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The Wealth & Wisdom Blog

Information on Estate Planning, Estate and Trust Administration and Unique Asset Planning

“Well, that was a son-in-law.” So exclaimed my golf playing partner immediately after he drove his tee shot off the first tee right into the trees, resulting in a penalty stroke. “What do you mean,” I asked my friend, what does that errant golf shot have to do with a son-in-law? “Not what I had in mind,” he responded.

Since the beginning of the pandemic, I have seen a marked increase in the number of clients expressing concern about how their son-in-law or daughter-in-law might impact their estate planning decisions, particularly lifetime gifts to their adult children. These conversations may be a result of marital stresses aggravated by the pandemic but, regardless, with more onerous tax rules on the horizon, more clients are concerned about how a son-in-law or daughter-in-law would impact lifetime gifts to adult children. This month’s update provides a few thoughts related to the management of a difficult son-in-law or daughter-in-law within estate planning decisions.

For the Strident Son-in-Law: Make a Loan, Not an Outright Gift

First, particularly for clients who are concerned about the marital status of their adult children, a client might transfer assets to a child and her husband as a loan, not as a gift, in order to protect the non-marital nature of the transferred asset. If the client’s child and her husband experience a divorce before the loan is repaid, the loan would need to be re-paid as part of the divorce settlement. In an advisory update I published earlier this summer, I noted how the interest rate required by the IRS for intra-family loans is at an all-time low. The following interest rates are applicable for intra-family loans originating in November, 2020:

Short-Term                    Mid-Term                     Long-Term
Length of Loan:              0 to 3 years                    3 to 9 years                 Longer than 9 years

Interest Rate:                     0.13%                           0.39%                          1.17%

The loan characterization has several positive legal and relationship implications:

  • The child and her spouse can decide together how to use, invest, or spend the loan for their benefit. If the loan assets are used to purchase a home, the home can be jointly-owned by the spouses, and both spouses have the proper incentives related to home ownership.
  • If a child receives an 8-year note from her parents, and invests the money in the stock market, the child’s investment return over that time period need only exceed 0.39% for the child to “net” a gain.
  • In some instances, the child and her spouse face a personal marginal income tax rate that the personal rate of the clients. A lower tax rate on the same income nets a tax gain to the family.
  • If the clients should subsequently “need” the principal amount of the loan, the loan could be “called.” Of course, this assumes the child and her spouse have sufficient liquidity to repay the loan.

For the “Ne’er-Do-Well” In-Laws, Create Trusts for Grandchildren

Second, a client should consider “skipping” their adult children with some portion of their assets and direct that such assets be distributed to a trust (or trusts) for the benefit of grandchildren. Rather than giving an adult child unfettered access to the assets and, by practical implication, access to the ne’er do well son-in-law, clients can create a trust for grandchildren. Such a trust could be structured to provide primarily for certain expenses of the grandchild (e.g., educational expenses), and could name a trustee not subject to the influence of the son-in-law. This plan should be communicated to the client’s family not as a reduction in the value of the inheritance received by the adult children, but as an effort to indirectly assist the child and her spouse by using certain assets to achieve certain purposes, such as educational expenses. Through this strategy, client can be assured that assets will be used for laudable purposes and eliminate the risk that assets would be invested in the in-law’s can’t lose business venture.

Leave Out the “Know-It-All” In-Laws from Family Discussions

Third, I recommend that when clients are making emotional or sentimental estate planning decisions with the family, that all in-laws are excluded. I have previously discussed the importance of ongoing conversations with adult children about the future of a family cabin; the same strategy should be employed with sentimental personal property items. Invariably, spouses of adult children do not have the sentimental connection to family assets and will push for outcomes that net the largest gain to their spouse, sometimes at the expense of a harmonious settlement of the trust or estate. While it may seem disrespectful to exclude in-laws from such discussions, I encourage clients to communicate these meetings in a ceremonial manner to emphasize the emotional importance of these communications and decisions.

As with many other estate planning decisions, the best approach to helping a client address a difficult in-law relationship will depend upon the situation. This issue again demonstrates the continued importance of customizing a plan unique for every family situation.