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Modernizing Trusts for Modernized Families

These changes impact family governance, how existing trusts are interpreted and how new documents should be drafted.

Evolving social norms and new technological advances over the past 40 years have challenged traditional notions of family—think of in vitro fertilization, children born to non-married couples, second families, non-traditional marriages and posthumous births via frozen genetic material.

For advisors who work with UHNW families, these changes impact family governance, how existing trusts are interpreted and how new documents should be drafted.

Defining Children and Descendants

For example, advisors may need to help family members with charges, or disputes, of paternity. In the UHNW space, these claims can bring unwanted publicity. Members of high-profile families often worry that the women dating their male descendants may have a financial incentive to become pregnant and want to protect the family’s wealth to the extent possible.

State law typically establishes paternity in uncertain or contested cases with a DNA test. Estate planning documents follow the same approach. While testing isn’t 100 percent conclusive, the degree of error is small. And it doesn’t require the exercise of discretion by a fiduciary.

Relying on DNA testing can, of course, result in a child inheriting assets from a parent they never knew. Some clients may not want to include biological children who have no relationship with the family in an estate plan, particularly when significant multi-generational wealth or a business is involved.

An alternative is to have a formal acknowledgment of genetic paternity, and write the estate plan with it included. An acknowledgment puts the determination in the father’s hands of whether the child is “in” or “out.” 

Male descendants may not be aware of this requirement. But relying on an informal or unwritten acknowledgment could lead to litigation. When the amounts at stake are large, there may be a tremendous financial incentive to dispute, or claim, an inheritance.

Divorce and Blended Marriages

Studies suggest that divorce rates among UHNW clients may be lower than among the general population. Nonetheless, given the wealth at stake, it’s important to plan for the termination of a marriage and the disputes and claims that often accompany it.

Many states’ laws automatically revoke a will (and, in some cases, a trust instrument) with respect to any disposition of property made under the document to a former spouse. To cover situations that fall outside of those statutes, such as roles in a family’s irrevocable trusts, it may be a good idea to include a provision that removes a spouse from controlling fiduciary roles in the wake of divorce.

Average life expectancies are nearing 80 years in the United States and are higher for the affluent. It’s relatively common for one spouse to simply outlive the other long enough to remarry. Advisors should discuss with clients whether a surviving spouse who remarries should continue to be treated the same in the former spouse’s estate plan. Beware of tax considerations, however. If the surviving spouse's interest in the trust terminates on remarriage, the trust won’t qualify for the unlimited marital deduction.

The relevance of domestic partnerships and civil unions has decreased now that same-sex marriage is permitted in every state. But members of the family may, nonetheless, choose one of these arrangements over traditional marriage. It’s increasingly common for all couples to choose long-term cohabitation over formal arrangements. In the UHNW community, the decision to not marry is one way to avoid the need for a prenuptial agreement or the risk of an expensive divorce, particularly among older couples who may have already been through one. To accommodate these long-term relationships, it may be desirable to provide flexibility by including unmarried cohabitants as potential beneficiaries.

Adoption and ART

Statutes now treat adopted children the same as biological ones, for most purposes. But, clients with multi-generational wealth are likely to have older trust documents that may expressly exclude adopted children as descendants.

That may be because of cultural norms at the time, or such restrictions may have been put in place to ensure that the governance of a family business was entrusted only to blood descendants of the founder, for example. The family office plays an important role in educating family members about these restrictions, as adopted children may face quite different financial futures than biological ones.

Similarly, whether a child conceived through the use of assisted reproductive technology will be included as a descendant in the family’s trust agreements is a common concern. Many trust documents don’t even contemplate these alternative definitions of parentage.

The increased use of technology and the evolution of family relationships means it’s now possible for more than two individuals to have a parenting role. Estate planning documents should define family relationships in ways that clearly prevent donors and surrogates from being treated as legal parents of the child conceived using their genetic material.

Contractual agreements are typically used prior to insemination or implantation to ensure that no rights are accidentally conferred on a donor or surrogate. Advisors should help make sure appropriate protections are in place and enforceable. Even if a contract is in place, parties should comply with any local statutory requirements to ensure that the parties’ intent is carried out. Finally, the typical precautions regarding privacy and mental health screenings are even more important for UHNW clients. In addition to the typical reasons a donor may want to meet his offspring, the substantial wealth of the family creates additional incentives and could cause emotional turmoil if the possibility is not addressed before the procedure.

Posthumous Reproduction

Historically, posthumous birth was limited to situations such as a married couple that conceives a child before the death of the husband and the child is born after the husband’s death, or in the rare case, rescued from its mother’s womb on her death. Because the father in this situation is typically aware of his wife’s pregnancy during his lifetime, there’s generally little question about whether the child should be included in the class of “children” or “descendants” who may inherit from him.

More complex issues arise with the advent of cryopreservation and post-death retrieval of reproductive material. Technology can be used to produce a child both conceived (or implanted) and born after the death of one or both parents. Advisors should consider discussing with clients if there’s a time limit in which a posthumously conceived child must be conceived. The possibility of a child of the decedent being born long after the decedent’s death leaves much uncertainty and has the potential to wreak havoc on trust administration.

Some states now have statutes that expressly declare whether a posthumously conceived child is an heir of the deceased parent. Most offer no guidance. Additionally, because posthumous conception is a recent phenomenon, it’s highly unlikely that older instruments provide for it.

Advisors also need to be prepared that family members, including spouses, may disagree about these issues, which are often very personal and emotional. A client with preserved genetic material may wish to bequeath that material to a spouse or partner. If it’s the client’s intent that the material be used for posthumous conception, the client should also specifically state their intention to provide for posthumous children. It’s important that any client with preserved genetic material carefully consider the individuals who are given the rights to determine whether the genetic material may be used.

Because storage of frozen genetic materials can be costly, UHNW families may be more likely than others to preserve genetic material for a long time. A couple who froze genetic material in their 30s could end up paying many tens of thousands of dollars during their lives. Continued costs associated with the storage of reproductive material may be an expense of the decedent’s estate, to be paid in the estate administration process, but a family office will need to work with the family and any fiduciaries to consider what happens to the frozen genetic material following death, including the selection of the decision maker and protecting that person from liability.

It’s essential to anticipate, as best as possible, further shifts in family definitions to ensure that the client’s wishes are effectively carried out. Include as much flexibility in the documents as possible to account for cultural and scientific changes in the future. While not every change can be anticipated, providing options to refresh a trust in the future will go a long way toward modernizing a UHNW family's estate plan.

This is an adapted version of the authors’ original article in the August issue of Trusts & Estates.

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