This has been quite a week for legal rulings affecting the trusts and estates community: the Supreme Court essentially struck down the Defense of Marriage Act and declined to rule on California's Proposition 8 for lack of standing. Both of these cases focused on the definition of marriage and the treatment of marital relationships across jurisdictions. While these cases will have major implications for tax aspects of estate planning, especially for same-sex couples, I’m struck by how they highlight issues that have long been faced by trusts and estates planners. Put simply, they both focus on the question of what is a “family,” and how will it be defined for various purposes. In a less public way than the high court, the T&E community has long been grappling with these issues - and will continue to do so far into the future. Some of the ways that these issues arise are highlighted below.
Many families today are living with trusts that their ancestors established decades ago. In each case, there’s a definition of “family,” either explicitly written into the trust or, by default, applied by its governing law. There are innumerable ways that these trusts might define which family members are eligible to be beneficiaries and/ or remaindermen of each trust. Any advisor working with a client who’s the beneficiary of an existing family trust has always had to focus on who’s considered a child, spouse or grandchild for purposes of the trust. I’ve addressed this issue numerous times in the past as a lawyer, and more recently, as a consultant to family enterprises. In one instance, a beneficiary found her power of appointment could only be exercised in favor of her natural born children. This meant that she could leave the remainder of her trust to her natural born child, but not that of her partner’s. Looking ahead, this meant that two children being raised in the same home would inherit vastly different sums from her. To the client, this was a far more pressing issue than potential estate taxes. In these cases, it’s essential to ask the right questions of the client and find solutions that may not be ideal, but may at least mitigate foreseeable disparity or unintended consequences.
Every family with a privately-owned business must face the question of who’s considered “family” for ownership and, often, management purposes. While families frequently overlook the “governance” aspects of their business, it ultimately comes down to identifying who is/are the current owner(s), and what voting rights are held by the owner(s). This can be trickier in the situation of a business that’s passed down across generations. Governing documents such as corporate by-laws or limited liability company (LLC) operating agreements must be carefully drafted to include definitional categories for all the family members who are intended to be eligible owners. This also arises with the increased use of family investment partnerships or LLCs. In all cases, it’s essential to start by reviewing existing documents and having a conversation among family members about how they wish to define eligibility for ownership purposes. In several recent client situations, I’ve raised this issue, and clients have discovered that the persons they have named in their wills and trusts aren’t eligible to own the interests they wish to leave them. Coordination among advisors is critical to anticipate and plan for these situations.
A family enterprise can include a family business, investment entities, charitable foundations and more. Families who have all of these activities will find that the definition of “family” for one purpose might differ from its definition in other cases. For example, a family might decide that “family” for purposes of inclusion in a general family meeting coversall family members, including significant others. However, for family business purposes, there might be a bloodline restriction so that only direct "bloodline" descendants can become owners of the business. The family foundation might define family more broadly and include partners, whether legally married or not, for purposes of eligibility for family slots on the board. Each family must make these determinations for itself through open discussion.
No Single Answer
Just as the courts are juggling with multiple definitions of family, so too are families today finding that there’s no single "“right” answer. Rather, they must ask the right questions and come up with answers that work for now and have enough flexibility for what the future might hold.