Estate planning with couples of all wealth levels

5 challenges of estate planning with couples

February 13, 2023 9:44 PM

Your client may think they know their spouse or partner better than anyone.

But when it comes to estate planning, many couples are in for a surprise.

"You don't realize how much your spouse may not like your sister until that person is being potentially named as the guardian of your children," said Katie Carlson, the head of wealth strategy for Bank of America Private Bank.

Discussing important decisions like who to name as guardian of children, how and when to give assets to heirs and even what charities to donate to can all spawn surprising, and sometimes volatile, disagreements.

"That's the one of the largest challenges that we see — that couples aren't quite as in sync as they thought they were," Carlson said.

Facilitating harmonious transfers of wealth within families is at the top of many advisors' priority lists, as industry research firm Cerulli Associates projects over $84 trillion of assets will change hands by 2045.

Spouses play a central role in this process. A Cerulli report released Monday shows that among investors with between $100,000 to over $2 million of investable assets, nearly half, or 48%, consulted their spouse during estate planning. That's more than any other person contacted, including a financial advisor, which 46% of respondents cited, and lawyer, which 19% mentioned. A mere 11% of respondents said they included their tax accountants.

"Millionaires are more likely to consult a financial advisor, while those with less than $1 million in assets are more likely to work with their spouses," the report said.

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Financial advisors should hold estate planning conversations with both spouses or partners in a household, alongside their legal expert, Cerulli wrote. Doing so "can be a key moment for the advisor to meet a client's spouse and potentially build a relationship that carries over along with the inheritance."

We spoke with three experts in estate planning about how to navigate these high-stakes conversations with couples at all levels of wealth. Below are five of the most common challenges they see, and tips on how to tackle them.

Beware the 'I love you' will

"Oftentimes, you see very kind of standard or simple wills, oftentimes actually referred to as an 'I love you' will, where a spouse or partner will pass all of their assets to the other partner." Carlson said.

Kathryn "Katie" Carlson, the head of wealth strategy for Bank of America Private Bank.

In these cases, the will is typically a client's first. In the beginning, when clients are newly married, forming new households and starry-eyed, "it makes a lot of sense and there's probably no tax downside to doing it depending on the size of the estate," Carlson said.

But what is intended as a loving gesture can fail to anticipate problems down the road.

"All of that money went to their spouse, because they loved them so much. Now that spouse has complete control over those assets," Carlson said. "If the spouse were to remarry someone, how do those assets potentially factor into the new spouse's estate? Would as much of that money be going to the deceased children, as they may want?"

This is why it's important to regularly meet with a client to update their will, Carlson said.

Differences in wealth background and views

For Peter Shieh, a senior wealth advisor at Citi Personal Wealth Management, one of the biggest challenges among couple clients involves individuals who come to the estate planning conversation with very different ideas of wealth and money management.

Peter Shieh, senior wealth advisor for Citi Personal Wealth Management.

A couple might be a mismatch in terms of how they came to wealth or how their source of wealth is structured. "I've seen couples that are both on the same page; usually they're married for a long time," Shieh said. "But the younger couples tend to really [disagree on] even just trying to get their own finances in order."

Overall, Shieh said he hadn't seen differences in cultural or racial backgrounds come up among clients in his California-based practice, as most of his clients are "pretty open-minded."

"I actually deal with more wealth segment differences. For example, either the husband or the wife is from a very wealthy family, the husband is not, and vice versa," he said.

When clients' current wealth or family backgrounds differ significantly, the imbalance in the relationship means that one party may want to discuss hedging tools, like an irrevocable trust, whose terms can't be changed, or a prenup in the event of a divorce.

Fighting over the family

Couples often disagree on when to give a child access to their inheritance, and how much to give to each child.

It gets even more complicated when multiple marriages, and kids from multiple marriages, are involved. "Everybody thinks they should get what they deserve." Shieh said. "And then that's when you have the infighting. It becomes an episode of "Succession," for sure."

Focusing clients on their values and encouraging them to have open conversations about family dynamics can help both parties better understand how to proceed.

Another tough question couples often face is deciding if they should use one of their children as their successor trustee. Deciding who is more responsible or deserving can reveal stark differences of opinion. If you introduce the concept of a corporate trustee — someone outside the family — "that could alleviate some of the pressure," Shieh said.

Carlson said that sometimes a conversation "can get heated on a variety of topics." She likes to intervene by saying, "Look, these are really personal decisions, and there's a lot of passion behind them. And we don't need to make a decision today." Expressing confidence that clients will get to the right place and suggesting that the conversation continue at home helps take the pressure off to commit to an action that doesn't satisfy both parties.

Carlson added that before meeting with an advisor, clients should be encouraged to discuss some basic estate planning questions at home, so that there are no or fewer surprises when they show up.

Not having the basics in place

"Oftentimes, people think that estate planning is for the wealthy, and, really, estate planning is for everyone," Carlson said.

Estate plans help arrange who will care for children if a parent passes away, how and when assets will pass, and who is empowered to take care of a client who becomes incapacitated.

"It's not just wills and trusts," Carlson said. "It's powers of attorney, it's health care proxy, who can step in and assist you if God forbid something happened to you, where you're in an accident and all of a sudden incapacitated."

While all 50 states allow individuals to appoint a health-care proxy to communicate on their behalf, a client's state of residence can control other outcomes, including those involving trusts, joint ownership of assets and taxes.

It can be helpful to broach the conversation with clients as an opportunity for them to control their fate. In an absence of estate planning documents, state probate laws can determine by default where someone's assets go upon their death. But that's undesirable, as probate can be a lengthy process that involves a judge making determinations about an individual's financial affairs.

"You have a plan, whether you know it or not. It just probably isn't a good plan," said Mitch Mitchell, an estate lawyer who was formerly in private practice.

Mitch Mitchell, associate counsel of estate planning at Trust & Will.

Traditionally, Mitchell said, the process of working on an estate plan was opaque. Financial advisors referred clients to a lawyer and from there, it could be a "black box," he said: "They don't really know how much it's going to cost them in advance."

Mitchell is currently the associate counsel of estate planning at Trust & Will, an online business that offers largely do-it-yourself estate planning services for households with relatively simple wealth transfer needs.

For any couple, no matter their wealth level, Mitchell recommends asking three key questions: First, are there prior marriages? Second, did one or either spouse bring significant wealth into the marriage, or are they anticipating inheritance? And third, are there children and grandchildren in the picture?

"Those are the three points you have to talk about, and there'd be so many follow-up questions," Mitchell said.

Domestic partnerships and other unmarried couples

If your clients are in a domestic partnership or otherwise unmarried, having a will and estate plan is even more important to ensure their assets pass on the way they want.

"The law today provides for married individuals to pass money to their spouse, tax free," Carlson said. Unmarried couples aren't afforded the same benefit, so advisors should prepare to do a different kind of tax planning with them.

It's also important to ask if they have children, Mitchell said.

"If it's a domestic partnership, or maybe it's a same sex couple... or they've had surrogacy, make sure that they have visited with a family lawyer about if adoption is necessary [or] there's some other form of agreement that their state respects, that will avoid uncertainty in the event of the death or incapacity of one member of the couple."