Testamentary and Lifetime Planning for the Married Couple: Creating a Lasting Legacy for Their ‘Love Story’

“Testamentary and Lifetime Planning for the Married Couple: Creating a Lasting Legacy for Their ‘Love Story’,” that is the subject of today’s ACTEC Trust and Estate Talk.

This is ACTEC Fellow Travis Hayes of Naples, Florida. Helping a married couple prepare their estate plans is a common situation that practitioners face. Yet, while this is a common representation, each marriage brings its own distinct issues that a practitioner must help the couple navigate while adhering to our own ethical obligations. Being sensitive to these issues, estate planners can help the couple clarify their intentions and avoid unintended consequences down the road.

ACTEC Fellow Jimmy Dougherty of Greenwich, Connecticut will share his expertise on issues that we should consider when advising a married couple on their testamentary and lifetime estate planning. Welcome, Jimmy.

James (Jim) Ian Dougherty: Thanks so much, Travis. As Travis mentioned, planning for a married couple is a very common scenario we as estate planners face, but no married couple is the same and there’s no one-size-fits-all for them. Now, this may be my own bias being married to another ACTEC Fellow, but I do see something romantic about helping a couple do their estate plan. It’s a real special place and honor for us as we help them plan their legacy.

Now, this summer at the CLE meeting in Boston for ACTEC, I was fortunate to have the chance to collaborate with ACTEC Fellows Jenny Smith and Natalie Perry as we gave a nearly two-hour presentation covering a whole host of issues facing us as estate planners and approaches we take working with married couples.

We only have a few minutes here together, so we can’t cover all those topics and certainly not how to help every couple out there, but what I’d like to do is touch on two overarching issues that are common in planning that we should focus on. The first one of those is our ethical obligations and how we handle those in practice, and the second one is tax language that we may want to include in our documents because we don’t want those getting overlooked, and they’re so technical in nature that clients will be relying on us to raise these issues.

Ethical Considerations When Representing Married Couples

First, let’s spend some time talking about ethics when representing a couple. It’s important to remember that a married couple is not a client. You are representing two separate individuals; it’s a concurrent representation-it’s what the Model Rules of Professional Conduct refer to. And when doing that, we need to address three big issues.

• The first one is conflicts.
• The second one is the form of representation and the duties we owe.
• And finally, the rules around confidentiality between our two separate clients, the spouses, and the marriage.

Now, the problem with ethics and talking on it generally is there’s a variation between the states and that the rules are drafted very broadly to apply to all areas of practice. Often as practitioners, we’re looking for real practical guidance on how to apply these rules to estate planning and the specific challenges we face there.

I’d like to point to two resources for you to consider in your own practice. The first one is The ACTEC Commentaries on the Model Rules of Professional Conduct, which the College makes publicly available. It provides helpful guidance and authority and examples on how to approach working with married couples.

I’d also like to refer you to the 1994 special report issued by the ABA RPTE Section that covers also a variety of examples working with couples and how to address those challenges. Now the specific rule that we’re dealing with when representing couples is Model Rule 1.7. So how to handle the concurrent representation, the model rule requires that we don’t take representations if there’s a significant risk that representing both clients will materially limit our ability and responsibilities in representing both of the clients.

Now the Model Rules acknowledge that joint representations can be a good thing. They help keep the costs down to clients and, as the ACTEC commentaries know, spouses are often benefited by having a coordinated estate plan rather than two distinct plans prepared by attorneys who may have different planning philosophies and knowledge of the facts.

The rules allow us to represent both couples, but only if we can satisfy certain requirements. To import ones to point to is that we reasonably believe that we’ll be able to provide competent and diligent representation to both of them and also that each client gives informed written consent. Now there are two essential ways to fulfill this ethical requirement: one is having good intake procedures, and the second one is good engagement letters.

Client Intake and Joint Representation

So, talk a little bit about client intake. It’s important to have a uniform process as you onboard clients to make sure you can fulfill your ethical requirements to them. Two different approaches in onboarding these clients is: how do you have that initial meeting with them? Jointly or have those meetings separately? In my own practice, I try whenever possible to have a joint meeting and I see the benefits there of seeing the couple interact together, see how I’m going to interact with that couple. Everyone gets to hear the same information and disclosures from the attorney at the same time, and it also just seems to be more efficient from the scheduling perspective. However, another approach that some attorneys take is having that initial meeting with the spouses separately. The main benefit there is possibly having more candor from each of them.

Regardless of the format that you take, I think it’s important that you cover a set list of issues. I like to have a checklist in front of me to make sure we cover six broad issues:

• One is identifying family members. This can mean children and descendants from a prior relationship, but also family members that one spouse may feel a special obligation to take care of such as a sibling or a parent.
• A second issue is identifying if they have a prenuptial or postnuptial agreement in place that I’ll limit the planning that we’ll be able to do for them?
• Third is getting an idea of what assets they have and who owns what, including future inheritances.
• Fourth is what do they expect their financial needs to be? Part of that is to see what inheritance is going to be left, but also is their meeting of the minds on how important it is to pass on a legacy versus spending now.
• Fifth is finding out what estate planning they’ve already done and get those documents on hand to review.
• And finally, just the broad question of finding out why are they there? Why are they trying to do estate planning together?

With that intake in mind, you need to consider what your form of representation can be. With spouses, it could either be separate, meaning effectively you’ll represent at the same time, but they can have different planning objectives and you’re advising them effectively as two different couples. The other approach, which is the one that I implement in my practice is the joint representation, where I’m planning more of a mediator counselor role to the clients, helping them develop their estate planning together.

Confidentiality When Representing Both Spouses

Now, this goes to the important issue of confidentiality when you’re representing both spouses. There are two ways to approach this. One is everything that they tell you must be shared with the other one, and the other approach is keeping secrets from each other. So, what one tells you is confidential from the other without permission.

My approach in practice is the no secrets approach for a variety of reasons. One is the estate planning representation goes on for decades. Practically it’s just difficult to remember who told you what and what can and can’t be shared. Second, your ethical duties involve supervising those working for you, such as associates, assistants, and paralegals, and keeping them on top of that can be difficult as well. Third, is you don’t want to have that issue in the case of divorce, arguing what is disclosable and what is not. And fourth, those duties of what remains confidential become murkier when those clients are sharing information with third party advisors where confidentiality doesn’t apply.

Engagement Letters for Married Couples

The important thing to remember is whatever approach you want to take is since most states have pretty murky law on what the default is, you want to clearly define this in writing at the outset, which takes me to engagement letters. It’s important to engagement letter to cover several topics. First, who is being represented in the form of representation; second, giving a disclosure on potential conflicts; and third, explaining what the rules are related to confidentiality. Another resource that the College offers is the ACTEC Engagement Letters: A Guide for Practitioners. This is also publicly available online, includes some very helpful language there.

Portability and Estate Planning Documents

With that, I’ll briefly turn over to talk a bit about two often overlooked tax issues that we want to incorporate into our estate planning documents. The first one to talk about is portability. Now, portability has been around for 15 years and comes from the same policy objective as the unlimited marital deduction that we’re going to try to treat the spouses as much as possible as a single economic unit for estate tax purposes.

Interestingly, though, in reviewing many estate planning documents, they’re silent on portability. They’ll have lots of language about S-corp elections and marital deduction and other tax language, but be silent on this issue. The problem with that is there’s not much case law out there in terms of what are the fiduciary duties with us that could lead to conflict in the state administration. And after all, at the end of the day, the point of good estate planning is to make first move the estate administration.

Take the following hypothetical: one spouse dies and survived by children from a prior marriage. The other spouse is the more moneyed spouse and would benefit from the portability election. Those children from the first marriage may not want their inheritance for that estate being spent on filing return for portability purposes. By clearly defining in the estate planning documents whether an estate is to make a portability election and who must bear that cost, the estate or the surviving spouse can avoid this conflict and uncertainty on the estate administration side.

Understanding the Marital Deduction Mismatch

The other major tax issue to raise and think about with clients is the marital deduction mismatch. This comes up, especially in cases where you’re not just helping clients with their testamentary planning, but also assisting them with gift planning. Now, the marital deduction mismatch is a real trap for the unwary and it really raises two thorny issues, effectively two layers of the marital deduction mismatch.

• The first one is when you have a formula clause that relies on the marital deduction to ensure there’s no estate tax out the first death. The problem with that is if the estate taxes are apportioned against the estate rather than the beneficiary receiving property such as that’s including the estate such as a spouse of lifetime access trust that for some reason is brought back into the gross estate, there could be a first death estate tax because the marital deduction only applies to property passing to the spouse. This requires revisiting estate tax apportionment language in documents when there is gifting in play to avoid the situation where effectively you’re further reducing the marital deduction by estate taxes being paid, creating a circular tax-on-tax situation.
• The second layer of the marital deduction mismatch is that the marital deduction is only available for the fair market value of the assets passing to the spouse. Well, the value of the included assets in the gross estate may be greater than the amount passing to the surviving spouse. This can create a real whipsaw effect when during estate administration it comes to fruition that the marital deduction is not serving as a dollar-for-dollar offset against the property passing.

Both the marital deduction mismatch and portability issues are things that are not going to be readily apparent to our clients and can create real issues during estate administration where we can easily resolve those issues with drafting during the estate administration phase.

With that, I want to thank everybody for taking the time today and for Travis and ACTEC for having me for this podcast today. I do hope you find the content today’s presentation useful in your practice.

Travis Hayes:  Thank you, Jimmy, for sharing your valuable insights on this important topic. Estate planning for married couples requires balancing the couple’s shared goals with their individual needs and circumstances. And we greatly appreciate you discussing your thoughtful approach to addressing these issues.

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