantly over budget.
Budget guidance, itself, can be a practical way to assist clients in the planning process. Before any planning decisions are made, there should be a clear understanding regarding the amount of money that will be available to spend. Many parents like to give their child the option of foregoing the big wedding and taking the available “wedding money” to use for a down payment on a home. If the child chooses to have the big wedding, one helpful strategy is to have the bride or groom list their three top priorities for the wedding. Then, if budget concerns arise, parents will know what aspects of the event are most important to their child prior to making cutbacks. For example, if the bride’s top priorities are her dress, the music and the photography, then compromises will be easier to reach on other items like flowers, cake and dinner menu selections.
Some say that paying for a wedding is like buying an expensive car and immediately driving it off of a cliff, but for those who are within budget, it’s helpful to remember the significance of the event. A wedding is a celebration of the joining of two lives. The memories formed at a wedding become part of the family’s legacy, and generations down the line will likely flip through a photo album and catch a glimpse of their family history. For estate planners, a marriage in the family of a client is an opportunity to shore up the foundation on which future generations of the family will be built.
In many ways, planning a wedding is much more taxing than even the most complex of business transactions. Beyond the financial cost, there can also be a hefty emotional toll. It isn’t uncommon for clients to have little to no relationship with their child’s future in-laws, so planning an expensive wedding together is comparable to two strangers entering into a business partnership. Accordingly, estate planners should be prepared to coach clients through conflict for the sake of the health of the family, especially when the problems seem to originate between the bride and groom. Certainly, some friction can be expected in any relationship during stressful times, but estate planners, as objective bystanders, can be useful in helping families differentiate between normal strains in an engagement and red flags that may be indicative of a deeper, “pack your bags” issue.
Regardless how tense the situation becomes during wedding planning, when the wedding is over, parents need to set aside any hard feelings and support the new couple. The parents’ relationship with the married couple (and future grandchildren) is more important than trying to settle any unfairness or holding a grudge. Put those feelings behind and move on.
When a bride and groom do decide to call off the wedding, there’s one issue that can cause significant controversy: Who gets to keep the engagement ring? While the exact answer to this question depends on the state where the parties reside, the prevailing rule treats the ring as a conditional gift, meaning that courts will treat the ring as being gifted on the condition that the couple marry. In the event the couple doesn’t marry, the ring must be returned to the donor. Though a majority of states follow this rule, some states provide an exception for circumstances in which one party was clearly at fault for the breakup of the engagement. If the ring holder can prove the donor was at fault for the ending of the relationship, then the donor isn’t entitled to get the ring back. Of course, if the couple agrees in writing that the ring must be returned should the wedding be called off, then proof of fault is irrelevant.
Prenups
The grim statistics for a successful marriage are well known—around half of first marriages in the United States end in divorce.4 Given that statistic alone, it’s irresponsible for families with great wealth to allow a child to marry without protecting assets in case of a divorce. In addition to high divorce rates, people are also choosing to marry at a later age. The median age for a first marriage is 25.8 for women and 28.3 for men.5 When people marry at an older age, the relationship will likely look very different from a marriage that started with a “young” bride and groom. Social scientist Charles Murray refers to these two types of relationships as “merger marriages” and “start-up marriages.”6 Adults in their late 20s (or older) will have had several years to establish a career, accumulate personal assets and thus bring more to the marriage—thereby creating a merger marriage between two successful adults. On the other hand, a marriage between two younger adults will more closely resemble a start-up business, with lean beginning years full of hardship and hope.
Both types of marriages have their own advantages and disadvantages. Start-up marriages, for instance, may begin with more challenges, but those challenges can also bring the couple closer together and provide a solid foundation of memories that can be drawn on in future times of trouble. Conversely, merger marriages may allow the couple to have more financial freedom and less career-related stress, but the couple may also be more set in their ways and have a harder time forming a united front after having achieved success independently of their partner. With merger marriages becoming more and more common, couples have more to lose financially in the event of a divorce. The most effective way to avoid or diminish the many problems that arise during a divorce is to come to an agreement well in advance of the marriage, before any issues arise.
Even if one party desires to have a prenup, broaching the conversation with a future spouse can be a delicate matter due to the stigma that prenups are essentially a way to pre-plan for an inevitable divorce. Regardless of how objectively reasonable it is to have a prenup in place, discussing a division of assets tends to evoke
emotions that dampen the excitement of an engagement. These obstacles, however, can be diminished with foresight and preparation, and a wise estate planner will have addressed the issue with clients long before the need for a prenup arises.
The best way to alleviate some of the awkwardness of the prenup process for an engaged child is to have clients establish a “standard family practice” that all children have a prenup. A basic form can be constructed that can serve as the basis for a future negotiation. Some families even include provisions in the parent’s estate plan that allow for distributions to be withheld from children who marry without executing a prenup. With a standard family practice in place, an engaged child will have an easier time explaining the need for a prenup to a future spouse.
If an individual is going to enter into a prenup, he should follow some recommended practices for the agreement to have a greater degree of enforceability. The Uniform Premarital Agreement Act (UPAA) provides a basis for states to determine how and when a prenup should be enforced.7 One potential challenge to a prenup is if the agreement wasn’t executed voluntarily. It’s important for the discussions about the prenup to have begun well in advance of the wedding date because a narrow period of time between when the prenup was signed and the wedding date could be used as evidence to support a claim of involuntary execution. Other factors that could support a claim of involuntary execution include the parties’ mental capacity, education levels and a lack of separate counsel.
Another potential challenge to the enforceability of a prenup is that the agreement was unconscionable at the time it was executed. In determining unconscionability, a court may look to how the agreement affects the economic circumstances of the parties and the conditions under which the agreement was made.8 To strengthen the enforceability of a prenup against such a claim, each party should be provided a fair and reasonable disclosure of the property or financial obligations of the other party or an adequate waiver of such disclosure. The UPAA places the burden of proof on the party alleging that the agreement isn’t enforceable. However, some states have placed the burden on the party who’s relying on the agreement, and other states have chosen a middle ground, stating that if a spouse is receiving disproportionately less than the other spouse, the other spouse bears the burden of proof of showing adequate disclosure.9
Best practices for a prenuptial agreement include: (1) each party should have independent legal representation; (2) discussions about the prenup should begin well in advance of the wedding date; and (3) there needs to be a full disclosure (or adequate waiver of full disclosure) of all asset and liability information for both parties. It’s also important to review the governing state law to verify that any required acknowledgments or waivers are properly addressed within the prenup.
When it comes to the details of a prenup, state laws on marital property must serve as the framework of the document. There are, however, many different considerations, both financial and non-financial, that should be addressed when constructing a prenup: (1) identifying assets each brings into the marriage; (2) specifying in community property states the manner in which the income of each party’s separate property will be classified; (3) characterizing wages, salary or other compensation in community property states; (4) assigning certain financial responsibilities like housing costs or schooling expenditures; (5) filing of income tax returns; (6) deciding on the disposition of retirement plans; (7) treating debts of a spouse; (8) dividing assets on death or divorce; (9) dealing with the issue of spousal support on divorce; and (10) handling other non-financial matters that are important to the relationship such as childrearing or religious upbringing of future children. Although the specifics of each will vary significantly from couple to couple, a solid agreement will be comprehensive and forward-thinking.
Another prenup planning concept with which estate planners should be familiar is the “reverse prenup,” which is essentially an agreement reached in anticipation that a wife may one day give up her career to raise a family. A typical reverse prenup establishes a formula payout that compensates the wife based on the number of years the parties are married. For women with successful careers, a reverse prenup provides a safety net in the event the marriage fails after she’s left the workforce.
Prenup Alternatives
The use of prenup alternatives can alleviate much of the pressure surrounding the drafting of a prenup, and in some cases, may remove the need for a prenup altogether. These prenup alternatives include irrevocable trusts and entity planning, and estate planners must recognize that it’s never too soon to incorporate one or more of these strategies into the client’s estate plan.
Irrevocable trusts. An irrevocable trust, if carefully drafted, can allow wealth to pass down from generation to generation without future spouses having any claim to the assets of the trust. Ideally, parents will direct that all lifetime gifts and any assets that pass at death to their children or grandchildren should be held in an irrevocable trust. Because assets held in a properly drafted trust are considered non-marital assets, they aren’t subject to review or division by a family court in the event of a divorce. Furthermore, a beneficiary of the trust needn’t have his future spouse sign any agreements with respect to the trust nor does the future spouse necessarily have to know of the provisions of the trust.
For single adults who’ve accumulated their own assets, a self-settled irrevocable trust provides another prenuptial estate-planning option. Some jurisdictions (Alaska, Delaware and Nevada) allow creditor protection to attach to self-settled trusts. The trust, which should be created and funded prior to marriage, will remove assets from the marital context, thereby preventing them from becoming subject to review or division by a family court.
Alternatively, individuals can enter into a transaction with a 678 trust (named after the Internal Revenue Code Section on which it’s based and also known as a “beneficiary defective trust”) created by a third party for their benefit. When non-marital assets are sold to the 678 trust in exchange for a promissory note, the assets in the trust will continue to be characterized as non-marital property, post marriage, but the resulting promissory note and/or the interest payments will acquire some degree of marital characterization post marriage.
Overall, the use of irrevocable trusts offers significant advantages not afforded by traditional prenups. Trusts, for instance, can be drafted to allow flexibility to provide for future spouses and are typically less expensive to draft than prenups because they aren’t negotiated between the parties. Moreover, whereas prenups terminate on the death of a spouse, trusts can be drafted to continue long after the primary beneficiary dies. Irrevocable trusts are also far less likely than prenups to be subjected to legal challenge, and if the characterization of assets in a trust is questioned, legal precedent tends to favor respecting the integrity of the trust. Despite this protection afforded trusts, however, there are specific drafting considerations with which estate planners should become familiar in light of some recent court decisions.
In the Massachusetts case of Pfannenstiehl v. Pfannenstiehl, the husband in a divorce proceeding was one of several beneficiaries of a pot trust established by the husband’s father.10 Although the husband had received regular distributions from the trust throughout his marriage, the distributions stopped immediately prior to the initiation of divorce proceedings. The lower court and the Massachusetts Appeals Court held for the wife, finding that due to the fact that trust distributions were subject to an ascertainable standard and that the husband would receive a share of the trust assets on termination of the trust, the husband’s interest in the trust had vested and thus could be considered a marital asset.11 Ultimately, the Massachusetts Supreme Judicial Court reversed the decision and found that because the husband was one of 11 beneficiaries and the trustees were instructed to consider the long-term sustainability of the trust prior to making distributions, the husband’s interest was too speculative to be considered a marital asset. Note that while the trust assets weren’t deemed to be includible in the marital estate, the court noted that the trust could be seen as providing an expectancy of acquisition of future assets/income and thus could be considered in deciding how to divide other property subject to division.
For those wishing to take an extra measure of precaution, there are additional steps estate planners can take in drafting irrevocable trusts.12 First, consider avoiding the use of ascertainable standards and instead provide for a trust protector (or special trustee) to have authority to amend the trust and direct or veto distributions. Second, include a special power of appointment (SPOA)—or the power to create an SPOA—to a third party who can move assets to another trust with similar (but more appealing) provisions. Finally, in some cases, it may be prudent to include a forfeiture provision that requires a beneficiary’s interest to terminate in the event such beneficiary is named as a defendant in a lawsuit or is a party to a divorce proceeding.
The Texas case of Sharma v. Routh, an appeal of a divorce decree, analyzed the issue of the characterization of the corpus of the trust and the impact of that determination on the characterization of the distributions from the trust.13 In Sharma, the husband was a beneficiary of two trusts created on the death of his first wife. He was also the trustee of both trusts and had power to take distributions of the trust corpus subject to an ascertainable standard (that is, health, maintenance and support, considering other resources available to the beneficiary). The trial court determined that the trust corpus was the husband’s separate property and therefore characterized the income received from the trust as community property subject to division. The Texas Appeals Court, in overturning the trial court, held that the trust corpus wasn’t owned by the husband because he didn’t hold a present possessory right over the corpus under the trust document. Because the husband didn’t own the corpus, distributions of the income received by the husband were gifts, which are non-divisible separate property under Texas law. Thus, under Sharma, the trust structure protected both trust corpus and distributions of trust income.
Entity planning. In some states, there are advantages to placing assets in an entity, such as a limited liability company or limited partnership, in contemplation of a future marriage to prevent future growth, in one form or another, from being divisible on dissolution of the marriage. For example, in Texas, the growth of value of assets owned in a partnership, as well as income earned but undistributed, aren’t divisible on divorce. Yet, this type of planning may not be as effective in other states. For example, income from separate property remains separate property in California, so this planning may not be necessary for this purpose. In Colorado, on the other hand, any growth in value of a partnership interest is considered to be marital property so a new entity may not help at all. Thus, it’s important for this entity planning opportunity to be reviewed on a state-by-state basis. For any state that does allow the growth and income in a partnership or similar entity to remain in a form not divisible on divorce, it may be prudent to provide adequate compensation to the community or marital estate to mitigate against a potential claim for a right of reimbursement by a divorcing spouse. While a person is allowed to expend a reasonable amount of time and effort in managing and preserving his separate property assets, if there are significant services and talents exercised on behalf of a party without adequate compensation to the community or marital estate, a spouse could potentially make a claim for reimbursement to the community or marital estate.
While there may be some scenarios in which alternative premarital planning completely eliminates the need for a prenup, in certain circumstances, it will always be best to have a prenup in place. Those entering a second—or multiple—marriage often carry obligations or duties to previous spouse(s) that will need to be addressed. A child from a prior relationship will also necessitate a prenup due to issues regarding financial treatment of the stepchild and future homestead rights of a surviving spouse. Finally, if either party to a marriage has a career with increased liability (for example, neurosurgeon), a prenup, in conjunction with other asset protection planning, may be advisable to provide an added layer of protection for the other party’s property.
Onboarding In-laws
Estate planners should be vigilant in looking out for issues that have the potential to threaten the human capital of the family, and while many feel comfortable guiding clients through the prenup process, too many estate planners fail to take the next step of teaching clients how to effectively incorporate new in-laws into the family.
As the saying goes, you can choose your friends, but you can’t choose your family. The idiom often rings especially true for in-laws. Even in circumstances in which a family and the in-laws within it enjoy strong relationships, there’s no getting around the fact that the in-laws grew up in a different home, with a different set of rules and, on some level, different values. And in many families, those differences become a source of tension. But, because human capital is vital to a family’s success, estate planners must have planning strategies to teach families the best ways to onboard in-laws and avoid problems that threaten the stability of the family. After all, the in-laws are helping to parent the next generation of the family.14
For HNW clients, a central issue within the family is often how and to what extent in-laws should be included in the family’s wealth-related affairs. Traditionally, the common approach was to largely exclude in-laws from discussions regarding the family business or wealth management, but from a practical standpoint, it becomes evident pretty quickly that an in-law will know everything that goes on within the family. The information will simply be filtered through his spouse, which can, at times, lead to a skewed view of the family and may help fuel misinformation and miscommunication. The more modern approach is to manage communication flow by including in-laws in all family affairs.
An estate planner has the ultimate goal of maintaining the wealth of a family for generations to come, and accordingly, planners should take an active role in helping clients establish policies that foster good relationships and promote family development and success. Because entering a new family can be overwhelming, estate planners should coach families to “immediately acculturate new in-laws, helping them to feel like valued members of the team.”15 Acculturation can be accomplished through the use of two big steps: (1) sharing information, and (2) getting involved in the family.16
Sharing information is a significant part of making the in-law feel included. Often, in-laws find themselves in a predicament in which they appear disinterested if they fail to ask enough questions but appear nosy if they ask too many questions.17 Granting in-laws a backstage pass to the inner workings of the family will ease anxiety and make an in-law feel like less of an outsider. Estate planners should also encourage families to allow in-laws to participate in family affairs, with such participation primarily being accomplished through the implementation of a family governance structure.
A governance structure will help accomplish many tasks such as: (1) communicating family values and future vision, (2) keeping family members informed of family business, (3) communicating decisions that affect family members, (4) establishing open channels of communication to allow family members to provide feedback and share ideas, and (5) facilitating family meetings for group decisions.18 For in-laws, the primary goal of a governance structure is to get them to buy into the family vision. If the in-laws feel included, valued and heard, they’ll be much more likely to be emotionally invested in the outcome of the family. Additionally, estate planners should stress the importance of fun. Relationships within a family will be much stronger if they’re built on shared experiences and not just a shared name. Families should schedule events that are free of business and devoted entirely to building up relationships within the family.
Any healthy relationship requires some work and, typically, a lot of compromise. For some families, it may seem unnatural to treat in-laws as part of the inner circle, but the benefits of doing so should far outweigh any momentary unpleasantness. Families don’t remain stagnant—they change and grow, and estate planners must be prepared to help with the growing pains. A successful transfer of wealth from generation to generation is a lofty and admirable goal, but within the estate-planning world, there should be more emphasis placed on preservation of the family. Estate planners must seize opportunities like engagements and weddings to address the human capital factor and pay a little more attention to the “family” in “family wealth.”
Endnotes
1. Using the labels “qualitative” and “quantitative” in this sense was introduced by James E. Hughes, Jr., in his book, Family Wealth—Keeping It in the Family, at p. 11.
3. http://money.cnn.com/2017/02/02/pf/cost-of-wedding-budget-2016-the-knot/index.html.
4. National Health Statistics Reports, “First Marriages in the United States: Data From the 2006-2010 National Survey of Family Growth” (March 22, 2012).
5. Ibid.
6. Charles Murray, “Advice for a Happy Life,” The Wall Street Journal (March 30, 2014), www.wsj.com/articles/advice-for-a-happy-life-by-charles-murray-1396045908.
7. “Comment, The Uniform Premarital Agreement Act and its Variations Throughout the State,” Journal of the American Academy of Matrimonial Lawyers, Vol. 23 (2010), at p. 355.
8. Ibid., at p. 358.
9. Ibid.
10. Pfannenstiehl v. Pfannenstiehl, 475 Mass. 105 (2016).
11. Ibid.
12. Alexander A. Bove, Jr., “Pfollowing the Pfamous Pfannestiehl Case,” Steve Leimberg’s Estate Planning Newsletter (Aug. 18, 2016).
13. Sharma v. Routh, 302 S.W.3d 355 (2009).
14. William S. Lockington, “In-Laws Don’t Need to Be Outlaws,” presentation at The Kawartha Family Business Group (Sept. 24, 2007).
15. “In-Laws or Outlaws? Making Siblings’ Spouses Part of the Team,” The Family Business Consulting Group (May 28, 2013), www.thefbcg.com/in-laws-or-outlaws-making-siblings-spouses-part-of-the-team/.
16. Supra note 14.
17. Patricia Angus, “Family Governance: A Primer for Philanthropic Families,” National Center for Family Philanthropy (2004).
18. Christian G. Stewart, “The Family Business Constitution: A Roadmap for Business Continuity & Family Harmony” (April 2010), www.familylegacyasia.com/whitepaper_pdf/Ten%20key%20insights%20into%20making%20a%20Family%20Constitution.pdf.