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“Plan Early to Avoid Conflict with the Stepkids”

By Matthew S. Dana

When parents start dating after a divorce or after the death of a spouse, conflicts between a step-parent and their step-children are a natural part of the equation. By getting married in their later years, a parent generally feels that the marriage will add to their quality of life, while a child often feels that their relationship with the parent, and possibly their inheritance, are threatened.

In an ironic twist of fate, adult children often will second-guess their parents’ choice of dating partners. Adult children often will ask questions such as: “Isn’t he too old for you, Mom?”, or “Doesn’t she just want your money, Dad?” One obvious question, that no one wants to articulate at the risk of sounding crass, is: “If you marry, what happens to your assets, both while you’re living and when you die?”

Because of the social stigma of questions that relate to a person’s money and death, adult children usually are left out of the loop on financial and estate planning matters. The new couple is firmly entrenched in each other’s daily activities and finances. The kids are on the outside looking in when the newlyweds restate their estate plans and make changes to their finances and distributions of property. The adult children often perceive that it will be easier to attempt to alienate the fiancé or spouse, rather than broaching these difficult subjects. In the beloved fairy tale “Cinderella”, her step-mother inherited, and subsequently squandered, the family estate. All the while, Cinderella played the role of the dutiful step-daughter. Fortunately for Cinderella, justice was done when Prince Charming made her his queen, and made the step-mother a palace servant.

In reality, it is all too common for children or a new spouse to be disinherited unintentionally, and it is all too easy to take actions that have a legal effect that is the complete opposite to the intended use and distribution of a person’s assets. In fact, the legal effect of a marriage causes very significant changes to the disposition of a person’s property (see Arizona Revised Statutes Section 14-2301 regarding a premarital will as an example). Even a routine deposit of a paycheck, payment of expenses, or addition of a joint owner to bank accounts, can have a dramatic effect on the nature of property and the distribution of property under a person’s estate plan. Below is a list of steps that responsible parents should consider to preserve the relationship between the parent’s children and new spouse and to ensure that their testamentary wishes are observed upon death. Due to the complexities and formalities involved, and because each person’s situation and wishes are different, it is imperative that the parents obtain legal counsel before changing any aspect of their finances and definitely 1-2 months before the marriage occurs.

Reaffirmation or Restatement of Estate Planning Documents. Either during the engagement or after the marriage occurs, it is critical that the spouses reaffirm or restate their estate plans. Failure to do so may result in partial or complete failure of the testamentary wishes of the new spouses and of their estate planning documents in effect at the time of the marriage.

Prenuptial Agreement. For those who are young and in love, or “not so young” and in love, any mention of a prenuptial agreement may dampen the passion of a budding relationship. Many people erroneously categorize a prenuptial agreement as a “divorce plan,” and no one wants to think about divorce before they’re even married. Even with divorces becoming more and more common, death is much more certain (although the timing is not). A well-drafted prenuptial agreement will set forth the expectations of the husband and wife (and of the children) whether the marriage ends due to divorce or death. The prenuptial agreement will provide clarity with regard to the character of property as community or separate property, the amount of alimony, rights to certain statutory allowances and retirement benefits, and the burdens of income taxes, property taxes, and estate taxes. Additionally, it will give guidance to third parties in the event that one spouse becomes incapacitated with regard to expenses that are intended to be joint, as opposed to the expenses that should be borne exclusively by one spouse.

Community / Separate Property Agreement. Whether before or after a marriage, a husband and wife may agree which of their assets are part of the community, and which assets are separate property. Arizona law has a presumption that all assets owned by a husband and wife are community assets, unless there is evidence to the contrary. The spouses may agree as to which debts and assets are separate and which are community, and that agreement will serve as evidence of the nature of the property.

Revocable Separate Property Trust. Spouses often choose to set up joint trusts to plan their estates. This practice should be questioned, especially when the spouses have children from prior marriages. A separate property trust will permit each spouse to dispose of their separate property in the ways in which they deem appropriate, rather than feeling compelled to come to an agreement with one’s spouse as to what will happen after the death of the first spouse, and then after both spouses are deceased. Further, separate property trusts add a significant amount of clarity to the question of the nature of the property (i.e. community as opposed to separate), and of the types of expenses that are approved in the event of incapacity of either or both spouses. A separate property trust may contain language related to an independent fiduciary and unitrust distributions (as set forth below), which will provide additional mechanisms which hopefully will serve to preserve the relationship between the surviving spouse and her step-children, and to fulfill the testamentary wishes of the deceased spouse.

Independent Fiduciary. The surest way to disagreements, hostility, and a court battle is for one spouse to nominate his or her adult children to manage trust property for the benefit of the surviving spouse, or to have the surviving spouse manage trust property for his or her own benefit. By definition, a trustee is trusted with a significant amount of discretion in management of property, and often in its distribution. In many cases, the appropriate course of action is to nominate an independent third party (i.e. a financial institution or a licensed fiduciary) to manage any trust for the benefit of a surviving spouse.

Unitrust Provisions for the Surviving Spouse. Estate plans often set aside an amount in trust for the benefit of a surviving spouse, to be managed by a trustee, with the remainder to be distributed to the surviving children of the deceased spouse. When a trustee is given discretion with regard to the distribution of property, that trustee’s actions generally are not subject to challenge as long as they are within the standard set forth in the trust agreement for exercise of such discretion. A unitrust provision provides the surviving spouse with a percentage of the trust’s value on an annual basis, rather than leaving the amount of distributions to the discretion of the trustee. This tact gives much more clarity to the rights of the surviving spouse, and much less likelihood that the surviving spouse or children will have to litigate to protect their respective rights under the trust agreement.

Those who get married later in life take on significant risks, in more ways than the typical couple understands. These risks impact their property and quality of life both for their later years, as well as their testamentary wishes. Proper planning can reduce or eliminate many of these risks. If a late-life marriage is being contemplated in your family, it is advisable to seek out independent legal advice for both spouses, so that at the very least, both spouses will approach the marriage being informed about the legal risks and challenges that are ahead. At the very least it will keep the adult children from chasing everyone they see walking around with the proverbial glass slipper.