Originally Aired: September 4, 2014
Topic: How Would a Change in Marital Status Affect Your Financial Future? with guest Howard Klein
The Lange Money Hour: Where Smart Money Talks
James Lange, CPA/Attorney
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How Would a Change in Marital Status Affect Your Financial Future?
James Lange, CPA/Attorney
Guest: Howard Klein
|Click to hear MP3 of this show|
- Introduction of Guest – Howard Klein
- Understanding The Safe Withdrawal Rate
- Reevaluate Your Money Allocations After Divorce
- Marriage Comes With A Fiduciary Duty
- Beneficiary Designations After Divorce
- Q&A: How To Find The Right Person To Help With Estate Planning After Divorce?
- Understanding Undue Influence
1. Introduction of Guest – Howard Klein
David Bear: Hello, and welcome to this edition of The Lange Money Hour, Where Smart Money Talks. I’m David Bear, here in the KQV studio with James Lange, CPA/Attorney, and author of two best-selling books, “Retire Secure!” and “The Roth Revolution: Pay Taxes Once and Never Again.” Many couples have worked out estate plans, but what happens if the couple itself doesn’t work out? How would a change in marital status affect your financial future? On tonight’s show, we welcome Howard Klein, an expert in how a parting of the ways can impact retirement and estate plans. An attorney who’s practiced family law for thirty-five years, Howard heads the probate department at the Los Angeles firm of Feinberg, Mindel, Brandt & Klein, and specializes in estate planning and trusts. He has written numerous peer articles on these subjects, including “Parting of the Ways: Clients Contemplating Divorce Need to Consider Revisions of Their Estate Plans” for the magazine, Los Angeles Lawyer. Listeners, stay tuned for an interesting and informative hour, and since our show is live, Jim and Howard are available to answer your questions. To join the conversation, call the KQV studios at (412) 333-9385. And with that, I’ll say hello, Jim and welcome, Howard.
Jim Lange: Welcome, Howard.
Howard Klein: Well, thank you so much, Jim. Nice to be there.
Jim: Well, first, I thought I would tell the listeners how I learned about you, and why I think that you’re such a perfect expert for tonight’s show. I was asked by the Pennsylvania Bar Institute to make a presentation to a group of divorce attorneys, and they wanted me to cover two sections, each one for an hour. The first one was retirement planning, which is where I felt very comfortable talking about, retirement planning both during and after divorce, and how expectations should change, and then the other area that they asked me to cover was estate planning for people getting divorced later in life, specifically divorcees over fifty. And they actually gave me a course because somebody had written the course, and the way I am is if somebody gives me a course to teach, that’s kind of like a starting point. And I looked at the course, and I didn’t know much about it at all, so I knew I had to kind of start from scratch using a combination of my own knowledge and knowledge that I would learn about from doing research. So, anyway, I’m researching the area of retirement and estate planning for divorce, and specifically, the area that I was a little bit weaker in, which was estate planning for divorcees, and I run into this wonderful article. It was actually the best article I had seen on the topic, and it was called “Parting of the Ways,” and Howard was the author, and I got some great ideas, but I thought that the article was so good and it was so important that I thought it would make a great handout. And usually, it’s not so easy when there’s an article and you want to use it as a handout. Usually, the authors give you all kinds of problems and talks about the publisher and everything else. But, anyway, I called Howard. I said, “Howard, this is a wonderful article. I’m going to give this presentation for the Pennsylvania Bar Institute. Would it be okay if I distributed your article?” And he said, “Yes!” And he said, “Well, I guess I have to check with the magazine,” and they quickly came back and said yes, which was very good. Howard is a particularly versatile guest today because he has done a lot of divorce work over his thirty-five year career. He’s also an estate attorney, and it’s a rare find that you find an attorney who specializes in probate and family law crossover matters. So, Howard, welcome to the show and thank you so much for agreeing to be here.
Howard: Well, it’s really great to be here, Jim, and thank you so much for your kind words. The one slight modification I would make to your introduction is, in fact, I’ve been practicing for fifty, 5-0 years.
Jim: Oh, fifty years?
Howard: Yeah, so I’m not quite as young as I sound.
Jim: Oh, I saw your picture. I didn’t think that you were that old!
David: But in the bio in the magazine, it says thirty-five, so that has to be corrected!
Howard: I see. There you go.
2. Understanding The Safe Withdrawal Rate
Jim: Okay, all right. Anyway, I wanted to start talking about, first, the living part. I sometimes distinguish different portions of my meetings with clients between the living part and the dying part. And I know that you have more to say about the dying part, but I want to start with the living part, and I know that you have counseled many people who are getting divorced. But I’m going to tell you the perspective that I had, and then you can please chime in whenever you like. So, when the Pennsylvania Bar Institute presented me this course to give to the divorce attorneys, it had all this technical stuff on taking withdrawals from IRAs before 59 ½, and they wanted me to go through all the technical rules about that, and here was my perspective: if you are a relatively recent divorcee, and you have to take money from an IRA before you are 59 ½, you’re probably going to be broke by the time you’re seventy. So, rather than getting into the technical rules, which I kind of look at as kind of shuffling the chairs on the deck of the Titanic, I thought, well, maybe, let’s go back a little bit and see how we can help people…and I guess, specifically, I’m thinking about the dependent spouse, that is, the spouse that is weaker financially, maybe doesn’t have the same income earning capacity as the independent spouse, and let’s say has some type of settlement. It might be a lump sum of money, inequitable distribution. It might be some alimony. It might be some child support. But what I really fear is that the dependent spouse doesn’t change their mindset, and they assume that they can kind of keep going more or less the way things were before, rather than having a complete financial change of view. Have you seen this problem in your own practice?
Howard: Well, I really have, Jim, and a person, and particularly a middle-aged or older person who goes through a divorce has to realize that the future may not be as bright as the past has been, and they have to tread with caution.
Jim: Yeah. I’d like to introduce a concept here that I think would be helpful. By the way, I think that this is a very helpful concept in divorce, or outside the divorce arena. In fact, we’ve actually had four radio shows specifically on this concept, and it’s called the safe withdrawal rate. So, I had a client that had…to make a long story short, there was a settlement that included an $800,000 settlement, and that doesn’t sound like such a terrible amount. So, basically, this woman had an $800,000 settlement, and the issue is okay. You have an $800,000 settlement. What now? And she was wanting to buy a house and wanted to spend between $300,000 and $400,000 on a house, wanted to buy a new car, didn’t want to go back to work, and wanted to really spend a fair amount of money on her kids. And I kind of went through the analysis with her, and I showed her if that she did that, she was going to be literally dead broke at age seventy. She would literally have no money. So, what I told her about and what I’d like to tell everybody about, which I think is relevant for a lot of people, is the safe withdrawal rate, and without getting into the specifics, let’s say, for discussion’s sake, you have a thirty-year retirement, and you have $800,000 in your portfolio, and let’s assume it is appropriately diversified and invested. The safe withdrawal rate would say that you could spend roughly 4%, and by the way, there are experts who are saying that that’s too high these days. But let’s just use the classic analysis, 4% per year, and never run out of money during your lifetime. So, if you have this woman with an $800,000 settlement, she can afford to spend $32,000 a year. Now, will she get some Social Security? Yes, and by the way, she can get some Social Security even on her ex-husband’s earning record. But she’ll even have to wait for that. And $32,000 a year, and Social Security that’s going to…I don’t know what it might be, say $15,000 or $20,000 that isn’t going to come for a long time, isn’t a lot of money, and you can’t go out and buy a $300,000 or $400,000 house, a new car, and then help your kids. And I don’t know if you’ve had to counsel people in those situations, Howard. Is that something that has come up in your practice that you just worry about people, and sometimes, the attorney, unfortunately, spends all their time trying to get the best settlement rather than trying to change people’s mindset about, even what I would consider, simple finances, simple safe withdrawal, $800,000 times 4%, you can spend $32,000.
Howard: Right. Yeah, Jim, I must say that in my background in this particular area, I’m not as sophisticated as you are, but I’ve always cautioned the spouse after a divorce particularly, a person who has not been the breadwinner, if you will, that he or she, usually it’s been a she, but he or she must be very cautious about making purchases of big ticket items, such as an expensive house, because that would appear to be a recipe for disaster.
Jim: Yeah, and even staying in the family home, it seems to be the winner, whoever ends up with the big, expensive family home, and I sometimes think well, maybe that’s the loser who ends up with the home.
Howard: Yeah, that person definitely could be the big loser because if that person is committed to paying a very, very high monthly maintenance rate for the house, it could be truly a recipe for disaster.
Jim: Right. I personally would prefer getting…a lot of times, the reality of it, and Pittsburgh’s a working town, and we have a lot of people who have W2 salaries, and even without a divorce, it’s hard to save money. You know, you pay for all the expenses. You pay the mortgage, you pay the car payment, you pay for your kid’s braces, you pay for kid’s college, all this stuff, it’s hard to accumulate money. But a lot of my clients have been faithfully putting money in a retirement plan, and a lot of times, if people are divorced, in that situation, there isn’t a lot of liquid money, and a lot of times, what there is ends up being a house and a retirement plan, and personally, no matter which person…and I’m not a divorce attorney. I’m a financial planner and an estate attorney…
Jim: …but if I’m talking with people, I usually like to prefer having the retirement plan, which is an asset that is growing rather than a house that requires a lot of maintenance.
Howard: Yeah, I find no fault with that approach.
Jim: All right. The other thing that concerns me is a lot of times, people will get, maybe, alimony for a certain period, or child support for a certain period, and they kind of treat that almost like it was wages or income, and they feel perfectly happy spending whatever the alimony or child support is, not really thinking in advance, “Oh geez, well, this is going to end in five years. What am I going to do then?” So, I think, another thing that I like to caution people is you really can’t use alimony or child support as something that you can completely blow through without any plan in the future. I mean, presumably, the idea is maybe to give you a means of support while maybe you go back to school, or you try to get a job, or you do something that will help your long-term future.
Howard: Yeah, I think that’s essentially correct, and one thing to remember about child support is that it is for the benefit of the children, and it is not primarily for the benefit of the spouse in whose home the children are being raised. It’s really for the kids, and also, with regards to spousal support, and, to a certain extent, child support, those can be modified depending upon change of circumstances, and thus because a person is receiving ‘X’ dollars…I don’t know, $5,000 a month or $2,500 a month in spousal support or alimony doesn’t mean that it will always be that way, and in fact, if the supporting spouse is injured, or for whatever reason is unable to maintain the payments, there goes the alimony.
Jim: Right, and frankly, we get a lot of…unfortunately, you have situations where people say, “Well geez, you know, I’m just working to pay alimony and support,” and sometimes, they magically lose income, particularly people in closely held businesses, or family businesses, or situations where income can be hidden, or at least deferred.
Howard: Yep, that’s been known to happen.
3. Reevaluate Your Money Allocations After Divorce
Jim: Yeah. The other thing that you mentioned was the expenses are for children, and one of the problems that I have had, not just in the divorce setting, but in, let’s say, everyday setting is many of my clients, in fact, I’d say the vast majority of them, do have a college education, and typically, got significant help from their parents in one form or another with their tuition. So, for example, I, myself, the deal in our house was my parents would pay for my undergraduate education, and that was when, frankly, education was a lot cheaper than it was today, but they have kind of the assumption that they are going to pay for their kid’s college education, and it’s not like it was back then, you know, a couple thousand dollars. Now, it might be $30,000, $40,000, sometimes $50,000 a year, and a lot of times, people have that expectation, which often isn’t realistic even if they’re married and everything’s fine, but then they get divorced, and sometimes, you just can’t do that, and Jonathan Clements’s big thing…Jonathan is the former personal finance writer for the Wall Street Journal. His big thing is, you can borrow money for college. You can’t borrow money for retirement. And I don’t know, Howard, if you have had problems with trying to change people’s expectations when they go through a divorce. That is, some of the things that they wanted even not just for themselves, but even for their children, are no longer financially feasible.
Howard: Yeah, the answer is I certainly have had that situation, or those situations have arisen, and sometimes, it’s difficult to drum into somebody’s head that because the finances were handled a certain way during the marriage and prior to the divorce, they very likely cannot be handled the same way now that there is a divorce because you have two households and it’s far more expensive, so…
David: Well, at this point, let’s take a quick break, and when we return, Howard and Jim will continue the conversation. If you have a question or comment, call the KQV studios at (412) 333-9385.
David: And welcome back to The Lange Money Hour. I’m David Bear, here with Jim Lange and Howard Klein. Listeners, there’s still time to join the conversation. Call the KQV studios at (412) 333-9385. Jim?
Jim: Howard, I considered you, both from your articles and reputation, and I like the word ‘crossover expert.’ That is, crossover between divorce and estate planning.
Jim: Could you tell me some of the counseling that you have done to some of your clients, either divorce clients, or clients who were referred to you by divorce attorneys for estate planning…
Howard: Yes, yes.
Jim: …and what people should think about in terms of their wills and their estate plans, and I know the law’s slightly different in California, and there’s some forgiveness in the Pennsylvania statutes, but maybe if you could just speak broadly and conceptually about what people should be thinking and doing?
Howard: Well, one thing that might be mildly interesting, Jim, is how I came to join my present firm, because it was a crossover matter that brought me together with this firm. I used to have a boutique firm with two attorneys, a paralegal, and my wife was the office manager, and then, 8 ½ years ago, I joined Feinberg, Mindel, Brandt & Klein, and the very first matter was one in which I assisted Robert Brandt, who was…we call the firm FMBK, who was FMBK’s family law, meaning divorce law, department head. He was handling the divorce of a very high-income elderly gentleman who had come to the conclusion that this lady whom he once regarded as a gift from heaven perhaps was not such a gift from heaven, and he wanted to get a divorce. But at the same time, he was concerned that with his poor health, he might not live through the divorce, and therefore, somehow or other, he didn’t want, by default, his estate going to his wife. He favored his two children by a former marriage. And so, I was brought in because, in California, at least, it’s sometimes not that easy to do divorce planning and divorce work, or to do estate planning, in the middle of the divorce, and I was able to counsel both the client and work with Bob to get a very favorable result so that the divorce was concluded and a new estate plan was in place and nobody had violated any rules or regulations.
Jim: But the old man didn’t die before he got the divorce, is that right?
Howard: No, he did not. He has since passed, but his goals were attained.
Jim: Well, and I guess one of the fears is sometimes with older people getting divorced is that…and the other thing is, particularly if there’s a business involved, or even not, it seems to me some of these divorces take forever to settle. So, you do have that period of, let’s say, from initial filing date until the final decree, in which case, you’re a little bit in limbo.
Howard: Right. One thing we have in California, and I believe in many other states, is the possibility of getting a bifurcated divorce. Bifurcated, of course, means cut in half, and it’s possible in California to actually have the court terminate the marital status. So, in essence, you have two single people before the court, and then the court can determine what happens to the property and can resolve such issues as alimony and child support. That’s often very helpful. So, it’s not the case that years have to pass before the marriage is terminated.
Jim: Well, Pennsylvania also has bifurcation.
4. Marriage Comes With A Fiduciary Duty
Jim: But why don’t you tell us a little bit more about what people should be thinking about in terms of estate planning, let’s say, both from the early stages and the later stages?
Howard: Sure. A couple of things, at least: number one, a marriage is kind of an unusual relationship. It’s called a ‘confidential’ relationship, meaning a relationship with trust and confidence, and also a fiduciary relationship because each of the spouses has fiduciary duties by statute to the other spouse, and therefore, if a divorce takes place during the marriage, the fiduciary duties that each spouse owes to the other spouse have to be honored, and that can be kind of a sticky wicket. It can be tricky business. What the parties should think of is this: their primary assumption in life has been changed. In most cases, when people are married, they assume that their first love and their first duty is to the spouse, but if the spouse is soon going to be an ex-spouse, the person who is going to be doing the estate planning has to think to herself or himself, “Whom do I want to benefit from my estate, or my share of the estate?” And…
Jim: Well, you…
Howard: Yeah, go ahead.
Jim: No, I’m sorry. You introduced a very important concept, not just in divorce planning, but actually throughout all financial planning, which is being a fiduciary.
Jim: So, for example, let’s say that there’s some money in a joint account. It’s not really kosher to go into that joint account, wipe it out, put it in your name, and then even transfer it to a close relative. That would be violating a fiduciary duty.
Jim: That would be against the interest of your spouse. By the way, it’s the same thing when you go to an advisor. At least in Pennsylvania, an attorney owes a fiduciary duty to their client, meaning that they must place the interests of the client above their own.
Howard: That’s absolutely identical to the situation that prevails in California, that the attorney has that fiduciary duty to the client.
Jim: Right, and interestingly enough, CPAs are that way, and since I am both a CPA and an attorney and a financial advisor, when I advise people financially, I am in a fiduciary capacity, meaning that I must put their interests above my own. So, if I don’t sell them a deferred annuity, or I get a ten point bonus…so I sell somebody a $100,000 annuity and I make $10,000, I mean, that might be great for me, but it’s not great for them. So, I’ve never sold one of those.
Jim: So, in your case, though, you’re saying that the spouses owe each other a fiduciary duty…
Howard: Yeah, that’s right.
Jim: …to protect each other’s financial interests.
Howard: You know, that’s true. In essence, a spouse may not take unfair advantage of his or her spouse, and he has to treat the spouse in all financial matters according to what are called the highest standards of good faith and fair dealing, and there must be no undue influence that one spouse places upon another spouse. Also, the spouses are required to keep each other informed of financial matters. It can’t be a hidden book. That is clearly a breach of the interspousal fiduciary duties.
Jim: Well, I don’t know about in California, but I’m sure in Pennsylvania that all spouses act 100% in a good faith fiduciary duty!
David: Especially soon-to-be ex-spouses!
Jim: Yeah, especially soon-to-be ex ones! So, I guess you have this fairytale obligation between people who are going through, let’s say, the bitterest, roughest times of their lives, filled with anxiety over money, kids, jobs, careers, etc. So, what are some of the things that people should be thinking about? So, let’s say they have a fiduciary duty. Should they be getting a new will? Should they be getting a new retirement and estate plan? New IRA beneficiary designations?
Howard: Yeah, sure.
5. Beneficiary Designations After Divorce
Jim: And what about the situation where somebody is employed, and they have a 401(k) plan that’s governed under ERISA, and the ERISA rules say that you must name your spouse, and to name anybody other than your spouse, or if your spouse is already on the beneficiary form, to change it to anybody other than your spouse, you need your spouse’s permission. How do you handle that one?
Howard: Well, normally, something like that, usually the spouse would not agree to have himself or herself removed as a beneficiary of a retirement plan, but that issue will come before the court in the divorce proceeding, and that’ll be a part of the division of the marital assets. But let me go, Jim, to a question that you raised a moment ago, and that is what should the parties be looking to do? Well, for one thing, they will have to change their estate plans because most likely, the existing estate plans favor the spouse. And so, it will be necessary, probably, to do a new living trust, if there is a living trust, and a new will so that the people that the person wishes to provide for, let’s say children or perhaps other relatives or other beneficiaries, are provided for, as opposed to what’s provided in the existing estate plan, which is for the great benefit of the spouse, in most cases.
Jim: And I’ll also take the liberty of adding, because this is my big thing, because we’re really doing a lot of work with people who have significant IRAs and 401(k)s and 403(b)s and SEPs and Keoghs…
Jim: …but the changing, assuming that you don’t have a problem with it, but changing the beneficiary designations of those documents is very important, and if you are naming, typically, children and grandchildren as opposed to the spouse as the primary or secondary beneficiaries, a lot of times, that has to be re-thought out completely, and particularly, if there’s young children or young grandchildren and you need a trust to be the beneficiary, that trust must meet five specific conditions in order to qualify as a designated beneficiary that will allow the inherited stretch IRA. And David is waving his arms…
David: Well, no, I’m just wondering whether you also have to do these kinds of things for documents like living wills, where you have more than retirement planning at stake?
Jim: Well, I’ll let Howard handle that one.
Howard: Well, let me ask you this: when you gentlemen are referring to a living will, do you mean something like a health directive?
David: Exactly, yeah.
David: Somebody who’s making decisions.
Howard: That’s terribly important because, you know, one thing is besides indicating who the beneficiaries of one’s assets will be, say, in the event of death, it’s also of critical importance to name the fiduciaries, the people who are going to be running the show. Who will be the trustee? Who will be the alternate, or successor, trustee? Terribly, terribly important.
Jim: And the other thing, you know, on the area…in Pennsylvania, you are always going to do, whether you call it a healthcare directive or a living will,…
Jim: …and then, there’s also, which is really more of a medical document, but then, also, a very powerful financial document is the power of attorney.
Howard: That’s right.
Jim: So, typically, people are naming their spouse. So, for example, I’m married, and if I am no longer in a position to make a financial decision, it would be my wife who would have the power to run my financial affairs, and I would have hers…
Jim: …and if we were going through a divorce, obviously, I would not want her to have that power.
Howard: Sure. You know, in California, the statute provides that following a divorce, all gifts or benefits for the person who is now the former spouse are cancelled, and all designations of the former spouse as a fiduciary are cancelled. But then, where does that leave you? Because if no new estate planning is done, maybe you have what is called an Intestacy situation, which means the people who get the estate are those who are provided in the probate code, and that is no good.
Jim: Right, which, by the way, in Pennsylvania, you go up, so it can go to the parents.
Howard: Ah! Okay, okay. Interesting.
Jim: And then, it’s proportion. Well, if there’s children involved, the children are going to get it before the parents, but a lot of times, it goes up to…if there’s no children, it goes up to parents, and then goes back down to brothers and sisters…
Howard: Yeah, same thing here.
Jim: …and not a lot of people want to leave a ton of money to their brothers and sisters. So, you certainly don’t want an Intestate situation because, usually, you have heirs that you would prefer, even if it’s a charity, rather than what the state statute happens to say.
Howard: Exactly. You do not want those matters determined by a judge of the probate court or the surrogate court, or whatever the court is called in the particular state, and also, it’s of great importance, if there are minor children involved, to designate who will be the guardian of those minor children. Who will raise them? Now, if what happens is that one of the divorced parents dies, then, in California, at least, the surviving parent is presumed to be the appointee to raise the kids. But it doesn’t always happen that way, and what if, somehow or other, the parents die at the same time? Who will do it? And, again, this is not a decision that should be left to a superior court judge.
Jim: Well, as a matter of fact, funny that you should mention that because when Michael Jackson died, and I don’t know if people know this or not, but at death, your will usually becomes a matter of public record, and these days, a lot of the counties are online, so this can be searchable. And I was actually looking at Michael Jackson’s will, and it said that in the event that he died, and the mother of his children would obviously be the first guardian, which he wouldn’t have…he couldn’t take it away from her, anyway, but the next one, if I remember right, was Diana Ross…
Jim: …which I thought was an interesting choice to raise young kids!
Howard: There you go.
Jim: But you’re right. That certainly has to be re-examined in the event of a divorce if there are young children involved.
Howard: Right. I think what’s of critical importance is that at this pivotal point of a person’s life, you know, the assumptions of his life, the facts of his life have changed, that person has to do some serious thinking about what happens next, and it’s important for the person to think, and also to get good advice from his or her trusted advisors, and also to have a sound estate planning attorney who can assist them.
David: Well, with that, let’s take one more break.
6. Q&A: How To Find The Right Person To Help With Estate Planning After Divorce?
David: And welcome back to The Lange Money Hour with Jim Lange and Howard Klein, and we have a question from a listener. It’s Paul Heckbert from Edgewood.
Paul Heckbert: Jim and Howard, my question is let’s say you’re going through a divorce. You’re about to finish up a divorce, and you’re starting to think about these things, think about estate planning, adjusting to a lower income or a limited income. Where would you find the right kind of advice to help you with estate planning in this situation? How do you find the right attorney or the right person to help you?
Jim: Well, I’ll let Howard…do you want to take that one first?
Howard: Okay. You know, I think, beyond the shadow of a doubt, you have to talk to an attorney who does estate planning for a living. For example, again, I’m not familiar with the way the structure is set up in Pennsylvania, but in California, we have certified specialists. And I, for example, am a certified specialist in estate planning, trusts and probate law. I think you have to…if they have an equivalent, or something like that, in Pennsylvania, or if not, at least, if you can be recommended by some trusted, knowledgeable friend and pointed to an attorney who does this for a living, I think that would be very helpful because that attorney will have handled probably hundreds of situations, and therefore has a strong basis to refer to in making recommendations to you.
Jim: Well, I would agree with Howard that it does make sense…these days, I think, everything has become so specialized that to get a will done by a divorce attorney whose skills and abilities are in the divorce arena and not in the estate planning arena is probably not the best use of their time and your money. The other thing, Paul, that I think is really important is particularly, if you have had, let’s say, shared advisors, whether they be a CPA firm, or perhaps a money management firm, one of the spouses might not want to stay on and use the same advisor or CPA as their ex-spouse. So, you might have to look for new advisors, either in the CPA world for tax returns, or in the world of investing. You know, personally, and people have heard me say this many times, I tend to look towards low-cost index investment advisors, and that’s somewhat self-serving because that’s what I do, but I like that on the investment side, and on the CPA side and tax preparation side, it would be better if you could get somebody who didn’t just have the ability to prepare a tax return, but could actually give you tax implications of different areas of divorce, for example, whether you’re going to file as a head of household or whether who’s going to get the exemptions and the dependents, and people who are familiar with some of those things. Does that help, Paul?
Paul: Yeah, yeah.
Howard: And Jim, if I may add something to your advice to Paul, if an attorney has done the estate plan for a married couple and then the couple gets divorced, that attorney cannot, at least in California, represent both of them as they move forward, unless they both agree to have him do so, because otherwise, it’s a conflict of interest. And so, that’s something that has to be considered, at least.
Jim: Yeah, and that’s a real problem, particularly…and frankly, I get that as an estate attorney. I’ve actually had people, and I get along very well with both of them, and then they’re going through a divorce, and the cases I’ve been involved with (and I guess I’m pretty lucky), even the couples that I have worked with have an estate attorney or even a financial advisor, I won’t say it’s been pleasant, but I’ll just say it hasn’t been one of those vitriolic divorces where people are ready to take each other’s heads off, and they have agreed, since usually, at least the ones I’ve been involved with, is it ends up being for the benefit of the kids. So, let’s say, for discussion’s sake, that we have already done the work for the trust, or particularly, if you have a special needs child or a spendthrift or you’re worried about the no-good son-in-law, or you have some, let’s say, common concerns, that is, mom and dad, who are, let’s say, in their sixties, have the same common concerns about their thirty-year old kids. They’ve already worked it out with me. They’re, or in your case, perhaps with you, they might both feel comfortable staying with that, and yes, there is a potential conflict. And by the way, we use the same criteria here to get out of a conflict, which I am a big believer in in almost every area of advisor/advisee relationships, which is full disclosure.
Jim: Full disclosure on everything, on fees, on what has been said, and in fact, even when we do a will for a married couple, even one who is happy, I actually explain to people that sometimes I’m going to give advice that might be more favorable for one spouse than another, but I’m just going to do it the way I see it, and I actually have a clause in my engagement letter that people agree to a joint representation.
Howard: Yeah, that’s of critical importance because, otherwise, one of the parties might say later on that he or she was not involved in this potential conflict of interest, and therefore, the entire thing was improper. Yeah, it seems to me, at this point, at least I’ve reached the point in my career that I will only represent a husband and wife in doing an estate plan if each will sign a conflict of interest waiver, and what is called a dual representation agreement. I think it’s very important.
7. Understanding Undue Influence
Jim: Well, that’s good. You know, I know you also have written and are an expert in two areas that I’d like to at least touch on before we end the show. Could you talk a little bit about undue influence? Because I know that that is an area that you’ve written about, and it’s not necessarily so obvious to a lot of people.
Howard: Right. Well, that’s…okay, I’d be happy to. There are really two general areas of undue influence: one is undue influence between the spouses, and the second area is undue influence involving a person who is a testator, meaning somebody who makes a will, or a settlor or trustor, meaning somebody who makes a trust, and a third party. For example, if somebody gets the ear of a person who is preparing a trust, and as a result of the person’s confidence in this individual and reliance upon the individual, a trust gets prepared, which heavily benefits the individual. That’s an area of a testamentary undue influence. In a family situation, as we’ve discussed before this, each of the spouses owes a duty of trust and confidence and a fiduciary duty, not to take advantage of the other one. And so, if a financial transaction is entered into, which is heavily, overwhelmingly, say, in favor of one of the spouses to the detriment of the other spouse, that’s another kind of undue influence, and what both of these situations, the husband/wife situation and the testimentor situation, have in common is the concept of unfair advantage. See, it really doesn’t show undue influence if somebody receives an advantage in a transaction, but is it an unfair advantage when all of the circumstances are considered? That’s of critical importance, and unfair advantage applies to the maker of a trust and the beneficiary who gets the maker’s ear, just as it does to a husband and wife.
Jim: Well, one of the areas that I wrestle with, I would say, and I guess I’m pretty lucky that that vast majority of our clients are, what I would call, ‘Leave it to Beaver’ marriages (original husband, original wife, and the same kids), but sometimes, I get a situation where there is a second marriage, and there are kids from a first marriage, and a lot of times, the kids from the first marriage don’t end up with a lot of money, or don’t end up doing very well, and I don’t know if you would consider that a situation of undue influence because…
Howard: Yeah, it absolutely does, really!
Jim: …but the people that come to the office are the second spouse and the original parent. And the kids aren’t in the room!
Howard: Yeah, you’re right. I was going to say, you don’t have the kids from the first marriage in attendance at that conference. No, you’re right. That could absolutely be an exercise of unfair advantage where, let’s say, somebody is divorced or widowed, and he or she has met a new special person in their lives, and what I’ve seen, and I’m sure you have too, Jim, seen very frequently, is that the estate plan of the person who frequently is elderly, the estate plan of this elderly person is drastically changed, so that the adult children of a former marriage get nothing, or next to nothing, and the new special person gets everything.
David: It sounds like Cinderella to me!
Howard: Yeah! Well, it is, sort of. And what the court asks is has…among other things. You know, they talk about the participation of the…
Jim: You have about thirty seconds, Howard.
Howard: Well, I can stop here, just say the participation, and also, has that person achieved or attained undue benefit? That’s it.
David: Well, on that note, let’s say thanks for listening to this edition of The Lange Money Hour, Where Smart Money Talks, and thanks to Howard Klein for joining us. Thanks also to our program coordinator, Amanda Cassidy-Schweinsberg, and to Jason Gruber, our in-studio producer. As always, you can hear an encore broadcast of this show at 9:05 this Sunday morning here on KQV, and you can also access the archive of past shows, including Jim’s chat with Vanguard Group founder John Bogle, on the Lange Financial Group website, www.paytaxeslater.com, along with the written transcript and a video clip from the interview. Finally, please join us in two weeks on Wednesday, February 20th at 7:05 for the next new edition of The Lange Money Hour, when Jim’s guest will be Dr. Kathleen Sindell, author of the book, “Social Security: Maximize Your Benefits.”
James Lange, CPA
Jim is a nationally-recognized tax, retirement and estate planning CPA with a thriving registered investment advisory practice in Pittsburgh, Pennsylvania. He is the President and Founder of The Roth IRA Institute™ and the bestselling author of Retire Secure! Pay Taxes Later (first and second editions) and The Roth Revolution: Pay Taxes Once and Never Again. He offers well-researched, time-tested recommendations focusing on the unique needs of individuals with appreciable assets in their IRAs and 401(k) plans. His plans include tax-savvy advice, and intricate beneficiary designations for IRAs and other retirement plans. Jim’s advice and recommendations have received national attention from syndicated columnist Jane Bryant Quinn, his recommendations frequently appear in The Wall Street Journal, and his articles have been published in Financial Planning, Kiplinger’s Retirement Reports and The Tax Adviser (AICPA). Both of Jim’s books have been acclaimed by over 60 industry experts including Charles Schwab, Roger Ibbotson, Natalie Choate, Ed Slott, and Bob Keebler.