Skip to main content

This article was originally published on November 12, 2020.

Reproduced with permission from Tax Management Estates, Gifts, and Trusts Journal, 45 EGTJ 06, 11/12/2020. Copyright R 2020 by The Bureau of National Affairs, Inc. (800-372-1033) http://www.bna.com 

While many still assume that a ‘‘traditional’’ family is one with a husband and wife who are legally married and have biological children of both parents, the definition of what is traditional has been evolving for many decades. Further, estate planning attorneys especially have been aware that ‘‘families’’ are not so easily defined. To provide the best plan for a client, we must be trusted with information that some may not feel comfortable sharing with the general public. However, more and more clients are comfortable living openly in situations that have historically been taboo. Polyamorous families typically involve three or more consenting adults living together. They may all be in a relationship together or they may have delineated relationships among only some members of the group. There may be multiple children with different parents the entire group is raising together as a family. As advisors, we should be comfortable with discussing these situations and familiar with their nuances. Further, with genetic testing and multiparent situations, it is important to consider how to best address these situations to avoid conflict.

Changing norms and societal views

While one man, one woman legal marriage is considered the norm, that this has only been the norm for a relatively short period of time. History has taught us that this concept of marriage is relatively new. Some societies encouraged (and still do) men to have multiple wives, not necessarily for the purpose of the man’s enjoyment, but more so to allow the women to help each other raise children and do housework together. While not all would agree to this arrangement, many wives enjoyed this arrangement as the additional help was beneficial to their daily lives. Of course, there are instances in which wives did not appreciate the competition. Still other civilizations encouraged same-sex partners because they believed that opposite sex partners could not provide the emotional support.

Even in recent history, we have seen regularly and rapidly changing views on marriage and its purpose. The Victorian Era encouraged women to be chaste and asexual. During the 1920s, young singles began interacting in social spaces like dance halls (insert gasp here) without chaperones. Most ads from the 1950s will show that Americans celebrated the nuclear family with a working husband and a stay at home wife. In the 1970s and the 1980s, more women began working outside the home and were getting married later or not at all since women no longer necessarily needed a husband’s income to rely on. More couples were having fewer children and later in life as well. The 21st century has proven that families can be created in many different ways with the American legalization of same-sex marriage and assisted reproductive technology. It is always important to consider that what is considered normal is determined by the society and history around us and is everchanging. What may be considered normal to one society is different to another, and the passage of time obviously affects these societal norms.

The legal rights of romantic partners, including for tax and estate planning purposes, are typically contingent upon marital status. Similarly, a child’s rights of inheritance and, in some circumstances, their ability to obtain insurance, social welfare, or legal benefits, may also depend on a parent’s marital status. A spouse’s status often has important consequences for tax planning, employee and governmental benefits, and defined assumptions under common law. However, with changing norms and priorities, individuals are choosing to live together and have a family but without wanting a legal marriage or feeling it necessary. Sometimes even married individuals have an agreement with their spouse to remain married while each party pursues his or her own romantic interests outside the marriage. These kinds of ‘‘nontraditional’’ relationships are not new, and estate planning attorneys should be prepared to discuss them openly and plan for these families.

Families that involve multiple partners require special care in planning. When most hear the term polyamory, they think of a polygamous family. In a typical family structure of polygamy, there is one legal spouse with one or more additional ‘‘spiritual’’ spouses committing for life. Children in a polygamous family usually are raised together in a communal arrangement where all ‘‘spouses’’ parent together. Popular shows like ‘‘Big Love’’ or ‘‘Sister Wives’’ have normalized these family arrangements to an extent. At a minimum, the shows have shed light on polygamous family relationships. Since actual polygamy is illegal in the United States, it would be unlikely for most estate planners to be asked to engage in planning for this type of family.

Polyamory is not limited to polygamy. Polyamory is the practice of having more than one open sexual and/or emotional relationships, typically with the consent of all parties involved. While polyamory may seem new to our lexicon, headlines throughout recent history have been filled with stories of people living in polyamorous relationships. Spencer Tracy stayed married throughout his life but was known to be in a long-term romantic relationship with Katharine Hepburn. Others choose to remain married for social or financial reasons, but maintain an agreement that each may engage in new committed and sometimes public relationships with a new partner.

And then there are the secret second family scenarios. Charles Kuralt maintained a second family without his first family’s knowledge for more than 20 years. With the widespread use of genetic testing kits, more families are finding out about half siblings they never knew about. Estate planning attorneys may or may not be aware of such scenarios and a plan may implicate such secret families.

In today’s world, the traditional definition of ‘‘relationship’’ rarely describes what truly exists. Planning for polyamorous relationships presents both typical and unique legal, tax, and psychological challenges that warrant special consideration.

What does it mean to be a parent?

Until recently, determining who was a descendant of whom was fairly simple under the law and in estate planning documents. While paternity may have been an issue, there was no question about a biological child being born more than nine months after a person’s death. The use of genetic material to create additional descendants after a person has died is an issue our court system is only beginning to tackle. We have already seen scenarios in which the children from the first marriage sue to prevent their father’s surviving spouse from using the deceased father’s sperm to create additional posthumous descendants that would dilute their share of their father’s estate.

Previously, illegitimate children were treated differently simply because their parents were unmarried, and they would not have been legal heirs of a father who would not recognize them. As societal norms have shifted regarding pregnancy out of wedlock as well as the ability to conclusively prove parentage, the law has come to treat illegitimate children mostly the same as legitimate children for inheritance purposes. However, children born outside a legal marriage (or their mothers) may still have to prove paternity to determine certain legal rights. Further, some states have enacted statutes of limitations regarding challenging paternity to avoid descendants materializing generations down the line. Paternity and heirship determinations still vary across the states, as evidenced by the following cases.

In a 1971 case, Labine v. Vincent, the U.S. Supreme Court held that a law precluding an illegitimate child from inheriting as an intestate heir was valid. In Labine, Ezra died without a will. During his life, Ezra had a child, Rita, with Lou Bertha.8 Ezra and Lou Bertha never married. While Ezra acknowledged Rita at his child, at that time acknowledgement did not automatically make Rita an heir in Louisiana. By law, Ezra had to take certain actions to formally acknowledge Rita thereby legitimizing her under the law. After Ezra’s death, his other relatives argued that they were the rightful recipients of Ezra’s property because Rita had not been formally acknowledged as required in the statute. However, Lou Bertha argued on Rita’s behalf that Rita was Ezra’s rightful and sole heir as his sole surviving child. Lou Bertha argued that the law disinheriting Rita was a violation of the Equal Protection and Due Process clauses in the Constitution. The Supreme Court, however, held that it could not override the Louisiana legislature’s determination to treat illegitimate children differently. The Court also focused on the fact that Ezra could have legitimatized Rita by formally acknowledging her or by marrying Rita’s mother to legitimize Rita, and the Court ruled in favor of the other relatives. While the Louisiana statutes have been amended to treat legitimate children and illegitimate children as equals for inheritance purposes,11 the U.S. Supreme Court has never overturned Labine.

In another U.S. Supreme Court case, Mathews v. Lucas, Belmira and Robert lived together for 18 years. During that time, they had two children together, but they never married. When Robert passed away, Belmira applied for survivor benefit under Social Security for the two children. Under the laws governing Social Security at the time, all dependent children (legitimate and illegitimate) of a decedent were entitled to seek survivorship benefits. However, illegitimate children had additional hurdles to overcome compared to legitimate children. Under the law, ‘‘a child, unless adopted by some other individual, is entitled to a presumption of dependency if the decedent, before death, (a) had gone through a marriage ceremony with the other parent, resulting in a purported marriage between them which, but for a non-obvious legal defect, would have been valid, or (b) in writing had acknowledged the child to be his, or (c) had been decreed by a court to be the child’s father, or (d) had been ordered by a court to support the child because the child was his.’’ Unfortunately for Belmira’s children, they did not meet any of the requirements under the law. Belmira, on her children’s behalf, challenged such standards on the grounds that they violated the Due Process Clause because they treated illegitimate children differently. The Supreme Court, however, found that the requirements were permissible as they were reasonably related to the government’s purpose of administrative efficiency in determining survivorship benefits. Presumably the Court reasoned that the line had to be drawn somewhere. While this is a 1976 case, and the Social Security Act has been subsequently amended, the case has never been overturned.

In a 2010 Supreme Court of Mississippi case, Thelma was the only child born to James and Alice. After James and Alice’s deaths, Thelma died without a will and with no surviving spouse or children. However, before his death, James was married to Rosetta, and they had five children, one of whom was Daniel. Daniel was the alleged father of numerous children who argued that they would be the heirs of Thelma’s estate. Under Mississippi law at the time, an illegitimate child could not have claim an inheritance unless there was an action for paternity filed within a certain time period after the death of the purported father. Daniel’s alleged children failed to claim paternity within the time period following Daniel’s death and therefore the court found that they were barred from alleging their status as heirs of Thelma’s estate. Presumably the court did not want to encourage distant relatives from using their alleged father’s status to come out of the woodwork in a rich relative’s estate.

In 2017, a Minnesota appellate court upheld a statutory presumption that a child born during the marriage of a couple was the biological child of the couple even if there was no biological proof. In Matter of Estate of Nelson, Wallace’s heirs were deemed to be the children of Mattie and John, the mother and father listed on the Wallace’s birth certificate. However, two other sets of individuals came forward to argue that in fact Wallace’s father was in fact not the father on his birth certificate, but the same father as such sets of individuals (there were two different sets of petitioners arguing for their respective father). The groups asked the court to order that DNA testing be done to determine who was Wallace’s biological father. Therefore, in the event Wallace’s father was determined to be someone else, the two side’s requested that the court distribute Wallace’s estate to heirs as determined by Wallace’s newly discovered biological family. Interpreting and upholding the validity of Minnesota statutes, the court found that ‘‘if a father-child relationship is established under the paternity presumption under the parentage act, only that father can be the child’s genetic father.’’ Therefore, court did not allow the purported half-siblings to do the DNA test and found that Wallace’s heirs were the children of the parents listed on his birth certificate.

While some of these cases many seem antiquated and irrelevant, they show that the status of a child and his or her rights are not always clear cut in blended or non-married families. Further, such status and rights are constantly changing depending on the statutes and a family’s specific scenario.

Is this your spouse?

The legal determination of who is a spouse and who is a descendant is typically reserved to the state legislatures and their judicial system. While these rules have come to be more uniform, there remain differences across the states. Such differences can create an inconsistent environment which produces unclear results depending on who is being asked the question, ‘‘is this your spouse?’’ For example, several states offer couples the alternative of a domestic partnership or civil union and a few states still have common law marriage.

In Yager v. Gregory Cattle Co., a couple had been married for 25 years but subsequently divorced. Eventually, the two reconciled and resumed living together and holding themselves out as husband and wife. However, they never legally remarried. After the man’s death, the surviving women applied for but was denied his worker’s compensation benefits. The Supreme Court of Mississippi determined that the woman, as the surviving life partner, was not entitled to his Worker’s Compensation benefits because they were not legally married. The court found that while ‘‘many of the indicia of a marriage were present,’’ including the filing of joint tax returns, cohabitation, and naming each other as insurance beneficiaries, to be a legal spouse for purposes of receiving the benefits, the parties needed an actual legal marriage.

Similarly, in Crescionne v. Louisiana State Police Retirement Board, the court analyzed the meaning of ‘‘surviving spouse’’. In this case Jean Claude and Sara were married but at the time of Jean Claude’s death, they were legally separated. Jean Claude was a State Trooper who died in the line of duty. He had children from a prior marriage to Sheila, and Sheila’s children would have been entitled to Jean Claude’s survivor benefits if it were determined that there was no surviving spouse. The court ruled that even though Sara was legally separated from Jean Claude at the time of his death, she was still the surviving spouse and under statute, the sole beneficiary of the survivor benefits.

These cases demonstrate that even in a more traditional relationship with just two parties, everyone may have different opinions on the definition of what is a spouse. It may be prudent to discuss with your clients what they consider to be a legal spouse and provide a definition in the estate plan that indicates when the status of ‘‘spouse’’ begins and ends. Depending on a client’s values and experience, they may wish to define the term ‘‘spouse’’ so that if divorce proceedings are initiated, the term spouse no longer applies rather than waiting until an order is entered dissolving the marriage.

In second (or third and so on) marriage scenarios, you may wish to discuss with your clients how to avoid contention between children or prior marriages and the surviving spouse. While an estate plan may provide for the distribution of all income to a surviving spouse with the possibility of principal in certain circumstances, such plan may encourage surviving children to question every expenditure for their step-parent’s benefit. This may lead to uncomfortable arguments and sometimes litigation. Providing for a unitrust distribution to the spouse or more specific guidance on how and if certain items will be paid may reduce the likelihood of litigation. Some expenditures that may be helpful to reference are real estate taxes, routine maintenance, repairs and upkeep on any residence, major capital expenditures (such as a new roof) for the residence, medical expenses and health insurance for the surviving spouse, utility bills, vacation expenditures, insurance on a residence, artwork or other valuables, income taxes on the distributions from the trust, caregiver expenses as the surviving spouse ages or becomes ill, and automobiles and auto insurance. Further, you may wish to discuss setting aside a specific amount for the children at the first spouse’s death so they are not waiting in the wings for stepparent’s death.

Though plural marriage remains illegal in the United States, examples of polygamy and polyamory continue and may be expanding in the United States today. However, these relationships do not always stand out as unusual in modern society. Further, accidental or unintended polygamy/polyamory may occur as well.

In 1921, the Supreme Court of Fulton County, New York was faced with a situation in which James had lived with Anna for over seven years.26 At some point James left Anna and married Flora. Anna brought suit alleging a common law marriage and requested support and maintenance and annulling James’ marriage with Flora since he was already married. The common law wife sued for spousal support and to have the subsequent marriage annulled. The court sided with the first wife and ordered James to pay Anna’s legal fees and a hefty seven dollars per week and the second spouse got nothing except an annulment of her marriage.

Cases dealing with multiple marriages, however, are not a thing of the past. In 2008, a Missouri court was overseeing the estate of George Davis and his two ‘‘wives.’’27 George married Agnes together they had eight children. At some point he left Agnes and began a relationship with Evelyn and they had a son, Thomas, together. George, Evelyn and Thomas lived together in a home owned by George and Evelyn as ‘‘George S. Davis and Evelyn Davis, his wife.’’ It is unclear whether Evelyn was aware George was already married. 100 years after George married Agnes, Thomas died without a will. Naturally, Thomas’ death led to a dispute between the George/Agnes descendants and Evelyn’s family about who would inherit. Due to the legal marriage between George and Agnes, the court upheld the lower court’s finding that the George/Agnes descendants established their relationship in accordance with the legal requirements and therefor they were the rightful heirs of Thomas.

Are you my mother (or father)?

While previously, children could only be created in a way which I do not need to provide specific detail, modern science and situations are providing different ways in which a legal child may be brought into the world. While most parents wish to provide for their children, providing for a child born prior to or during the marriage out of wedlock may not be a priority of a surviving spouse. Even if someone is a biological child, there are situations in which parents engage in lawsuits with their own children over insurance benefits, retirement benefits, and other assets distributable upon a person’s death.

An early case on the issue of assisted reproductive technology is In re Adoption of Anonymous. In this case, a husband and wife were married but unable to have children together. With both parties’ consent, the wife underwent ‘‘artificial insemination’’ using a donor’s sperm. Her husband was listed as the father on the child’s birth certificate. The parties later divorced, and the wife eventually remarried. Her second husband petitioned the court asking to adopt the child and argued that the first husband’s consent was not necessary to the adoption action since the first husband was not the biological father of the child. The court found that while this type of reproductive technology was new, the first husband was the listed father on the birth certificate and was the legal father regardless of biology. The court referenced that this kind of technology would likely continue to cause litigation, and they were correct.

A later case that references the outcome of In re Adoption of Anonymous is In re Martin B. out of the Surrogate’s Court of New York. In this case, Martin created several trusts for the benefit of Martin’s ‘‘issue’’ and ‘‘descendants.’’ Later, Martin’s son, James, died of Hodgkin’s Lymphoma shortly before Martin. Before James’ passed away, he and his wife decided to cryopreserve James’ semen in the event of his passing. After his death, James’ surviving wife underwent in vitro fertilization using cryopreserved semen on two separate occasions in years after James’ death and gave birth to two children. The trustee of the trusts petitioned the court to provide guidance and direction on whether such posthumously born children were descendants of Martin for purposes of being beneficiaries of the trusts. Looking to several treatises and the existing New York laws, the court found that absent an expression otherwise in the governing instruments, the posthumously conceived children were to be treated as ‘‘issue’’ and ‘‘descendants’’ for purposes of the trusts.

Further, courts have found that even if the child is not biologically related, non-biological children can use the theory of equitable adoption in some states to claim the status of an heir. Of the states that do recognize equitable adoption, some require the existence of an express or implied contract to adopt and some do not.

Equitable adoption is discussed at length in DeHart v. DeHart by the Illinois Supreme Court in 2013. In DeHart, James DeHart, the purportedly equitable adopted son, filed a complaint against the executor of Donald DeHart’s estate. During Donald’s life, he had held James out to be his biological son. Donald even had provided to James a birth certificate showing that he was James’ father. Eventually James discovered that he was not the biological nor adopted son of Donald. Donald told James that due he actually adopted James during a relationship with James’ mother. Donald made his funeral arrangements listing James as his son. Donald died with a surviving wife who held herself out as Donald’s sole heir. However, James alleged that he was also an heir and eligible to inherit from Donald under the doctrine of equitable adoption. The surviving spouse and the estate argued there was no valid claim because there had been no legal adoption and no contract to adopt. The court found that, in Illinois, the requirements and circumstances that would create an equitable adoption are unclear. The court chose to adopt the holding of Estate of Ford v. Ford, a case heard by the California Supreme Court in 2004, to hold that the alleged child must prove that the decedent intended to adopt him and consistently acted as if that were the intention. There must be evidence demonstrating that the decedent’s intention was to maintain a ‘‘close and enduring familial relationship’’ with the child.33 Because this existed in DeHart, James was found to be an heir of Donald.

Williams ex rel. Z.D. v. Colvin involved an appeal to the U.S. district court after a denial of Social Security benefits to an allegedly equitably adopted child. The court found that Z.D. was not the equitably adopted child of Williams and therefore Z.D. was ineligible to receive child’s insurance benefits. The Social Security Administration rules provided that ‘‘an individual is entitled to child’s insurance benefits on the earnings record of one who is entitled to disability benefits if the individual (1) is an insured person’s child, (2) is dependent on the insured person, (3) applies for child’s insurance benefits, (4) is unmarried, and (5) meets certain age requirements.’’35 An equitable adopted child is deemed to be an insured person’s child, thereby fulfilling the first requirement. To create an equitable adoption, Texas law mandated that there must be a clear and convincing agreement to adopt. In Williams, the evidence demonstrated that Z.D.’s mother was not willing to enter into an agreement to adopt with Williams and had sought to obtain custody and therefore there was no agreement to adopt. Therefore, the court found that Z.D. was not equitably adopted.

In re Estate of Fairhurst involved the reverse use of equitable adoption. In Fairhurst, the alleged parent sought to file a wrongful death action on behalf of a deceased minor’s estate thereby receiving a share of the deceased minor’s estate. The petitioner alleged that he (as an equitably adoptive parent) had standing to bring the suit. The court found that the concept of equitable adoption was created to benefit the child, and that the concept only allows the court to use its discretion in awarding a child rights to inherit. Because equitable adoption (in New York) does not create a legal relationship between the two parties that goes both ways, the court held that the petitioner lacked standing in order to commence the action.

These cases are examples of the many ways there are to create or finds extra ‘‘descendants.’’ As an advisor, you may want to discuss with your clients defining such terms as ‘‘child’’ and ‘‘descendant’’ in estate plan documents to close any gaps in the law and reduce the likelihood of litigation. Further, discussing these kinds of scenarios with clients may offer you an insight into what values and beliefs your client’s have about the kinds of descendants they wish to support. Depending on their personal thoughts you may want to restrict or broaden what a descendant is for purposes of distributions.

Despite the above, it may seem well settled that a child can only ever have two legal and biological parents at a time (though as evidence above, a legal parent may be difficult to define). However, this ‘‘fact’’ may be changing as well. There are now multiple examples of a child having three legal parents in certain states and countries as well as scenarios in which a child has three biological parents.

Some states are allowing more than two individuals to have certain legal and parental rights to a child. These situations may be amicable relationships in which three people have chosen to raise a child together, either as a polyamorous, triad, or simply as friends. There may be no need to court action while all parents are getting along harmoniously. However, in other cases, the courts have had to get involved to determine who has parental rights. In one recent case, Kitty was living with Darren and Darren’s boyfriend, Sam, on the east coast. Kitty and Darren decided to have a child together as friends and that all three would raise the child together. In fact, Kitty and Darren agreed to give the child Sam’s last name. Over time, the relationship soured, and Kitty met someone else. She and her new spouse got married and she decided to move to California and take the child with her. Darren and Sam objected and brought suit to enforce their parental rights. Clearly Darren would have enforceable parental rights, but Sam also wanted to be deemed a parent. A New Jersey court found that Sam was a ‘‘psychological parent’’ and ordered that Kitty could not take the child away.

Perhaps even more complicated, scientists have discovered a method to mix DNA from multiple parties. Such child would have more than two biological parents depending on what metrics you are using to determine ‘‘biological.’’ While this technique has not been used in the United States yet, it has been used in other countries in in vitro fertilization. With U.S. courts already recognizing three legal parents, and with such advances in DNA technology, we will likely see more three or more parent scenarios.

No matter the number of parents, ideally all parties should coordinate the naming of a guardian in their estate plans to avoid conflicts. Considering parties that may not agree with the family arrangement and their potential objections in court in the event of the death of one or more of the parents may also help avoid controversy. Including language in a will or having a detailed letter of wishes in the safekeeping of the attorney or other trusted party may help ensure the wishes of the parents are known to and followed by the court.

Marriage? It’s just a social construct.

For many living in committed relationships, they find no reason to enter into a legal marriage. Others have had a failed (or more than one failed) legal marriage and do not wish to ever go through the divorce process again. Nonetheless, legal marriage still overs benefits of which those who are not legally married cannot take advantage. For example:

  1. The unlimited gift and estate tax deduction for transfers between spouses;
  2. The filing of joint income tax returns may reduce one’s income taxes;
  3. A surviving spouse can rollover the deceased spouse’s IRA and take such distributions out over the survivor’s lifetime to stretch out the benefits;
  4. A non-employed spouse can use the working spouse’s income to contribute to a spousal IRA;
  5. A surviving spouse’s benefits from Social Security;
  6. A legal spouse is the default agent to make medical decisions in many states; and
  7. Spousal forced share rights to an estate.

Nonetheless, it is important to note that non-spouses are sometimes allowed certain rights typically limited to legal spouses. For a time, non-spouse beneficiaries were able to roll over inherited retirement plan benefits to an IRA on a tax-free basis even if the beneficiary was anyone other than a spouse. Section 829 of the Pension Protection Act of 200640 allowed a non-spouse beneficiary to directly rollover qualified retirement plan benefits to an inherited individual retirement account. Further, the Worker, Retiree and Employer Recovery Act of 2008 (WRERA) made rollover of a plan mandatory by the non-spouse recipient. From January 1, 2010, until December 31, 2017, qualifying plans were required to allow non-spouse beneficiaries to roll over inherited retirement benefits received as lump sum to an inherited IRA on a tax-free basis.42 However, this ability was revoked in the Tax Cuts and Jobs Act of 2017 such that only legal spouses can rollover an IRA. It is uncertain if non-spouses will receive this ability again.

In June of 2020, Somerville, Massachusetts adopted a city ordinance granting polyamorous groups certain rights held by spouses, such as the right to visit one in the hospital and the ability to confer health insurance benefits. Specifically, the ordinance specifies that domestic partnerships are an ‘‘entity formed by people’’ changed from an ‘‘entity formed by two people.’’ While it is unclear if other cities or states will follow, it is an acknowledgment of the existence of polyamorous relationships.

While there are still many legal benefits to being legally married, the focus of marriage has shifted more to simply finding a suitable life partner than being in the traditional legal marriage. Because of this societal shift and due to more acceptance of ‘‘nontraditional’’ relationships, fewer individuals are getting married. Further, more individuals are living in open relationships and living with multiple partners, some of whom or none of whom may be married. The rise of multiperson relationships as opposed to the two-person legally married couple creates issues in planning that must be considered.

As previously discussed, married spouses have certain legal rights under the law upon the first spouse’s death. In Illinois for example, if a spouse dies intestate, her surviving spouse shall receive the entire estate if there are no children.44 In Florida, a surviving spouse is entitled to the entire estate if there are no descendants and if all of the descendants of the decedent are descendants of the surviving spouse.45 The inheritance rights of a surviving spouse differ throughout the 50 states. The important point is that in all states, only a surviving legally married spouse can take advantage of these legal rights—non-married individuals would have no right to any portion of the estate.

In Blumenthal v. Brewer, a 2016 Illinois Supreme Court case, a nonmarried same-sex couple who had been together for decades had broken up. The parties in Blumenthal brought suit again each other alleging certain ‘‘marriage-like’’ property rights upon the break-up.46 The Illinois Supreme Court, however, held that public policy kept the court from treating the relationship like a marriage. The court ruled that one of the partners was arguing to treat the relationship as a common law marriage, and that such argument was therefore barred by the Illinois statute prohibiting common law marriage. While the ruling is especially unfair considering that at all times during the relationship, both in Illinois and at the federal level, same-sex marriage was illegal, an important takeaway is the court’s reluctance to give any property rights to unmarried partners.

So how do we plan for all of this?

As advisors, we are familiar with the contention that may arise between children of a prior marriage with the new spouse and between half siblings or step-siblings However, such issues may intensify when there are multi-partner relationships when you combine multi-partner households, and where there may be half siblings or step-siblings living full or part-time with their parent’s current partner(s) while maintaining a relationship with their other biological parent. Such complicated scenarios may be best addressed by creating parenting and visitation agreements to ensure that the parents, biological or not, have the desired access and involvement in each child’s life.

Polyamory also presents a special set of problems for individuals residing in community property states. Alaska residence, with its community property opt-in regime, may also cause issues if the spouse with one or more non-marital partners has opted into community property with the legal spouse.

In community property jurisdictions, title is not necessarily determinative of ownership, and therefore a surviving spouse may have rights to property, even if the decedent specifically bequeathed property to or designated as beneficiary a non-marital partner. In general, the surviving spouse owns an undivided one-half interest in each community asset at the first spouse’s death. For example, if decedent owns a house that is occupied by the non-marital partner, and the house was purchased with decedent’s income earned during marriage, then upon the decedent’s death, the surviving spouse and the surviving non-marital partner likely are tenants-in-common for that residence. Even if the decedent titled the property in the name of the non-marital partner, if it was paid for using community property, the result is likely the same. Therefore, unless the spouse consented to such titling, the surviving spouse has a one-half undivided interest in the residence also half owned and occupied by non-marital partner. In either case, particularly if spouse did not know about non-marital partner, this result is a recipe for estate litigation.

An attorney advising a client in a community property state regarding planning (gifts or bequests) for a non-marital partner with a consenting spouse can help to avoid litigation by having the client and his or her consenting spouse execute an agreement severing community property rights from the assets intended to pass to the non-marital partner.

Without a written agreement, many courts refuse to enforce a partner’s claim against another, even if it results in inequity. In Hewitt v. Hewitt, a woman brought suit against the man with whom she had lived, unmarried, for 15 years. The woman claimed that the man orally promised to ‘‘share his life, his future, his earnings and his property’’ with her and, therefore, that an implied contract between them entitled her to a share of the property accumulated during their ‘‘family relationship.’’ The Illinois Supreme Court refused to enforce the parties’ oral agreement because their living arrangements violated public policy. To hold otherwise, according to the court, would encourage the formation of ‘‘illicit’’ relationships.

The policy expressed in Hewitt was reaffirmed in a 2006 case before the Illinois appellate court. This case involved a man suing a woman with whom he had lived for 24 years. While the couple never married, the man alleged that they had a ‘‘quasi-marital’’ relationship. His action against his former cohabitant was for a constructive trust over her property and an accounting of all income and assets in her possession. The court ultimately ruled that Illinois public policy prevents the court from granting enforceable property rights to unmarried cohabitants.

Other jurisdictions, however, will infer and enforce an agreement based on either the conduct of the parties or principles of equity. The leading case, Marvin v. Marvin, was decided by the California Supreme Court in 1976. Actor Lee Marvin and the plaintiff had an oral agreement that that the plaintiff would ‘‘give up her lucrative career as an entertainer,’’ to devote her time to the defendant as ‘‘companion, homemaker, housekeeper, and cook’’ in return for ‘‘financial support and needs for the rest of her life.’’ When the parties broke up, most assets were in Lee’s name. The court held that the plaintiff’s claim stated a valid cause of action for breach of an express contract. The court further held that, in the absence of an express contract, the courts should ‘‘inquire into the conduct of the parties to determine whether that con-duct demonstrates an implied contract, agreement of partnership or joint venture, or some other tacit under-standing between the parties.’’ The court determined that a promise to perform homemaking services was lawful and adequate consideration for a contract, and the agreement would be unenforceable only to the extent that consideration consisted of sexual services. This case is instructive for jurisdictions that require an express contract, whether oral or written, in determining property rights between parties.

To avoid any issues of public policy, claims in non-marital ‘‘divorce’’ cases generally should be based on economic rights substantially independent of the relationship and should not be based on rights arising from the cohabitation or the performance of domestic services. For example, in Spafford v. Coats, an unmarried woman, who lived with an unmarried man, sued to impose a constructive trust on cars acquired during the couple’s cohabitating relationship, and for which the woman could prove that her funds provided the majority of the purchase price for such automobiles. The court held that the woman’s rights were independent of the relationship and were not based on rights arising from cohabitation. The court stated, ‘‘[W]here the claims do not arise from the relationship between the parties and are not rights closely resembling those arising from conventional marriages, we conclude that the public policy expressed in Hewitt does not bar judicial recognition of such claims.’’

Spafford was followed by Ayala v. Fox. In Ayala, after the parties broke up and moved out, Ms. Ayala sued Mr. Fox for recovery of payments Ms. Ayala made with respect to the couple’s home. The property was titled in Mr. Fox’s sole name even though he had promised to put the title in both of their names. The court found that, in reliance on that promise, Ms. Ayala jointly signed the mortgage and paid a majority of the mortgage, taxes, and insurance. However, Mr. Fox refused to transfer title or money upon the break-up. The court found for Mr. Fox, and distinguished Spafford on the grounds that Ms. Spafford ‘‘did not seek recovery based on rights closely resembling those arising from a conventional marriage or on rights founded on proof of cohabitation. . . .’’ If co-owning the home appeared too similar to a marriage, a written agreement may have granted Ms. Ayala an enforceable property right.

Mississippi recently ruled that when a claim is not based on relationship, the court can award a former unmarried cohabitant the amount she contributed to a joint residence on the theory of unjust enrichment. In Cates v. Swain, an unmarried couple lived together for six years, and during that time Swain contributed money toward expenses of the jointly occupied residence. After the break-up, Swain asked the court to declare a constructive trust or a resulting trust and alleged that Cates had been unjustly enriched. Since Swain was not alleging equitable division of property, but rather argued for unjust enrichment based on her contributions to property legally owned by Cates, the court found for Swain.

Instead of hoping for a court to find an implied agreement or rule in favor of certain property rights, it may be prudent to create express agreements between and among cohabiting parties so there are clear results upon a break-up.

Put it in writing – even if you can’t

When there are multiple parents to a child, legal or otherwise (emotional, psychological, etc.), the parties may want to discuss what arrangement would be in a child’s best interests. These kinds of discussions set expectations for all parties, both during the relationship and upon its dissolution. Such written document can provide the parties’ thoughts as to where the child should live (both location and with whom), how often each party should be able to see the child, vacation and holiday schedules, and financial support expectations for each child in the event the adults’ relationship ends. While these written agreements may not be enforceable by a court as they deal with minor children, discussing these issues openly when the relationships are amicable may facilitate more cooperation and agreement upon the determination of the relationship and thereby avoiding or lessening the need for litigation. Even if the agreement is not necessarily enforceable, a court could still look to the terms of the agreement to determine best interests of the child and what the parties would have agreed to when cooler heads prevailed.

Such agreements may be especially helpful when certain members of the group do not have legal rights to a child. This includes a situation in which multiple adults are living together and a child may have an emotional and loving relationships with all of the adults, not just his or her legal/biological parents. In the event the partners in the relationship decide to end their relationships, the legal parents will have the most legal rights with respect to the child, including the right to keep an ex non-parent from visiting the child. However, before a situation becomes acrimonious, the parties may agree that it is in the child’s best interests to maintain regular contact with all of the adults in the event of a breakup. To make visitation easier on all, the parties may also agree to continue to live in the same area.

State law varies regarding cohabitation agreements. California grants rights of cohabitants based on an implied or an express contract. Florida allows unmarried cohabitants to enter into an enforceable contract that establishes rights and responsibilities provided that there is clear, valid, and lawful consideration without express or implied agreement regarding sexual relations. In Texas, ‘‘nonmarital conjugal cohabitation agreements’’ must be in writing.

Polyamorous groups should consider entering into cohabitation agreements just like premarital agreements. General contract principles such as consideration or other required jurisdictional elements n may need to be addressed in order to make such contracts enforceable. The parties should disclose their assets and liabilities to avoid any challenges to an agreement based on lack of information or unconscionability. Parties may wish to determine property ownership among them both during and after the relationship, especially if certain members of the relationship are married to each other. For example, should a married couple own the main residence as tenants by the entirety? Should the parties each own the property as tenants in common or as joint tenants with rights of survivorship? Do community property rights need to be waived? What happens to dependent parties upon a breakup e.g., how and where will they live?

Many polyamorous groups will say that honesty and communication are the best way to keep their relationship healthy and strong. To assist the parties in having an open discussion regarding what would occur upon a party’s death or if a party leaves the group, the advisor may want to provide the group with a list of issues that may need to be considered to have an open conversation and put together an agreement for the parties. For example:

  1. Wages/earnings;
  2. Mortgage/rent payments;
  3. Real estate ownership and division;
  4. Personal property ownership and division;
  5. Insurance/retirement plan beneficiaries/proceeds;
  6. Shared bank account contribution;
  7. Filing of income tax returns; and
  8. Inheritances/gifts from family.

Such agreements can also discuss more specific and daily issues including:

  1. Payment of household expenses;
  2. Division of household duties;
  3. Division of childcare duties;
  4. Ownership, custody, and care of pets;
  5. Duties and obligations of a partnership, joint venture, or other business arrangement with the cohabitant (especially if the business is operated out of the home);
  6. Division of prior, current, and future debt obligations, including upon termination of the cohabitation;
  7. Retirement, membership, medical, and other benefits each cohabitant has and the division of those benefits including upon termination of the agreement; and
  8. Health, disability, property, life, and other insurance of each cohabitant.

While some of these issues may seem trivial or complicated to discuss ahead of time, it is important, especially in a multi-person relationship, to lay out each person’s expectations in an effort to avoid future surprise. In a group relationship where the parties may be dependent on one person to provide support, the parties may wish to discuss their support expectations ahead of time in the event of a break-up. Further, without an agreement or a list of each party’s property, upon the death of an individual, it may be difficult to prove whose property is whose and what property was not jointly acquired by all of the cohabitants.

Conclusion

As our world becomes more aware of and tolerant of ‘‘non-traditional’’ families, an advisor may need to consider how to plan for such mixed and expanded families. Creating an environment where your clients are able to discuss financial and familial expectations during and after the relationship openly with each other and with you will allow you to understand the full picture of a family and help guide clients through the issues they should consider as a result of their family structure. Providing flexible and real-world solutions for these families by discussing expectations and establishing agreements shows clients that you respect their relationship and that you have experience in dealing with every kind of family. Understanding the many nuances when it comes to multi partner and multi parent scenarios helps your clients properly plan for both the good times and difficult life events in a way that can reduce the need for and potential of litigation.

Reproduced with permission from Copyright [2020] The Bureau of National Affairs, Inc. (800-372-1033) www.bloombergindustry.com.

This article was originally published in Bloomberg Tax and republished on August 3, 2022. 

As a working mom of three emerging adults who has practiced estate planning law for 30 years, I appreciate more than most that no asset is more worthy of protection than the well-being of one’s children. And while the legal protections for minors (those under the age of 18) are fairly clear, there are several often-overlooked legal and practical issues to consider for college-aged children.

Parents who have a child leaving for or already in college usually have a lengthy to-do list. Having their child sign estate-planning documents before heading to campus, however, may be far more important than purchasing a laptop, deciding on dorm room de´cor, or teaching them to do laundry without turning their white t-shirts pink.

Once a child turns 18, the state considers them an adult for certain purposes. This is the case whether they are in high school, attending college, or working full time. It may surprise some parents that in this age of the Health Insurance Portability and Accountability Act (HIPAA) and other privacy laws, they do not automatically have the right to check grades, receive tuition bills, or obtain information regarding a child’s healthcare, regardless of whether they are paying all those hefty bills. Instead, a student must give explicit permission through a power of attorney or other school-generated form to ensure their parents have access to health, financial, and educational information.

Many universities will accept payment for tuition and other related expenses from a parent, but they will not directly send an invoice or provide account information to anyone other than the student. Similarly, if a parent, requests a copy of their child’s grades or health records, they may be out of luck. But we, as advisors can help our clients ensure they have the documents needed to allow access to their child’s academic files, medical records, and other protected information. We can also help our clients understand the importance of considering liability protection for college-bound students.

Durable Power of Attorney for Health Care and HIPAA Release

HIPAA restricts medical professionals from disclosing health care information due to privacy and confidentiality concerns. Without specific written authorization, medical providers are prohibited from sharing and discussing an adult child’s medical condition, diagnosis, and treatment. Most people understand that a Durable Power of Attorney for Health Care is important for elderly people, but this document is also imperative for young adults.

A Durable Power of Attorney for Health Care allows a child to designate an agent (usually a parent) to make important medical decisions when he or she is unable to do so. For a young adult, it is important to determine if a state’s Durable Power of Attorney for Health Care form includes HIPAA release language allowing the named agent access to medical records. If a state’s Power of Attorney form does not incorporate HIPAA language, a separate release form should be prepared. This is particularly important when a child is too busy with schoolwork to take care of follow-up health care items, such as transferring files or requesting copies of x-rays to hometown doctors. Unless a parent can produce documentation evidencing authorization, she will be unable to facilitate these types of requests.

Although not the primary focus of a student’s Power of Attorney of Health Care, the document also allows the expression of wishes relating to end-of-life decisions, including the withholding of life-sustaining medical treatment or the artificial administration of food and water. Finally, a Durable Power of Attorney for Health Care can include language relating to organ donation and burial or cremation instructions.

Durable Power of Attorney for Property

In addition to a Durable Power of Attorney for Health Care, an 18-year old child should execute a Durable Power of Attorney for Property. Without it, even though the parents may be a child’s sole source of support, they have no right to access a college aged child’s bank account. A Durable Power of Attorney for Property designates an agent (again, usually a parent) to make financial decisions for the principal (the child). While the child is at school, a parent may need to manage student loans, investment accounts, and other fiscal matters. For example, if a child decides to study abroad, the Durable Power of Attorney for Property would allow the agent to file the child’s tax return and write a check from the child’s checking account. The need for Durable Powers of Attorney and the identification of an appropriate agent and successor agent becomes even more pronounced in a separated or divorced household. Durable Powers of Attorney can also serve another very important purpose. If a child becomes incapacitated and did not execute a Durable Power of Attorney, the client might be required to initiate court proceedings in order to appoint a Guardian. A Guardian of the Person could be required to make decisions about a child’s physical well-being, while a Guardian of the Estate could be required to make decisions relating to the child’s finances. The legal process associated with a guardianship is often emotional, time-consuming, and expensive. It also allows information relating to private family matters to become part of the public record—an often-undesirable consequence.

Authorization to Receive Educational Information—FERPA Release

The Family Educational Rights and Privacy Act (FERPA) is a federal law that protects a student’s rights and restricts any other individual or entity, including parents, from having access to academic files. In response to FERPA, many schools developed their own forms relating to the release and waiver of their students’ records. A Durable Power of Attorney for Property and your child’s school form should be obtained and executed prior to the beginning of the first day of school in order to ensure that a parent’s access to educational records are not restricted by FERPA.

Will and/or Revocable Trust

College students who have assets in their own names should also consider signing a Will and possibly a revocable trust to avoid the imposition of intestacy laws. If a person dies without a Will, the laws of the state of residency will dictate the manner of distribution of assets. In the case of an unmarried young adult without children, the majority of intestacy laws provide for assets to be distributed to parents and siblings. In many cases, this may be an acceptable outcome. However, a student should consult with an estate planning attorney and consider whether these family members are appropriate beneficiaries. Many factors should be examined, including but not limited to, income and estate tax consequences. Further, without a Will, state laws dictate who is in charge of administering property. Any disagreements between individuals wanting to act in this capacity may take a significant amount of time and money to be adjudicated in probate court.

By establishing a Will, a young adult can direct the distribution of personal effects, including cars and jewelry, and other financial holdings such as checking, savings, and brokerage accounts, to desired beneficiaries. Further, by appointing a personal representative in a Will, the individuals or entities most capable of handling the responsibilities associated with administering an estate can be designated. Even without significant wealth, a young adult may feel that the default choices provided by state law will not accomplish his or her intent.

The estate planning process is a perfect opportunity to begin teaching a college-age child about family values from many different perspectives. It is likely that this will be the first time that the student will need to open a checking account, apply for a credit card and take responsibility for payment of tuition and housing bills. As part of the introduction to ‘‘real life,’’ it is an ideal time to discuss and ask a child to execute a Durable Power of Attorney for Health Care, Durable Power of Attorney for Property, waiver and release forms created by a school and a Will or other appropriate estate planning document.

Umbrella Insurance Coverage

Parents, with the help of a professional, should also consider issues that they have never thought about when their child moves out of the family home. For example, parents should review the coverage limits associated with their automobile and homeowner’s insurance policies and consider purchasing or increasing their ‘‘umbrella’’ or excess liability insurance. Umbrella policies protect assets when faced with a catastrophic liability claim. What if a child is accused of cyber bullying? Does a child have the family car? What if the family car is lent to a friend and that friend is in an accident? Did a child bring a pet to school? What if the pet bites a visitor? An umbrella policy is relatively inexpensive and could provide liability protection to parents in these types of situations.

Renter’s Insurance

While a student lives in a dorm or in campus owned housing, parents should confirm if personal property at school is covered by an existing homeowner’s insurance policy. When a child moves off campus, it is more likely that renter’s insurance will be required. If a student has valuable property at school, like jewelry, a bike, or a computer, renter’s insurance protects against theft. Also, renter’s insurance often covers the medical expenses of guests injured at the residence. Finally, renter’s insurance typically protects against fires caused by electrical issues or other unintentional causes.

What to Do Next?

Advisors should reach out to their clients and make sure that when a child turns 18, they have the appropriate documents in place. It is critical to discuss potential issues that can arise when a child is in a good physical and psychological place and not overwhelmed by schoolwork and the other social pressures that often accompany the start of college. Consider the story of a client whose 18-year old freshman became depressed while at school to the point of hospitalization. When the parents found out that their child was being treated (incidentally communicated by the roommate), they were unable to access any health records or make any provisions for care without their child’s consent.

Or consider the story of a client whose 19-year old son was attending a prestigious private university and paying his own tuition through a personal checking account that the parents funded on a monthly basis. The student was struggling academically, placed on academic probation, and ultimately failed out of school with no parental notification. A primary cause of the academic struggle was a substance abuse issue of which the parents also had no knowledge. All the while, the parents continued to fund their child’s bank account with money intended for tuition and other related expenses.

While it would be any parent’s nightmare to have either of these scenarios play out, the appropriate planning discussed in this article could have eased the stress of both situations. The time to act is before there is a problem and signing estate planning documents should be included as part of a standard family send-off-to-college-ritual.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners. Sheri E. Warsh is a partner at Levenfeld Pearlstein LLC in the Trusts and Estates Group. She can be reached for comments and questions at swarsh@lplegal.com or 312-476-7513.

Updated 2/9/2022: This article was originally written in 2019, but it continues to be relevant today. Given the active M&A market among accounting firms, many firms are updating their partnership agreements or entering into new partnership agreements post-transaction. This article details several key considerations regarding retirement provisions in partnership agreements for accounting firms and other partnerships, as well.

LP Partner Russell Shapiro authors Accounting Today article

Relationships are the lifeblood of every successful accounting firm. The relationships among the partners in a firm and with their clients are among a firm’s most valuable assets. So, when partners retire, maintaining client relationships and providing retiring partners with clear expectations for their retirement are important building blocks for a firm’s sustained success and future growth. Here are a few retirement considerations you should take into account when drafting or reviewing your firm’s partnership agreement. (For purposes of this discussion, we will use the term “partner” to refer to an equity partner.)

Transition Plans

Any partnership agreement should include a transition plan — it’s critical to ensure the firm retains the clients, skills, and abilities of the retiring partner. The transition plan itself is something that will be developed by the retiring partner in consultation with and with the ultimate approval of the managing partner or the managing partner’s designee. It is quite common to have penalties built into a partnership agreement for failure to give the requisite notice or failure to adhere to a transition plan. I like to give the executive committee latitude (within a range) to reduce retirement payments in the event of a failure. In fact, I recently drafted a partnership agreement allowing the executive committee to reduce a retiree partner’s payments by up to 50 percent for failure to give the requisite notice or failure to adhere to the transition plan.

Vesting Period

Retirement benefits typically have a defined vesting period — 20 years is not uncommon. Your firm can decide to give partial or full credit for any years a partner spent as an income partner. Merged-in partners will be given credit for the period of time they were a partner at their old firm. Death and disability typically do not accelerate vesting, although in some firms it does.

Payout Period

The retirement payout period is typically 10 years, with the total aggregate amount payable to retired partners each year usually capped at some portion of the annual revenue or net income of the firm, for example, 4 percent of firm revenue. This is to ensure the firm continues as a financially healthy organization while it is paying out the retired partners. It’s also worth noting that, while not universal, retirement payouts typically do not accrue interest.

Retirement Payment Protections

Your firm may also need to account for retirement payment protections. These protections are more common in firms that still have their founders. Retirement payment protections may include personal guarantees of retirement payments by the remaining partners, the right to vote on certain matters (like mergers), and a security interest in the assets of the firm. You typically do not see these things in more mature firms as they could hinder the ability of the firm to grow and combine with other firms.

Retirement Ages: Early and Mandatory Retirement

The vast majority of firms provide for mandatory retirement. The larger the firm, the younger the age seems to be. Mandatory retirement is generally somewhere between the age of 62 to 70 years old. I used to see generally younger mandatory retirement ages in accounting firms, but in the last few years I have seen the age trending upward, as economic factors and people beginning families later in life has kept them working longer. The current average retirement age stands around 67, though 65 is still common.

Most partnership agreements will allow for early retirement starting at ages 55 to 60, provided the individual has a specified number of years of service as a partner. Should your firm include a provision for early retirement, the notice period should be long. Ideally, you want a notice period of two years in order to allow for the proper transition of clients.

My own experience is that early retirement is often discussed but rarely used. Most partners are not in a position to retire at 55 or 60 years old. Additionally, many partners do not want to retire around that age because they find this to be the time in life when they are most effective. Walking away from a successful accounting practice when they’re in their prime isn’t an appealing option.

Working After Retirement

Whether they retire early or not, many partners still want to work in some capacity after they retire. What retirement means in this context is a partner gives up his or her equity in the firm and becomes an employee. Typically, retired partners are paid for their personal productivity and for new clients. If your partnership agreement allows retired partners to continue working at the firm, my recommendation is to have year-to-year contracts in these situations. These short-term contracts help to manage expectations.

Don’t forget tax considerations for the partners-turned-employees. If your firm continues to compensate the partner for services rendered after retirement, self-employment tax issues need to be considered on the retirement payments.

Life Insurance

Many firms obtain life insurance on their partners. This could be used to fund some or all of the retirement payments. Firms will often keep the insurance for a period after a partner retires and may allow their partners to take over the policies if they no longer want them.

Clawbacks

There has been a recent revival in retirement “clawback” provisions. These provisions essentially reduce otherwise expected retirement payments if the retired partner’s book of business does not remain with the firm after the partner’s retirement. Clawback provisions are intended to encourage a well-executed retirement transition that accounts for the firm’s best interests. Several years ago, firms were moving away from clawbacks, but now, at least anecdotally, I see firms using them again in a limited manner.

There is usually a buffer zone and a maximum on the retirement benefit amount that may be clawed back. For example, you might see an approach where if the partner’s historical book falls 20 percent or more in the 24-month period after retirement, then the retirement payments could be reduced on a pro rata basis up to an aggregate of, say, 25 percent of the retirement payments.

Transitioning Retirement Systems

As a firm evolves, it may be appropriate to transition retirement systems. A firm might originally use a “book of business” approach. That is, the partnership will pay for someone’s book of business when they retire. But as the partnership matures, the firm might find that approach results in partners behaving in a manner not in the best interests of the firm as a whole. As a result, the firm may move to a deferred compensation or equity-based model to pay partners upon retirement. Similarly, a firm with an equity-based model may change to a deferred compensation model if, after a period of time, the equity approach no longer works for them.

Retirement system transitions are sometimes used to prevent founding partners from getting too much upon retirement based on their founding equity percentages. However, firms with an equity-based model have ways to address this other than converting to a deferred compensation model, such as requiring purchases and sales between partners to ameliorate the effects of highly disproportionate equity allocations.

When moving from one system to another, firms need to take care to avoid creating disadvantages for those who grew up in the firm and are at or near retirement. One option is using floor amounts for partners over a certain age. Another option is to maintain two separate systems and give the legacy partners the ability to select the higher of the two.

Preparing for retirement in a partnership agreement does not have to be complicated or set in stone. The retirement provisions in your partnership agreement today may not make sense 20 years from now. Discuss retirement payouts, mandatory retirement age, transition plans, and vesting periods with your partners to determine what provisions make the most sense for your firm today and where it will likely be in 10 years. It can save you a lot of time and hassle as the key members of your firm start getting gray hair and migrating toward warmer climates during the winter months.

Read the article on Accounting Today.

Want to learn more? Click here to view our collection of resources for accounting firms and the people who run them.

The below article first appeared as a column in the July 2018 newsletter for the Midwest Business Brokers and Intermediaries (MBBI), and given current M&A activity, the topic of “Legal Ethical Issues in Mergers & Acquisition Transactions” is still relevant today.

Corporate Partner David Solomon was a featured columnist for the Midwest Business Brokers and Intermediaries (MBBI) July 2018 newsletter on the topic of Legal Ethical Issues in Mergers & Acquistion Transactions.

Owners of a closely-held business typically “wear many hats”. It is not uncommon for an entrepreneur who started their business with friends or family members to act as a member of the board of directors and CEO of the business and may perhaps also be the company’s landlord. So, when a business owner decides to sell their company and is ready to hire a lawyer, it begs the question, who is the lawyer’s client?

Like most legal ethical issues, the answer can be found in the rules governing a lawyer’s professional conduct. For the purpose of this discussion, this author will focus on the rules that are in place in the State of Illinois.

Under Illinois Rule 1.13, a lawyer employed or retained by an organization represents the organization acting through its duly authorized constituents. Based on this rule, the lawyer is obligated to explain to the organization’s directors, officers, employees, members, shareholders, or other constituents, who their client actually is when the lawyer knows or reasonably should know that the organization’s interests are adverse to those of the constituents with whom the lawyer is dealing. However, under these rules a lawyer representing an organization may also represent any of its directors, officers, employees, members, shareholders or other constituents, subject to the provisions of Illinois Rule 1.7.

Illinois Rule 1.7 provides that a conflict of interest like the one described above (i.e. lawyer wants to represent an individual shareholder or director of an organization which is also the lawyer’s client) if informed consent to such conflict is provided. So, when the organization’s consent to the dual representation is required by Illinois Rule 1.7, the consent shall be given by an appropriate official of the organization other than the individual who is to be represented or by all of the organization’s shareholders.

Practical Application of These Rules

So, now that you understand the basics of these ethical rules, let’s apply them to typical scenario that arises in an M&A deal. In many transactions, the Company’s management team is asked to sign an employment agreement with the Buyer and the CEO of the Company (who is also the majority shareholder and chair of the board of directors) asks the company’s lawyer (who will also represent the company and all of the shareholders in connection with the sale transactions) to represent her in negotiating the terms of the employment agreement.

The lawyer and the CEO may not even see this as an ethical problem for the lawyer since it is fair to say that the buyer might not even buy the company if the CEO is not willing to sign an employment agreement. However, on the other hand, the CEO in this case may be in a position to “hold the deal hostage” by making various demands on the buyer that could cause the buyer to walk away from the deal thereby harming the other shareholders who want the deal to go through but are not going to continue employment with the buyer. Therefore, it would behoove the lawyer and the various interested parties at the company to have a frank discussion about these issues before the CEO hires the lawyer to represent her in connection with negotiating the employment agreement with the buyer and the lawyer should draft a conflict waiver to be signed not only by the CEO but the other shareholders too.

Hopefully the next time a lawyer reading this article gets approached by a client asking for help in executing an M&A transaction will stop and think about the various conflicts of interest associated with their role and consult with the owners and executives of the company before commencing their engagement. The author also hopes this article will help owners of closely-held companies be more sensitive to these issues when they are ready to prepare their company for sale.

For more information, please visit the Midwest Business Brokers and Intermediaries (MBBI).

Originally published in March 2016, Updated as of May 18, 2021

Most practitioners have now heard of “series” limited liability companies. Series companies (and series partnerships) have been around for quite some time now in Delaware and are becoming more familiar as series organization laws have been adopted in other states, including Illinois.

Having been an “early adopter” of the series LLC, we wanted to share some insights into where it is appropriate and (more to the point) inappropriate to use series organizations.

Our view is that the series company is a potentially complicated solution in search of a need that rarely exists.

10 Reasons Not to Use Series

Despite the apparent attractiveness of series organizations, on balance, there are usually more reasons to avoid them rather than to use them. Here are just a few:

1. Financing may be made more difficult due to lender unfamiliarity with series structures.

2. Licenses and permits issued by governmental authorities may be more difficult to obtain due to bureaucratic unfamiliarity with series structures.

3. Insurance coverage gaps may occur due to insufficient policy boilerplate and missteps in properly communicating insured parties.

4. Heightened risk of consolidation in a bankruptcy setting due to absence of case law.

5. Possible lack of limited liability when doing business in jurisdictions that do not have series laws.

6. General unfamiliarity by transactional counterparties can result in increased transaction costs (e.g., when a series is selling real estate, having to negotiate demands for guarantees by other series, dealing with gaps in title, etc.).

7. Employment and tort claims are more likely to “infect” affiliated series than separately organized affiliates due to a lack of case law and possible jury bias that a series may be just a dodge.

8. Lack of clarity in the tax treatment of certain series organizations. See the attached flowchart for the numerous ways a series organization can be viewed for tax purposes.

9. Difficulty of documentation. While forming a series organization is not difficult, drafting proper operating agreements for a series organization or individual series can be more complex and costly, with greater risk of defects in buy-sell and governance arrangements.

10. The client who is motivated to use series mainly to save annual filing fees is often the client most likely to shortcut formalities, resulting in increased vulnerability to “piercing of the corporate veil” or confusion in identifying the correct parties.

For these and other reasons, and despite having been an early user of series organizations, we tend to reject them more than we use them.

Where to Use?

In the middle market, we tend to use series organizations when we wish to achieve either greater commercial flexibility in the migration of assets to different series or when we are trying to simplify the implementation of complex tax planning structures.

We also like to use a series within the context of family limited liability companies, as estate planning can be done on a series-by-series basis. For example, if a family limited liability company has exchange-traded equities, bonds, and real estate within one family LLC platform, we may want to do gifting with the equities and real estate (which have more potential for appreciation) and not with the bonds (which may not be as likely to appreciate meaningfully). That targeted gifting effort is aided by a family LLC in series form.

Series organizations have also been used in segments of the financial services industry (e.g., where there is a separate series for each investment theme in a multi-themed hedge fund) and by insurance companies (as a way of isolating risks).

Tax Treatment of Series

In 2010, the Internal Revenue Service issued proposed regulations on series organizations.

Although the proposed regulations do not answer all questions, they provide a sensible framework for analyzing whether the series organization or a particular series (sometimes known as a “cell”) is a separate tax partnership or a disregarded entity.

What Do Series LLCs Look Like?

While the proposed regulations provide useful tax guidance, one should not think that all is now clear in the world of series organizations. Before you even get to the tax issue, consider all the types of ownership structures one can have with a series organization. Click this link for a chart that illustrates several iterations of series organizations with different tax results.

This just begins to scratch the surface of all the different ways to think about series organizations and the confusion that can be created.

Too Much of a Good Thing

And that is the gist of the problem. In terms of external commercial dealings, there continues to be considerable confusion about series organizations. An example is financing. A sophisticated lender with sophisticated counsel can get to the right place, but a less sophisticated lender with counsel who is not familiar with series organizations may not be able to see the path to limiting its recourse to the series that owns the property to be mortgaged and impose liability on the larger series organization or other series cells.

One of the more common reasons given for using the series organization is that it saves costs of forming separate LLCs. That is partly true, although in Illinois filing fees for an LLC that is authorized to create series is somewhat higher than the filing fees for an ordinary LLC, and each series that is formed involves a separate filing fee. Except in rather unusual situations where you may be creating dozens of series, the aggregate savings by using the series organization should not be material, and one must be realistic in assessing whether the apparent savings and filing fees are outweighed by the additional time and costs of setting up a proper series operating agreement, dealing with the attendant tax issues and the various commercial challenges that those series will face in the marketplace.

LP Partner Kevin Slaughter writes for Cannabis Business Executive.

 

As the market for the recreational use of cannabis develops in Illinois, more work needs to be done to give minorities a fair shot at ownership of dispensaries. Since the Illinois’ Cannabis Regulation and Tax Act went into effect on Jan. 1, no minorities have secured licenses to operate a dispensary. While the law has good intentions, with provisions designed to allow minority-owned businesses access to licenses, no African Americans or other people of color currently have one.

As drafted, the legislation contains a few loopholes that established cannabis operators can exploit to their benefit. A few changes to the statute would create a more level playing field for minority owners in Chicago and the rest of the state.

It would be the fair thing to do. Minorities in urban areas have been disproportionately affected by the war on drugs, a failed policy that criminalized possession and dealing of banned substances. Their communities were eviscerated by the incarceration of people of color, especially African-American men who turned to drug dealing as a way to earn money.

Legislators have taken this history into account. Laws in Illinois and other states have included “social equity” provisions in legislation legalizing cannabis, which are intended to help populations harmed by past drug policies to access the economic benefits of cannabis legalization. The Illinois law uses various tests to determine whether a business qualifies as a “social equity applicant.” Under one test, an applicant can qualify if control of the applicant, and at least 51% of its ownership, are held by one or more individuals who have resided in an “disproportionally impacted area” for at least five of the last 10 years (these areas are census tracts that meet one of several criteria, such as having a poverty rate of at least 20%, having 75% or more of its children participate in the federal free lunch program, or having an average unemployment rate that is more than 120% of the national average). Applicants can also qualify if 51% of their ownership is held by individuals arrested or convicted for crimes eligible for expungement under the act. Alternatively, applicants with at least 10 full-time employees qualify if 51% of current employees either reside in impact areas, or if those employees themselves have records eligible for expungement.

Unfortunately, these provisions make it too easy for white owners to exploit.

Here’s how it works: under the Illinois law, applications for conditional adult use dispensing organization licenses are scored on a scale from 0 to 250. Social equity applicants automatically receive 50 out of 250 possible points. That’s a nice head start, especially when the difference between a successful application and a losing application can be one point or less.

This makes it all too tempting for white applicants to game the system. Some recruit “owners” who help them qualify as social equity applicants, only to have those “owners” magically disappear after the license is granted. I’ve heard stories of people getting paid as much as $25,000 to stand in for that purpose. White-owned businesses can also just hire enough low-paid budtenders to reach the employee demographics required to qualify for social equity advantages. In many cases, you can’t fault people because they’re following the rules to the letter technically, but the intended benefits aren’t being realized. That’s a problem.

There are signs states are catching on to these tricks. Last year, Ohio revoked the cultivation license of Harvest Health and Recreation Inc., over suspicion that it had falsely claimed to be owned by an economically disadvantaged group. Harvest also surrendered permits for two dispensaries in Pennsylvania for allegedly misrepresenting its business there.

It’s a start, but much more work needs to be done. In the patchwork of states that have legalized cannabis, there is a lack of minority participation at all levels of the supply chain, from cultivation to processing to retail. They are steps to take, both legislatively and in regulatory enforcement, to ensure that social equity applicants can obtain licenses and thrive in the years to come. And while no law is perfect, there are specific ways to make the Illinois legislation more fair to social equity applicants. Here are six:

  1. Apply MBE rules to social equity. Cannabis social equity provisions should borrow from the stringent rules that are used by states for applicants seeking contracts as minority business enterprises (MBEs). Many states require that 51% of individuals in management are minorities, or that 51% of compensation is paid to minority employees. Local governments can enforce this. For example, Chicago’s Department of Procurement Services looks at MBE entities and their certification process in excruciating detail.That same level of attention should be applied to reviewing the organizational documents, and support and management agreements submitted in cannabis applications, to really understand who actually controls the applicant and how the economics flow.
  2. Improve economic assistance. Applying for a cannabis license is an expensive endeavor, and the state needs to make assistance available to minority-owned applicants before they get a license. The need for funding is particularly acute given that cannabis businesses are denied access to a banking system skittish over federal law that continues to prohibit the sale and use of cannabis. Illinois’ application is complicated—about 400 pages in length—requiring the hiring of consultants and legal counsel. While the current law makes a “Cannabis Business Development Fund” available for “qualified social equity applicants,” it doesn’t include assistance for those applying for a license.
  3. Add market protections for social-equity shops. Legislators need to address the power of established cannabis businesses, which have the potential to squeeze out smaller shops. Industry concentration is a real threat, especially given that federal antitrust protection doesn’t apply to activities deemed “illegal” by the federal government. Moreover, some large cannabis cultivators and processors have used draconian and unrealistic commercial terms that hurt small retailers, such as high-dollar minimums or requirements to buy extra product. In order to create a more level playing field, suppliers should be required to sell to social-equity businesses at fair prices and on fair terms. Otherwise, the suppliers could shut out small social-equity shops.
  4. Tighten rules on sale of social-equity businesses. The law currently states that licensees may not sell until Dec. 21, 2021, which is just two short years away. This could lead to a wave of social-equity retailers accepting lucrative offers from deep-pocketed purveyors, putting the industry in the hands of a few players. Amendments to the law could restrict to whom social equity owners could sell. A total ban on the practice wouldn’t be fair to owners, but we need more safeguards to ensure that there will be a respectable number of social-equity participants in perpetuity.
  5. Relax state preemption rules. A lot of the damage of the criminalization of cannabis happened in cities, down to the neighborhood level. While state legislators touted the new law last year, the Black Caucus of Chicago’s City Council had no authority to make it easier for local entrepreneurs to take part in the first round of the awarding of licenses last November. Instead, white-owned medicinal cannabis dispensaries scooped up the best locations downtown, on the North Side, and in the West Loop. The Black Caucus was limited in its ability to accommodate the concerns of its local constituents because state law preempts the City of Chicago’s home rule authority, which members of the Chicago City Council rely on in order to accommodate the needs of their local communities.

Legislators had good intentions in enacting the cannabis law, but improvements are needed. Pursuing the above changes would be a good start to creating a more fair and just competition for those intended to benefit from social equity programs. Given the history of criminalization of the use and sale of cannabis, and its devastating effects on urban communities of color, the changes wouldn’t just make economic sense for these areas, but would be the right thing to do.

Condo Lifestyles publishes article by Adam Kahn and Molly Mackey | Reprinted with permission from Condo Lifestyles

Monthly assessments are the lifeblood of condominium associations. These funds pay for the associa­tion’s ongoing expenses, (such as fees for management and other professionals, costs for maintaining the building, etc.), as well as any capital improvements. They also fund the association’s reserves. Without payment of monthly assessments by unit owners, associations simply could not function.

Unit owners who fail to pay their monthly assessments, whether due to economic hardship or otherwise, put their association in a bind and the other unit owners will be left to pick up the slack to meet the association’s ongoing financial obligations. Collection issues are further complicated by the fact that financial issues among neighbors can be delicate and uncomfortable. That said, the bottom line is that boards have a fiduciary obligation to ensure that monthly assessments are paid in full and on time.

Since delinquencies pose a threat to the operating of an association, the question facing boards of directors is: what can an association do to protect the association’s interests in the event that a unit owner fails or refuses to pay their monthly assessments? The following steps are a general outline to assist boards to effectively handle assessment delinquencies and protect the association’s financial interests:

 

  1. Keep Track of Delinquencies: The first step to prevent delinquencies from spiraling out of control is to keep track of all assessment pay­ments. Monthly ledgers that accurately show the amount due should be sent to all unit owners on a monthly basis to promote com­plete and on-time payment. It is customary for management (if the association is profes­sionally managed) to send monthly ledgers by (or before) the first of the month, and some managing agents offer electronic payment and “auto-pay” options to make payment more convenient. Accurate ledgers are also essential should legal action to collect the outstanding assessments become necessary (see #3 on next page).

Tip: Be sure to maintain up-to-date contact infor­mation for any unit owners who live offsite so that they can be notified of an assessment increase, special assessment, or delinquency.

 

  1. Impose Late Fees. In order to incentivize on-time payment, it is customary for associations to impose reasonable fees for late assessment payments (e.g., $50 per month), which are usually spelled out in the association’s rules and regulations. Once accrued, late fees should be added to the monthly ledger for the unit.

Tip: any late fees imposed by management (as opposed to the association) must be expressly included in the management contract.

 

  1. Engage Legal Counsel to Initiate a Collection /Eviction Action. If delinquencies remain unpaid for a certain period of time, the next step is to involve the association’s legal counsel to initiate a collection/eviction action. Best practice is to turn accounts over to the association’s legal counsel once they are 60 days past due; however, the association’s gov­erning documents should be reviewed to ensure that they do not provide for a different timeframe. Allowing additional time to make payment on past-due assessments before turning the matter over to the association’s legal counsel is generally not recommended, as delinquencies may continue to grow, and formal collection proceedings can take months to complete.

The first step in commencing a collec­tion/ eviction action is to issue a formal 30- day demand letter stating the amount of the delinquency. Once the 30-day demand period expires and if the unit owner has not paid the outstanding balance, a complaint may be filed against the unit owner seeking an eviction order and money judgment in the amount of the delinquency.

Tip: The Illinois Condominium Property Act creates an automatic lien on a unit in favor of the associa­tion for any unpaid assessments and provides that any attorneys’ fees incurred by the association to collect delinquent assessments can (and should) be billed back to the delinquent unit owner.

 

  1. Enforcement of the Order. Under Illinois law, two separate legal remedies are available to associations for unpaid assessments, both of which are discussed below:

a. Collect on the Money Judgment. If the per­sonal service of the collection lawsuit is obtained on the unit owner, the association can seek a money judgment against the unit owner in the amount of the delin­quency.

Tip: Once a money judgment is obtained, the asso­ciation can seek to garnish the unit owner’s wages (assuming the unit owner is gainfully employed) to collect on the outstanding judgment.

b. Lease the Unit. In addition to a money judgment, the association may obtain an order of possession allowing the association to lease the unit and apply the rent to pay down the outstanding balance. This remedy is available regardless of whether the unit owner is served personally or via posting and gives the association the right to possess (but not own) the unit to lease it out. The lease can be for a term of up to 13 months and must commence within 8 months after the 60 day stay for the pos­session order expires. (Note: per Illinois law, condominium unit eviction orders are auto­matically stayed for 60 days from the date of entry; after the stay expires, the order must be placed with the Sheriff for evic­tion.) Thereafter, the association may, with the permission of the court in each instance, renew the lease for additional 13-month terms.

Tip: It is strongly recommended that any such lease be prepared and / or reviewed by the association’s counsel to ensure that it is proper and adheres to the requirements for leases entered into pursuant to an order of possession.

The above remedies are in addition to (and not in lieu of) the automatic lien for unpaid assessments (see #3).

 

  1. Watch for Foreclosures. If a unit owner fails to pay their monthly assessments, they may have also fallen behind on their mortgage payments. Associations should monitor fore­closure actions, and in the event a unit is sold at a foreclosure sale, seek payment of the out­standing assessments from the new owner. If a unit is sold at foreclosure auction or trans­ferred to the lender to satisfy the outstanding debt (a “deed in lieu of foreclosure”), the lender will only be required to pay the assess­ments going forward. So long as the lender meets its obligations to pay the assessments following the foreclosure/deed in lieu, if the lender subsequently sells the unit to a third party, the third party will only be responsible for paying the 6 months’ worth of assess­ments immediately preceding the foreclo­sure/deed in lieu, and the remaining balance is wiped out.

Tip: Courts are split as to whether there is a dead­line/timeliness requirement for lenders to pay the assessments following a foreclosure/deed in lieu in order to have the remaining balance (i.e., anything beyond 6 months’ worth of assessments) wiped out, and if so, what that deadline is. Accordingly, best practice is to monitor payments and aggres­sively pursue available remedies if payment is not made in a reasonably timely manner.

 

While assessment collection issues pose a difficult challenge to condominium boards and threaten the financial well-being of asso­ciations, the steps outlined above can help effectively address the issue, protect the finan­cial interests of the association and the invest­ment of unit owners. By acting diligently to collect unpaid assessments, the board not only fulfills its fiduciary obligation to protect both the financial health and interests of the association and all unit owners, but also sends a message that non-payment will not be tolerated and that all unit owners will be held to the same standard of meeting their financial obligations to the associa­tion. The above recommendations are intended to highlight common strategies for effectively handling delinquencies but are not an exhaustive list of all available remedies.

Each year, LP’s Labor & Employment Practice Group is pleased to provide a short checklist of steps that all companies should consider taking to measure their readiness for the coming year. We hope that you find our 2020 Labor and Employment Law Checklist to be a helpful guide to best practices for the year ahead.

Download a PDF of the 2020 Labor & Employment Checklist here.

If you found this checklist helpful, subscribe to our blog. For concise, practical updates on the developments that impact you and your business, please subscribe at http://lpemploymentlaw.com.

Download a PDF of the 2020 Labor & Employment Checklist here.

This article originally appeared in the November 2019 issue of the Estate Planning Journal, a publication of Thomson Reuters. 

Author: Carrie A. Harrington

Traditional strategies involving use of the federal estate tax unlimited marital deduction and state intestacy rules do not anticipate decedents with multiple partners.

CARRIE A. HARRINGTON is an attorney in the Trust & Estates Group of Levenfeld Pearlstein LLC in Chicago, Illinois. This article is adapted from a chapter in The Tools & Techniques of Estate Planning for Modern Families, 3d edition, (National Underwriter, a division of ALM Media). Copyright ©2019, Carrie A. Harrington.

___________________________________

In recent years, there has been much debate about the changing legal landscape as it relates to marriage and the alleged erosion of traditional relationships. However, the term “traditional” means something different to everyone and reflects the values of the time in which those passing judgment have lived and the views of the particular community where they have resided. People have been living in “nontraditional” relationships for centuries. Estate planners often focus on the traditional husband-wife situation because that is the most tax-friendly and “common” situation, although non-heterosexual relationships now have the option of being equally tax advantaged through marriage in the U.S.

With “nontraditional” lifestyles becoming more accepted, estate planners are encountering more people openly living in what are generally considered alternative family relationships. Estate planning for nontraditional family arrangements is possible. Successful structuring of an estate plan for a client with multiple spouse-like partners, however, requires a focus on the particular challenges presented by the law in order to effectuate the intent of the client. 1

History of Marriage

Marriage is often thought of as the traditional step couples take after dating and before having children (and, according to historical societal norms, in that order). Some commentators argue that marriage is only for two people and for the purpose of having children, and therefore should also be only between one man and one woman. However, a look at history shows that this concept of marriage is relatively new. Some civilizations encouraged a man to take multiple wives so that the wives would be able to help each other in doing housework and raising the minor children. 2 Some wives enjoyed this setup as the extra help was welcome-but many did not and they even schemed with their children against their co-wives. 3 Other civilizations supported same-sex relationships, as it was their belief that opposite sex partners could not provide the emotional support or friendship found in same-sex couples. 4 In still other civilizations, husbands would marry off their wives to political allies-polygamy was not an issue for them. 5

Having a spouse enter into a second marriage for the purpose of political alliance is similar to marrying sons and daughters off in exchange for wealth and land. 6 Families could create concentrations of land by marrying off their children with their neighbor’s children. Further, poorer families could advance their status by having an attractive child marry into a wealthy family.

Eventually, religious groups began requiring that marriages be church-sanctioned in order to be considered legitimate. In 1563, marriage was deemed one of the seven sacraments in the Roman Catholic faith. 7 Until then, most people did not get married inside a church, likely because most people did not live close enough to a church. At that time, the church hierarchy required that a marriage occur inside a church for it to be valid. As Catholicism spread to other parts of the world, the one man, one woman, church-sanctioned couple began to be the norm for developed cultures. 8

The 20th century was a constant seesaw with respect to generational views on marriage. The Victorian Era encouraged women to be chaste and asexual. 9 The 1920s saw women and men interact in social spaces without chaperones. The 1950s found the best family to be the nuclear family with a working father and a stay-at-home mom. 10 In the 1970s and the 1980s, more women were working outside the home and couples were getting married later.

It is only recently that married couples began receiving financial incentives for having a legally recognized union. Earlier in U.S. history, spouses in non-community property states did not receive any special treatment when the first spouse died-all assets passing to the surviving spouse were considered part of the first spouse’s taxable estate. 11 Those in community property states fared slightly better. In community property states, only separate property passing to the surviving spouse was taxable. 12 Eventually, the laws changed and the bonus for community property residents was lessened. In 1942, the surviving spouse’s interest in the community property was made includable in the decedent’s gross estate unless it could be shown “to have been received as compensation for personal services actually rendered by the surviving spouse or derived originally from such compensation or from separate property of the surviving spouse.” 13

These hard times for surviving spouses were short-lived. In 1948, Congress created the marital deduction. The 1948 law restored the beneficial federal estate tax treatment to community state residents and it also gave spouses in common law states similarly equal treatment. 14 However, the maximum amount of the deduction was up to 50% of the “adjusted gross estate” of the deceased spouse. 15 Furthermore, in community property states, the community property amount was deducted from the adjusted gross estate, in effect nullifying the marital deduction for such community property. 16

Over time, Congress increased the total dollar amount that could pass tax free between spouses until eventually, in 1981, the marital deduction was made unlimited for transfers between spouses. 17 In addition, the law allowed the marital deduction to fully apply to qualified terminable interest property. 18 Since this time, there has been little to no discussion of repealing the marital deduction; however, legislative and case law repeatedly have made clear that one must be legally married in order for a surviving spouse to receive such treatment.

In fact, the marital deduction played a major role in bringing about the recognition of same-sex marriages. Windsor 19 and its related cases had larger implications, but they highlighted the disparate tax treatment that couples received based on gender due to permitted marital status when one of the partners passed away. Since marriage was limited to heterosexual couples, only heterosexual married couples could receive the federal marital deduction during life and at death. The couple in Windsor successfully argued that denying the deduction to same-sex couples was unconstitutional. In our current environment, any two people who are legally married, regardless of gender, are entitled to all benefits due to spouses under the law.

Some commentators have argued that the allowance of same-sex marriage will lead the way to allowing multiple legally married partners. This chapter does not allow for a full discussion of the legal arguments on both sides of that debate, and for purposes of this discussion, the author assumes that legally recognized marriage will be allowed only between two individuals.

The rights of romantic companions, under the law and for tax and estate planning purposes, are often contingent upon marital status. For children of an individual, their rights of inheritance and, in some circumstances, their ability to obtain insurance, social welfare, or legal benefits, also hinge on the marital status of their parents. The status of an individual as a spouse has important consequences for tax planning, employee and governmental benefits, and general definitional assumptions under common law. As societal norms have changed, couples are choosing to live together and have a family without feeling that legal marriage is a necessity. In fact, even individuals who have married sometimes have an agreement with their spouse to remain married while each party pursues his or her own romantic interests outside the marriage.

Situations that involve multiple amorous parties require special care in planning and also implicate ethics issues for attorneys and other advisors that necessitate careful consideration. The stereotypical polyamorous relationship, and one that has been addressed in-depth by the courts, is polygamous marriage. In the typical family structure of polygamy, there is one legal spouse with one or more additional “spiritual” spouses committing for life. Children in a polygamous family usually are raised together in a communal arrangement where all “spouses” parent together. Thanks to popular shows like “Big Love” or “Sister Wives,” these types of relationships have been normalized somewhat on cable television. Actual polygamy is illegal in the U.S., and for most estate planners it would be rare to be asked to engage in planning for this type of family.

But polyamory is not limited to polygamy. Throughout the 20th and 21st centuries, the headlines are filled with stories of famous people who were married, but in long-term relationships with other people. For example, Spencer Tracy remained married to his wife for religious reasons, but was known to be in a long-term romantic relationship with Katharine Hepburn. Other people choose to remain married for social status or financial reasons, but agree that each spouse is able to engage in a new committed, monogamous, and often quite public relationship with a new partner. Planning for the second spouse is common. Planning for the second non-spouse while the spouse is still in the picture presents an entirely different challenge.

And, of course, there are the secret second-family scenarios, such as that of Charles Kuralt, who secretly maintained a second family for more than 20 years. Secret relationships, in particular, present a host of ethical and legal issues for estate planning professionals. Even if an attorney represented only the spouse with the secret second family and was required by the ethics rules to maintain the confidential information, the surviving spouse is likely to be angry and possibly litigious following the post-death revelation of the spouse’s deception.

At present, the traditional definition of “relationship” rarely describes what truly exists. Planning for polyamorous relationships presents both typical and unique legal, tax, and psychological challenges that warrant special consideration.

Overview of Parentage Issues

Marriage and romantic relationships are not the only family situations to see legal changes over time. A hundred years ago, the question of whether someone was a descendant of another person was a simpler question than it is today. While paternity may have been at issue, there were no issues with a biological child of a person being born more than nine months after his death. Use of genetic material of a decedent to create additional descendants after the person has died is a problem the courts are only beginning to tackle. It does not take much creativity to think of a scenario where the children of a first marriage sue to prevent their father’s surviving spouse, who is approximately the same age as the children from the first marriage, to prevent a surviving spouse from using the deceased father’s sperm to create additional posthumous descendants that would water down their share of the estate.

In the past, illegitimate children were treated differently because their parents were unmarried. Illegitimates would not be deemed as legal heirs or the children of a father who would not recognize them. As societal norms have changed regarding pregnancy outside of marriage as well as the development of paternity tests to conclusively prove parentage, the law has come to treat illegitimate children the same as legitimate children for inheritance purposes. However, children born out of wedlock (or their mothers) may still have to prove paternity to determine certain legal rights. Some states allow certain statutes of limitations to run regarding challenging paternity to avoid descendants materializing generations down the line. Paternity and heirship determinations still vary across the states, as evidenced by the following cases.

In Labine v. Vincent, 20 the U.S. Supreme Court held that a law precluding an illegitimate child from inheriting as an intestate heir was valid. Ezra and Lou Bertha had a baby girl, Rita, while they were living together but unmarried. Rita was acknowledged by Ezra, but at the time acknowledgement did not automatically make them an heir; the parent had to take action to create a formal acknowledgement to legitimate the child. Under Louisiana law at the time, acknowledging an illegitimate child did not give her the same rights as a legitimate child, but did allow the child to claim support from such parent and allowed her to be a “limited beneficiary” under the parent’s will. At the time, however, an illegitimate child would not be deemed an heir for intestacy purposes. 21

Ezra died without a will. Ezra’s relatives argued that they were the rightful recipients of Ezra’s property under the law because Rita had not been formally acknowledged, whereas Rita’s mother argued on Rita’s behalf that she was his rightful and sole heir. Rita’s mother argued that the law disinheriting Rita was a violation of the Equal Protection and Due Process clauses. The Court, however, held that it could not usurp the determination of the Louisiana legislature to treat illegitimate people differently.

The Court also focused on the argument that Ezra could have included Rita in a will (although she would have been allowed only to take up to one-third of his property), legitimated Rita by stating expressly that he wished to be an heir, or simply marrying Rita’s mother to legitimate Rita. Therefore, the Court held in favor of the other relatives. While Louisiana law has come to treat legitimate children and illegitimate children the same for inheritance purposes, 22 Labine v. Vincent has never been overturned by the Supreme Court.

In Clark v. Jeter, 23 the Supreme Court struck down a six-year statute of limitations in Pennsylvania that forced a child or the child’s mother to bring a lawsuit to establish paternity, as such time limit was a violation of the Equal Protection Clause. The law allowed a legitimate child to seek support from a parent at any time, but a child born out of wedlock only had six years to bring suit. The Court found that because illegitimate children are a protected class under the Equal Protection Clause, the law did not pass the heightened scrutiny necessary.

In a Mississippi case, Estate of McCullough v. Yates, 24 Thelma died intestate without any surviving spouse, children, or parents. She was the only child born to James and Alice. James was later married to Rosetta, however, and they had five children, one of whom was Daniel. Daniel was the alleged father of numerous children and grandchildren who argued that they were the heirs of Thelma’s estate. Under Mississippi law at the time, an illegitimate child could not claim an inheritance unless there was an action for paternity filed within a certain period after the death of the purported father. Daniel’s alleged children failed to claim paternity within the time period following Daniel’s death and therefore the court found that they were barred from alleging their status as heirs of Thelma’s estate.

In another case, a court upheld a presumption that a child born during the marriage of a couple was the biological child of the couple. In Matter of Estate of Nelson, 25 the decedent’s heirs were deemed to be the children of Mattie Della Shaw and John L. Nelson, the mother and father listed on the decedent’s birth certificate. However, two other sets of individuals came forward to argue that in fact the decedent had a different biological father than what his birth certificate stated, and in fact his real father was the same father as such sets of individuals (each group had a different father and were arguing for their father to be deemed the father of the decedent). Each group requested that the court do DNA testing to determine who was the biological father of the decedent, and in the event the decedent’s father listed on his birth certificate was determined not to be his father, that the court distribute the decedent’s estate to the children of the newly discovered biological family.

Based on Minnesota law, the court found that “if a father-child relationship is established under the paternity presumption under the parentage act, only that father can be the child’s genetic father. Thus, even if an heirship claim is not based on the paternity presumption, the paternity presumption still applies to that claim if a father-child relationship is established under the presumption and the claimant seeks to establish a genetic relationship between the claimant and decedent through decedent’s father.” The court did not allow the purported half-siblings to do the DNA test and moved forward with the decedent’s heirs being the children of the parents listed on the decedent’s birth certificate.

In still another case, Regalado v. Estate of Regalado, 26 Joseph received a large settlement and subsequently died without a will. Pursuant to the laws of intestacy, his heirs were deemed to be his surviving parents, brothers, sisters, and the issue of any deceased siblings. During Joseph’s lifetime, his father married Paula’s mother, 35 years after Paula was born. Shortly after Joseph’s death, the marriage between his father and Paula’s mother was annulled. After the annulment in 2005 (subsequent to Joseph’s death), Joseph’s father acknowledged Paula as his biological child, and Paula therefore claimed to be a surviving sibling of Joseph. Naturally, another surviving sibling of Joseph disagreed with Paula and challenged the decision by the lower court that Paula was deemed an heir of Joseph simply by Joseph’s father acknowledging her as his daughter.

Paula’s argument relied on Indiana Code section 29-1-2-7(b) which provided that “a child born out of wedlock shall be treated as if the child’s father were married to the child’s mother at the time of the child’s birth if the putative father marries the mother of the child and acknowledges the child to be his own.” While the court did not determine heirship ultimately, it did find that Paula needed to show that she was born out of wedlock before such statute applied and further that Joseph’s father’s acknowledgement of Paula did not bar Joseph’s father or the other heirs from challenging Paula’s paternity.

In Mathews v. Lucas, 27 the mother of two children applied for survivor benefit under Social Security for her children, who were born during her 18-year cohabitation with the decedent. Under the laws governing Social Security, dependent children of a decedent are entitled to seek survivorship benefits. However, illegitimate children have a further hurdle to prove. Under the law, “a child, unless adopted by some other individual, is entitled to a presumption of dependency if the decedent, before death, (a) had gone through a marriage ceremony with the other parent, resulting in a purported marriage between them which, but for a nonobvious legal defect, would have been valid, or (b) in writing had acknowledged the child to be his, or (c) had been decreed by a court to be the child’s father, or (d) had been ordered by a court to support the child because the child was his.”

Unfortunately for the children in Mathews v. Lucas, they did not fulfill any of the requirements under the law, and challenged such standards on the grounds that they violated the Due Process Clause because they treat illegitimate children differently than legitimate children. The Supreme Court, however, found that the classifications were permissible as they were reasonably related to the government’s purpose of administrative efficiency in determining survivorship benefits. Presumably the Court reasoned that the line had to be drawn somewhere.

Spousal Rights

Many individuals see no reason to be legally married to their partner as a committed, cohabitating relationship is sufficient for them. However, legal marriage still offers numerous benefits of which those who are not married cannot take advantage. For example:

  1. Unlimited gift and estate tax deductions for transfers between citizen spouses.
  2. Filing of joint income taxes may lead to a reduction in income taxes.
  3. A surviving spouse can roll over his or her deceased spouse’s IRA. If the surviving spouse is younger, he or she can take the distributions out over the surviving spouse’s lifetime, instead of the older spouse’s life expectancy.
  4. A non-employed spouse can use his or her working spouse’s income to contribute to a spousal IRA.
  5. A surviving spouse can receive survivor benefits from Social Security.
  6. A spouse is the default agent to make medical decisions in many states.
  7. Surviving spouses have certain rights to a deceased spouse’s estate that a non-married partner would not have, such as spousal forced share rights.

Spouses typically have easier access to medical records and making medical decisions on behalf of their spouse. Married spouses have preference in acting as the estate representative. If there is a legal spouse and a non-marital partner or a second family, the legal spouse in many cases could keep the non-marital partner from visiting the sick individual in the hospital, from obtaining information about how or why an individual died (protected medical records), and possibly even from knowing where the remains have been laid to rest.

Nonetheless, it is important to note that non-spouses have more rights than before. Previously, non-spouse beneficiaries could not roll over inherited retirement plan benefits to an IRA tax-free if the beneficiary was anyone other than a spouse. The Pension Protection Act of 2006, 28 in section 829, allows a non-spouse beneficiary to directly roll over qualified retirement plan benefits to an inherited individual retirement account. Further, the Worker, Retiree and Employer Recovery Act of 2008 (WRERA) 29 made rollover of a plan mandatory by the non-spouse recipient. After 1/1/2010, all qualifying plans were required to allow non-spouse beneficiaries to roll over inherited retirement benefits received as a lump sum to an inherited IRA on a tax-free basis. 30

While there are still legal benefits to getting married, the focus of marriage has shifted more to simply finding a suitable life partner than producing multiple children and marrying to increase landholdings. Because of this societal shift and due to more acceptance of “nontraditional” relationships, fewer individuals are getting married and more are living in open relationships and living with multiple partners. The rise of multi-person relationships as opposed to the two-person legally married couple creates issues in planning that must be considered.

Issues Typical to Marriages

Married individuals are more likely to encounter the estate planning issues discussed below.

Spouses. Determination of who is a spouse and who is a descendant typically is reserved to the state legislatures and judiciaries. While there are many consistent rules across the various jurisdictions, the typical differences seen in statutory and common law among the states can create an inconsistent landscape that can produce different answers for the same couple depending on who is asking the question, “Is this your spouse?” Several states offer couples the alternative of a domestic partnership, and a few states still have common law marriage. 31

In Yager v. Gregory Cattle Co. the Supreme Court of Mississippi determined that the surviving life partner of a deceased worker was not entitled to his Worker’s Compensation benefits because they were not legally married. 32 The couple had been married for 25 years and then divorced. After they divorced, the pair reconciled and resumed living together as husband and wife. The court found that “many of the indicia of a marriage were present,” including filing of joint tax returns, cohabitation, and naming each other as insurance beneficiaries. 33 A legal spouse requires an actual marriage, however, and the survivor here did not meet that definition.

Similarly, in Crescionne v. Louisiana State Police Retirement Board, 34 the court analyzed the meaning of “surviving spouse.” In this case, however, a legal marriage existed but the parties were legally separated. The decedent was a state trooper who died in the line of duty. He had children by a prior marriage, and so those children would be entitled to survivor benefits if there were no spouse. The court ultimately ruled that a spouse who is legally separated from the decedent at the time of death is still the surviving spouse and under statute, the sole beneficiary of the survivor benefits.

These cases demonstrate that even in a more traditional relationship with just two parties, it is important to consider and provide a definition in the estate plan that indicates when the status of “spouse” begins and ends. Depending on the type of planning and the family structure, a client may wish to define the term “spouse” so that it ceases to apply when divorce proceedings are initiated, rather than waiting until an order is entered dissolving the marriage. When a person ceases to be a “spouse” upon initiation of divorce proceedings, it is important to consider that such processes are sometimes started in the courts and then withdrawn.

Another common problem area in estate plans in traditional marriage situations occurs particularly when there are divorce and remarriage situations. Children of a prior marriage who are waiting for a stepparent’s death to inherit will often hang on every action by the trustee to ensure that a stepparent does not receive a penny more (and preferably a penny less) than that to which he or she is entitled.

The traditional structure that specifies distribution of all income to a surviving spouse and possibly allows for invasion of principal in the trustee’s discretion often affords fewer parameters than what is truly necessary to reduce the chance of arguments. Providing for a unitrust distribution or specifying how certain typically contentious items will be paid can help reduce the likelihood of litigation. Some of the more frequently litigated items among parents/children or stepparents/stepchildren include the following:

  1. Real estate taxes on any residence owned in a trust.
  2. Routine maintenance and repairs on the residence.
  3. Major capital expenditures (such as a new roof) for the residence.
  4. Medical expenses and health insurance.
  5. Utility bills.
  6. Insurance on a residence, artwork, or other valuables.
  7. Income taxes on the distributions from the trust.
  8. Vacation travel.
  9. Caregiver expenses as the surviving spouse ages or becomes ill.
  10. Automobiles and auto insurance.

While there are many reasons to grant discretion for the care of a spouse, careful consideration of an appropriate budget in blended family situations can protect all involved. Being more specific does not necessarily reflect a lack of trust or less affection for the surviving spouse, but rather, it reflects a caring and thoughtful approach to protect the spouse from having every distribution challenged. In addition, solid boundaries can afford the remainder beneficiaries with the peace of mind that distributions are not being abused, and it clarifies the grantor’s intent through specificity.

Children. The Crescionne case, discussed above, also reflects the issue of biological animosity that can arise in traditional romantic relationships. Subsequent spouses versus children of a prior marriage is not an uncommon controversy in estate administration. Providing for a child born prior to or during the marriage out of wedlock often is not the first priority of a surviving spouse either. And, parents are even known to engage in lawsuits with their own children over insurance benefits, retirement benefits, and other assets distributable upon death.

An example of this is in In re Martin B. 35 out of the Surrogate’s Court of New York. The Grantor created several trusts while his son was living, which trusts were for the benefit of the grantor’s “issue” and “descendants.” The son died of Hodgkin’s Lymphoma shortly before the grantor. The deceased son’s wife underwent in vitro fertilization using cryopreserved semen three years after her husband’s death and gave birth to a boy. The wife underwent the same procedure again shortly thereafter, giving birth to a second son less than two years after the first birth. Looking to several treatises and the existing New York laws, the court found that absent an expression otherwise in the governing instruments, the posthumously conceived children were to be treated as “issue” and “descendants” for purposes of the trusts, mostly because the legislature could not even comprehend posthumous conception when it drafted the applicable law.

And even if the child is not biologically related, equitable adoption allows nonbiological children in some states to claim the status of an heir. Of the states that do recognize equitable adoption, some require the existence of an express or implied contract to adopt and some do not.

The concept is discussed at length in DeHart v. DeHart, 36 decided by the Illinois Supreme Court in 2013. In DeHart, James DeHart filed a complaint against the executor of Donald DeHart’s estate. James alleged that he was eligible to inherit from Donald under the doctrine of equitable adoption, but the estate argued there was no valid claim because there was no contract to adopt. The court found that, in Illinois, the requirements and circumstances surrounding equitable adoption are unclear. The court adopted the holding in In re Estate of Ford, 37 a case heard by the California Supreme Court in 2004.

The Illinois Supreme Court held that the alleged child must prove that the decedent intended to adopt him or her and consistently acted as if that were the ultimate intention. There must be evidence demonstrating that the decedent’s intention was to maintain a “close and enduring familial relationship” with the child. 38

Williams ex rel. Z.D. v. Colvin 39 involved an appeal to the U.S. District Court for the Northern District of Texas after a denial of Social Security benefits. It found that Z.D. was not the equitably adopted child of Williams and, therefore, was ineligible to receive child’s insurance benefits. The Social Security Administration rules provided that “an individual is entitled to child’s insurance benefits on the earnings record of one who is entitled to disability benefits if the individual 1) is an insured person’s child, 2) is dependent on the insured person, 3) applies for child’s insurance benefits, 4) is unmarried, and 5) meets certain age requirements.”

In order to meet the first requirement, the child must fall into one of the following categories: biological, legally adopted, stepchild, grandchild, stepgrandchild, or equitably adopted child. Texas law mandates that there must be a clear and convincing agreement to adopt for equitable adoption to apply. In this case, the evidence demonstrated that Z.D.’s natural mother was not willing to enter into an agreement to adopt with Williams and had sought to obtain custody. Because abandonment was not applicable and there was no agreement to adopt between the biological mother and Williams, the court found that Z.D. was not equitably adopted.

In re Estate of Fairhurst 40 involved a slightly different take on the use of equitable adoption. In this matter, the alleged parent sought to file a wrongful death action on behalf of the deceased minor’s estate. The petitioner alleged that he had standing to bring the suit. The court found that the concept of equitable adoption was created to benefit the child, and that the concept allows the court to use its discretion only in awarding a child rights to inherit. Because equitable adoption (in New York) does not create a legal relationship between the two parties, the court held that the petitioner lacked standing in order to commence the action.

The fact that even in traditional relationships there are so many ways to create extra pools of “descendants” presents a compelling case that defining terms such as “child” and “descendant” in estate plan documents is an important step to close gaps in the law and reduce the likelihood of litigation. At a minimum, attorneys should consider including a paragraph that identifies by name the family members intended to benefit from the document.

Despite the changing definitions of marriage, it seems long-accepted that a child can have only two legal and biological parents. However, this “fact” is now changing as well. There are currently instances of a child having three legal parents in certain countries as well as a child having three biological parents.

Multiple states throughout the country are allowing three people to have parental rights to a child. These situations can be happy and agreed-upon relationships in which three people choose to raise a child together. 41 Courts also have recognized legal rights for certain individuals in contentious situations. In one case, Kitty was living with Darren and his boyfriend, Sam, on the East Coast. 42 Kitty and Darren decided to have a child together, and they gave their child Sam’s last name. Eventually, Kitty decided to get married and move with the child to California. Darren and Sam objected.

A New Jersey court found that Sam was a “psychological parent” and ordered that Kitty could not take the child. Kitty canceled her move, and the three maintain a co-parenting relationship. Equally complicated, science is now able to mix DNA from multiple parties, allowing the potential for more than two biological parents. 43 This technique has not been used in the U.S. yet, but has been used in other countries. Because U.S. courts have already recognized three legal parents, and with advances in DNA technology, it is likely that more and more three-parent situations will be seen as time goes on. Because courts are allowing more than two parents, it is not inconceivable that someone could have more than three parents.

No matter the number of parents, ideally all parties should coordinate the naming of a guardian in their estate plans to avoid conflicts. Considering parties that may not agree with the family arrangement and their potential objections in court in the event of the death of one or more of the parents may also help avoid controversy. Including language in a will or having a detailed letter of wishes in the safekeeping of the attorney or other trusted party may help ensure the wishes of the parents are known to and followed by the court.

Issues Typical to Non-married Persons

There are many ways that non-married individuals decide to live together. Simply, some do not wish to or choose not to marry another person. They live in a committed relationship for their entire life without being legally married. These non-marital committed relationships also can happen in situations where a person is already married to another but no longer resides with his or her legal spouse. Each married spouse may go on to create a long-term relationship with another person and live in a marriage-like relationship without the legal marriage. Still others wish to cohabitate with multiple individuals, all or some of whom are in romantic relationships. This last group can present particular challenges for estate planning to establish legal rights and avoid claims for support and other conflicts.

As previously discussed, married spouses have certain legal rights under the law upon the first spouse’s death. In Illinois for example, if a spouse dies intestate, his or her surviving spouse receives the entire estate if there are no children and one-half of the estate if the decedent has descendants. 44 If an Illinois spouse dies testate, the surviving spouse has the right to elect against the will and take one-third of the probate estate even if there are descendants.

In Florida, the surviving spouse is entitled to the entire estate if there are no descendants or if all of the descendants of the decedent are descendants of the surviving spouse; otherwise the surviving spouse is entitled to one-half of the estate. 45 The rights of a surviving spouse differ throughout the 50 states. 46 The important point is that only a surviving spouse can take advantage of these legal rights.

In Blumenthal v. Brewer, 47 an Illinois nonmarried couple who had split up sued each other for certain “marriage-like” property rights upon the break-up. The court, however, held that public policy kept it from treating the relationship like a marriage. The court ruled that one partner was arguing to treat the relationship as a common law marriage, and that such argument was therefore barred by the Illinois statute prohibiting common law marriage.

Advisors often see issues that arise between children of a prior marriage and the new spouse, and between half siblings or stepsiblings These issues may intensify when there are multi-partner relationships in which the half siblings or stepsiblings are living full or part-time with their parent’s current partner while maintaining a relationship with the other biological parent. In unmarried adult relationships, there may be biological animosity among the children and their respective parents and non-parents. As discussed in greater detail below, creating parenting and visitation agreements to ensure that the right adults have access and involvement in each child’s life may ease these tensions.

Issues Particular to Intersection of Marriage and Another Relationship

In a multi-person relationship where only two of the partners can be married at a time, only those individuals can take advantage of the marital deduction. The other partners may be reliant on the married couple to protect the wealth, but there must be an extreme amount of trust. For example, A, B, C, and D are in a relationship. A and B are married, and A has the majority of the wealth to support the quad. Assuming A dies first, B can receive all of A’s assets estate tax free. If that is done, however, the quad must trust that B will continue to support C and D. Further if the remaining partners wish to ensure the assets continue to pass tax free, B may choose to marry one of C and D. The remaining partner is again reliant on the survivor for support.

The increase in the federal estate tax exemption effective 1/1/2018 affords more opportunity for the wealthy party to provide for a non-spouse, however, the looming sunset of that tax provision leaves reliance on the expanded exemption as an uncertain result. Tying planning for such a couple purely to the vagaries of legislatively determined exemption amounts, therefore, may not be the right structure for such polyamorous families.

Merriam-Webster online dictionary defines “polygamy” as a “marriage in which a spouse of either sex may have more than one mate at the same time.” Polygamy in the U.S. has a long history and was popular in certain Mormon populations in the 1800s. Reynolds v. U.S. 48 addressed the constitutionality of the Morill Anti-Bigamy Act, which was signed into law by President Abraham Lincoln in 1862. The court upheld the law against the constitutional challenge, finding that laws cannot regulate religious beliefs, but they may regulate religious practices or actions.

Plural marriage remains illegal in the U.S., although some scholars argue that the recent same-sex marriage cases have opened the door to polygamy by rolling back some of the prior restriction based on social norm. Regardless, polygamy and polyamory continue in the U.S. today; however, these relationships do not always stand out as unusual in modern society.

For example, Bob and Sue are married and have three children. After the children are out of the house, Bob and Sue decide they are not satisfied in their relationship anymore. They are still friends and enjoy their mutual family, social status, and group of friends, so they do not wish to divorce. Instead, Bob and Sue agree that they will remain married but will agree to discreetly see other people. If Sue establishes a long-term romantic relationship with another person, she is in a polyamorous relationship.

In 1921, the Supreme Court of Fulton County, New York, was faced with a situation where a common law marriage existed and then James Procita married another woman. 49 The common law wife sued for spousal support and to have the subsequent marriage annulled. The court sided with the first wife and ordered $200 in legal fees and $7 per week.

Cases dealing with multiple marriage situations, however, are not a thing of the past. In 2008, the Missouri Court of Appeals dealt with the estate of George Davis and his two “wives.” 50 George married Agnes in 1903 and had eight children. He never divorced Agnes, but began a relationship with Evelyn Rishovd no later than 1943, as their son, Thomas, was born in February 1944. George, Evelyn, and Thomas lived together as a family and lived in a home owned by George and Evelyn as tenants in common. George and Evelyn held themselves out as husband and wife, and took title to their home in 1955 as “George S. Davis and Evelyn Davis, his wife.” Thomas died intestate in 2003, resulting in a dispute between the George/Agnes descendants and Evelyn’s family about who would inherit. The court upheld the lower court’s finding that the George/Agnes descendants established their relationship in accordance with the legal requirements.

It does not take much imagination to think of scenarios where common law marriages, marriages that have not been properly dissolved, or marriages that are ignored by one party who subsequently enters into another marriage could create problems even in the estate of a testate decedent. As discussed below, the distinction between children born out of wedlock and those born during wedlock has been largely eliminated except as to statutes requiring that paternity be proved during the lifetime of the father, or similar requirements under state law that relate to a legitimate state purpose. Rather than leaving such determinations to chance and the variations in state law, drafters may wish to consider identifying the names of the spouse and children of the testator to help avoid arguments about who is intended to benefit under the estate plan documents.

Polyamory also presents a special set of problems for individuals residing in Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin, which are the community property states. Alaska residence, with its community property opt-in regime, may also raise issues if the spouse with one or more non-marital partners has opted into community property with the legal spouse.

Title is not determinative of ownership in a community property state, and therefore a surviving spouse may have rights to property, even if the decedent specifically bequeathed that property to a non-marital partner. Although there is some variation under state law, the general rule in community property jurisdictions is that the surviving spouse owns an undivided one-half interest in each community asset at the first spouse’s death. So, if a decedent owned a house that is occupied by the non-marital partner, and the house was acquired with the decedent’s income during marriage, then upon the decedent’s death, the surviving spouse and surviving non-marital partner likely are tenants-in-common for that residence. If the decedent purchased the residence with income earned during the marriage but placed the residence in the name of the non-marital partner, the result may be the same.

In general, the community can only be severed by agreement of both spouses. Therefore, unless the spouse consented, the surviving spouse has a one-half undivided interest in the residence occupied by non-marital partner. In either case, particularly if spouse did not know about the non-marital partner, this result is a recipe for estate litigation.

In community property states, the presumption generally is that property owned by either spouse is community property. The burden to prove that the property is not subject to the rules applicable to community is on the party seeking to demonstrate otherwise. An attorney advising a client in a community property state regarding planning (gifts or bequests) for a non-marital partner with a consenting spouse can help to avoid litigation by having the client and his or her consenting spouse execute an agreement severing community property rights from the assets intended to pass to the non-marital partner.

For legally married couples, premarital agreements generally become effective upon the date of the marriage and such agreements will have no effect if the marriage does not take place. However, cohabitation and parenting agreements typically will be effective upon execution and will terminate upon a party’s death or the termination of the relationship, which timing may be harder to define than with a legal dissolution. For multi-partner relationships, defining termination of the relationship and rights upon termination can help avoid controversy by creating a set of rules where no statutory framework exists to otherwise assist the parties.

Without a written agreement, many courts do nothing to enforce one partner’s claim against the other, despite the usual inequity resulting from the lack of legal protection for the parties trying to exit the relationship. In Hewitt v. Hewitt, 51 a woman brought suit against the man with whom she had lived, unmarried, for 15 years. The woman claimed that the man orally promised to “share his life, his future, his earnings and his property” with her and, therefore, that an implied contract entitled her to a share of the property accumulated during their “family relationship.” The Illinois Supreme Court refused to enforce the parties’ oral agreement because their living arrangements violated public policy. To hold otherwise, according to the court, would encourage the formation of “illicit” relationships.

Many courts, however, will infer and enforce an agreement based on either the conduct of the parties or principles of equity. 52 The leading case, Marvin v. Marvin, 53 was decided by the California Supreme Court in 1976. In Marvin, actor Lee Marvin and the plaintiff, an entertainer and singer, orally agreed that the plaintiff would “give up her lucrative career as an entertainer,” to devote her time to the defendant as “companion, homemaker, housekeeper, and cook” in return for “financial support and needs for the rest of her life.” At the dissolution of the relationship, Lee Marvin had title to most of the assets. The court held that the plaintiff’s claim stated a valid cause of action for breach of an express contract. Moreover, the court agreed that recovery could be based on the doctrine of quantum meruit, or equitable remedies such as constructive or resulting trusts.

The court further held that, in the absence of an express contract, the courts should “inquire into the conduct of the parties to determine whether that conduct demonstrates an implied contract, agreement of partnership or joint venture, or some other tacit understanding between the parties.” The court determined that a promise to perform homemaking services was a lawful and adequate consideration for a contract, and the agreement would be unenforceable only to the extent that consideration consisted of sexual services.

In order to avoid the public policy issue surrounding claims being considered as based on sexual services, claims in nonmarital “divorce” cases generally should be based on economic rights substantially independent of the nonmarital relationship and should not be based on rights arising from the cohabitation or the performance of domestic services. 54 For example, in Spafford v. Coats, 55 an unmarried woman, who lived with an unmarried man, sued to impose a constructive trust on cars acquired during the couple’s cohabitating relationship, and for which the plaintiff had furnished most of the consideration. The court held that the woman’s rights were “substantially independent” of the cohabitating relationship and were not based on rights arising from cohabitation. The court stated, “[W]here the claims do not arise from the relationship between the parties and are not rights closely resembling those arising from conventional marriages, we conclude that the public policy expressed in Hewitt does not bar judicial recognition of such claims.”

Spafford was followed by Ayala v. Fox. 56 In Ayala, upon break-up of the cohabitation relationship, Ms. Ayala sued Mr. Fox for recovery of payments made with respect to the couple’s home, which was titled in Mr. Fox’s name despite his promise to place title in both names. In reliance on that promise, Ms. Ayala jointly took out the mortgage, paid the majority of mortgage payments, the majority of the taxes, and insurance (including all amounts during a four-year period while Mr. Fox was unemployed). Mr. Fox refused to transfer title or money upon the break-up. The court found for Mr. Fox, and distinguished Spafford on the grounds that Ms. Spafford “did not seek recovery based on rights closely resembling those arising from a conventional marriage or on rights founded on proof of cohabitation….” If co-owning a home looked too much like marriage for the court, a written partnership agreement may have granted an enforceable right to the plaintiff in Ayala.

Mississippi recently determined that when a claim is not based on relationship, the court can award a former unmarried cohabitant the amounts she contributed to a joint residence on the theory of unjust enrichment. In Cates v. Swain, 57 an unmarried couple cohabitated for six years, and during that time Swain contributed money toward expenses of the jointly occupied residence. After the break-up, Swain asked the court to declare a constructive trust or a resulting trust and alleged that Cates had been unjustly enriched. The court distinguished the facts from Davis v. Davis, 58 where the claim was for equitable division of property on the basis of a relationship. In this case, Swain was not alleging equitable division of property, but rather argued for unjust enrichment based on her contributions to property legally owned by Cates.

The policy expressed in Hewitt was reiterated in a 2006 case before the Illinois appellate court in Costa v. Oliven. 59 This case involved a man suing a woman with whom he had lived for 24 years. While the couple never married, the man alleged that they had a “quasi-marital” relationship. The man argued that Hewitt should not “be applied as a blanket rule in every set of circumstances involving unmarried cohabitants.” His action against his former cohabitant was for a constructive trust over her property and an accounting of all income and assets in her possession. The court ultimately ruled that Illinois public policy prevents granting enforceable property rights to unmarried cohabitants. 60

When there are multiple parents to a child, legal or otherwise, the parties may consider discussing what arrangement would be in a child’s best interests, both during the marriage and upon dissolution of a relationship. The parties can make an agreement addressing where the child should live, how often each party should have visitation, vacation and holiday schedules, and financial support for each child in the event the adults’ relationship ends. While a court will always have the final say in making legally enforceable provisions regarding minor children, discussing these issues openly when all parties are still getting along may facilitate a reasonable and cooperative agreement regarding the children, thereby avoiding litigation.

These types of agreements can be especially beneficial when certain partners in the group may not have legal rights to a child. In such cases, multiple adults may be living in a household and a child may have an emotional and psychological relationship with all of the adults, not just the legal or biological parents. In the event the parents and other partners in the relationship decide to end their relationships, the parties may agree that it is in the child’s best interests to maintain regular contact with all of the adults.

Legal parents will have the most legal rights with respect to the child, and often will have the legal right to keep an ex non-parent from visiting with the child.

It is important to note that parenting agreements may be considered by some courts as void in violation of public policy. 61 Nonetheless, these agreements can be useful in establishing the terms of a parent-child relationship that has been formed if it is later called into question, and the court may still consider enforcing such agreement or certain terms within the agreement. 62 Accordingly, the involved parents may wish to document how they will handle issues such as custody, visitation, and education, belief systems, etc. of the children, understanding that the court’s determination of the best interests of the children will ultimately prevail. 63

The law varies from state to state when it comes to cohabitation agreements. For example, California grants rights of cohabitants based on an implied or an express contract. 64 Florida allows unmarried cohabitants to enter into an enforceable contract that establishes rights and responsibilities provided that there is clear, valid, and lawful consideration without express or implied agreement regarding sexual relations. 65 In Texas, “nonmarital conjugal cohabitation agreements” must be in writing. 66

Cohabitation agreements among multi-partner relationships should be entered into like premarital agreements, although general contract principles such as consideration or other required elements in the applicable jurisdiction must be addressed in order to make such contracts enforceable. Each party should disclose his or her assets and liabilities in order to avoid challenges based on lack of information or unconscionability. Parties may wish to determine property ownership, especially if certain members of the relationship are married to each other. For example, should a married couple own the main residence as tenants by the entirety? Should the parties each own the property as tenants in common or as joint tenants with rights of survivorship? Do community property rights need to be waived?

Often, the group will not have even thought of the issues that may come up if a party wishes to leave the group or if a party dies. Many polyamorous groups will say that honesty and communication are the best way to keep their relationship healthy and strong. 67 To assist the parties in having an open discussion, the advisor may want to provide the group with a list of issues to be discussed prior to the meeting in the lawyer’s office. For example:

  1. Wages/earnings.
  2. Mortgage/rent payments.
  3. Real estate ownership and division.
  4. Personal property ownership and division.
  5. Insurance/retirement plan beneficiaries/proceeds.
  6. Shared bank account contribution.
  7. Inheritances/gifts from family.

Such agreements can also discuss more specific and daily issues including:

  1. Filing of income tax returns.
  2. Payment of household expenses.
  3. Division of household duties.
  4. Division of childcare duties.
  5. Ownership, custody, and care of pets.
  6. Duties and obligations of a partnership, joint venture, or other business arrangement with the cohabitant (especially if the business is operated out of the home).
  7. Division of prior, current, and future debt obligations, including upon termination of the cohabitation.
  8. Retirement, membership, medical, and other benefits each cohabitant has and the division of those benefits including upon termination of the agreement.
  9. Health, disability, property, life, and other insurance of each cohabitant. 68

While some of these issues may seem trivial or complicated to discuss ahead of time, it is important, especially in a multi-person relationship, to lay out each person’s expectations in an effort to avoid future surprise.

Courts have found that a cohabitant may have a claim for “palimony” against an individual (or against his or her estate if the individual does not survive the lawsuit) when providing homemaking services as consideration for a property-sharing agreement. 69 In a group relationship where multiple people may be dependent on one person to provide support, it is best for the parties to discuss their support expectations ahead of time in the event of a break-up. Without an agreement or a list of each party’s property, upon the death of an individual, it may be difficult to prove whose property is whose and what property was not jointly acquired by all of the cohabitants.

Parties with interests in trusts or family businesses may wish to disclose such interests, especially if the parties plan to live off such interests. However, the wealthy partner’s family may be more hesitant to disclose such information in a polyamorous relationship.

Legal divorce is difficult enough. In a polyamorous situation where there are multiple relationships, with or without a legal marriage, a separation can involve extra complications. If a triad or larger group is part of the dissolving relationship, the other partners may have legal claims or personal interest in the property division. For example, say A and B are married and live with C. B and C have a joint bank account. B has been contributing marital assets to the joint bank account. The bank account with C may be part of the divorce proceedings as it was funded with marital assets. However, C may have contributed to the account as well. The complications are endless considering different types of property-real estate, businesses, personal property, etc.

Furthermore, one partner may have been responsible for supporting the entire group. If the group is breaking up, there may be certain expectations by one or more of the parties that financial support will continue. Having a conversation ahead of time and agreeing to certain parameters in the event of a break-up can save the parties time, money, and emotional stress in the long run.

Ethical Implications for Advisors

Bigamy is prohibited across the U.S. While state statutes differ in their wording, in general, bigamy is typically defined as intending to enter into or entering into marriage while already married or with knowledge that the other person is married. 70 However, some states’ bigamy laws are stricter than others.

For example, Colorado law provides that any “married person who, while still married, marries, enters into a civil union, or cohabits in this state with another person commits bigamy.” 71 Similarly Georgia law states that a “person commits the offense of bigamy when he, being married and knowing that his lawful spouse is living, marries another person or carries on a bigamous cohabitation with another person.” 72

Arguably, anyone who stays legally married but lives with another person in a marriage-like relationship is committing bigamy under Colorado and Georgia law, presumably even if the spouse consents. Interestingly, Illinois law allows a second spouse, who unknowingly married a bigamist, the right to receive maintenance pursuant to divorce law so long as the allowance is not inconsistent with the rights of the first legal spouse. 73

If a lawyer finds out, or is told through the course of representation, that a client or a group of clients have committed bigamy, the lawyer is protected from having to report such criminal conduct by the Rules of Professional Conduct. Specifically MRPC Rule 1.2(d) provides: “(d) A lawyer shall not counsel a client to engage, or assist a client, in conduct that the lawyer knows is criminal or fraudulent, but a lawyer may discuss the legal consequences of any proposed course of conduct with a client and may counsel or assist a client to make a good faith effort to determine the validity, scope, meaning or application of the law.”

The lawyer can counsel the individuals on the consequences of having committed bigamy, but generally should not be required (or permitted, depending on the state) to report them for having committed the crime. If a married client comes to a lawyer and asks if he or she can get married again, of course the lawyer cannot aid or counsel the client on how to commit such bigamy.

Consider the following: Jean has been Alice’s estate planning advisor for ten years. Alice (who Jean knows is legally married to Barry) asks Alice to prepare or review a premarital agreement drafted by Chris’s attorney as Alice and Chris are preparing to enter into a legal marriage.

Clearly, Jean cannot represent Alice in the premarital agreement. But what if Jean learns that Alice has hired another attorney to represent her in the premarital agreement? Is Jean required to report the other attorney to the state disciplinary bar if the other lawyer knows Alice is married already? Should-or may-Jean report such information to Alice’s attorney or Chris’s attorney if they do not know Alice is married already? Jean is likely barred from disclosing such information, but Jean may wish to counsel Alice that she is committing a crime.

Separate from the premarital agreement transaction, can Jean continue to represent Alice in her estate planning, knowing she may be lying to both of her “spouses” about their rights to her estate? If Alice never brings either spouse to Jean, Jean probably can continue the representation in most states without violating the legal ethics rules. If Alice ever wishes Jean to represent her jointly with either “spouse,” Jean will have to decline.

Changing the facts a little, what if Alice and Barry ask Jean to draft a cohabitation agreement with Chris? If Jean is practicing in a state like Georgia or Colorado that defines bigamy as marriage-like cohabitation with someone other than the individual’s spouse while legally married, Jean technically is helping Alice and Barry commit a crime. Knowing the law of bigamy in the state where one practices is important to avoid an unintended violation of the ethics rules.

Conclusion

As the world becomes more accepting of “nontraditional” families, estate planners need to consider planning for such mixed and expanded families. It is important to create an environment where clients are able to discuss financial and familial expectations during and after the relationship openly with each other, as well as with their advisor. Understanding and advising these families about legal and tax consequences can help them to properly plan for the good times and difficult life events in a way that can reduce the need for and likelihood of litigation.

To view the full article including citations, please click here.

By  | FOXBusiness

Nobody likes to plan for events like aging, incapacitation or death. But failing to do so can cause families burden and grief, thousands of dollars, and hundreds of hours.

It is estimated that more than 50 percent of all Americans don’t have a will, and in our Future File business, we have estimated that less than 10 percent of the U.S. population has a complete legacy and wishes planning system.

Preparing for life’s unexpected events is crucial but can often be a difficult process to navigate. Here are the top estate planning mistakes to avoid, according to industry experts:

 

1. Not having a will (or one that can be found) 

The leading mistake is simply not having a will in the first place. As Kelly Dancy, an attorney at Walny Legal Group, says, “Estate planning is critically important to protect an individual, their family, and their hard-earned assets, during their lifetime, during any period of incapacity and upon their deaths. Everyone needs estate planning documents, regardless of the amount of assets that they have.”

Despite knowing this, too many people put off gathering key documents together. Tim Hewson, president of USLegalWills.com, believes that “waiting for a ‘more appropriate time’ to put together your will is a mistake. Everybody should have a will. It should be written when you are young and updated throughout your life as your circumstances change.”

In addition to having a will, it needs to be findable. The Wall Street Journal says that the biggest estate planning mistake is simply losing a will. Make sure your family has access to the documents that express your future wishes.

 

2. Neglecting to choose and update appropriate beneficiaries 

When you have an asset that has a beneficiary designation, that will supersede anything written in a will. Ryan Repko, a financial advisor at Ruedi Wealth Management, suggests that you review your 401(k), IRA, life insurance and any other accounts with beneficiaries after major life events.

He says, “The most grievous example [of a beneficiary issue] is when a married couple divorces, then remarries without changing the beneficiary to the new spouse. In this all-too-common and completely avoidable scenario, the ex-spouse is legally entitled to the assets, and a lengthy legal battle ensues on behalf of the new spouse and/or the children to claim the assets.”

There are financial implications to think through as well. Sheri E. Warsh, a partner at Levenfeld Pearlstein, LLC also shares, “Without a proper beneficiary designation, income tax on retirement accounts may have to be paid sooner, which may lead to a larger than necessary income tax liability, and the designation of a beneficiary on a life insurance policy can impact whether the proceeds are subject to claims of creditors.”

Daci L. Jett, managing attorney at Daci Jett Law LLC, identifies another mistake that impacts people with minor children. “A mistake people make is choosing a guardian for their minor children and then naming that person as beneficiary of their life insurance instead of leaving it to a trust for their child. A named beneficiary becomes the legal owner for all purposes of the life insurance proceeds and your minor child has no recourse to get that money. Plus, it exposes the money to the beneficiary's creditors and spouse.”

Hilary Fuelleborn, an estate planning attorney with Luskus & Fuelleborn P.C., also says that not being clear about beneficiaries or ownership can create issues with the way the assets pass on to their heirs. She notes, “As parents get older, they will often put an adult child on a bank account to allow the child to pay bills for the parent. This can be a big mistake. Upon death of the parent, that joint account automatically becomes the property of that adult child, regardless of the will that may designate all property to be divided equally amongst all children. So, if there is $100,000 in a bank account that is joint with one child, upon the parent's death, that $100,000 belongs to that one child, regardless of whether that was the parent's intent.”

 

3. Overlooking the importance of powers of attorney for kids over 18 years old 

While you may think that your kids are your kids, if they are adults in the eyes of the law and something happens to them, you may be left without power – literally. Sheri Warsh advises, “If an 18-year-old becomes ill or has an accident, a doctor will not speak to a parent if a power of attorney for health care is not in place. Similarly, unless a power of attorney for property is in place, a parent may not be able to take care of bills, make investment decisions and pay taxes without the child’s signature. This could be very difficult when a child is in college, especially if they are out of the country.” It is imperative that when your child turns 18 that you get those powers of attorney put into place.

 

Reprinted with permission from Fox Business.