USA – CALIFORNIA Trends and Developments Contributed by: Jennifer Jordan McCall and Paul Fraidenburgh, Pillsbury Winthrop Shaw Pittman LLP
Strategic Issues in High Net Worth Litigation and Dispute Resolution The planning phase The importance of clear communication Money is a sensitive topic. It is almost impossible for a child to bring this subject up with a parent, and par - ents can also find it hard to discuss with their children. Similarly, with a spouse, the discussion of finances can be fraught with the danger of offending the other spouse, and, for that reason, this topic can be avoided and, when conflict arises, a spouse can fail to effec - tively advocate for themselves. While complicated, money must be directly discussed, as it is a reality of modern life. It affects living expens - es, and, after essentials are covered, it affects luxu - ries, such as vacations and other amenities. Money impacts a family’s sense of financial security, directly related to peace of mind. An imbalance in access to finances among family members or between spouses can lead to jealousy, competition and destructive bit - terness. Sometimes these forces can lead to litiga - tion, leaving scars in a relationship that will never be healed. The first building block in avoiding these issues is clear communication about shared and personal finances. To prepare for a discussion on this topic, it can be helpful to obtain advice from an experienced financial advisor. Considerations can include how much infor - mation to share with a spouse or child and when; and the extent to which the family member with greater assets plans to share their wealth, and with whom. In a family where there has been a second or third marriage, the inheritance for the children can be vul - nerable to the needs or demands of the succeeding spouse(s). This should be addressed upfront, so that a plan can be arrived at that reflects the true wishes of the wealthy spouse. Clearly advising a subsequent spouse and the children from a prior marriage on the aforementioned issues can reduce tension among the family members. Once decided, later communications may be more authentic, as there is no incentive for “jockeying for position”. Trusts as a protective mechanism A trust can be an excellent mechanism for protect - ing children or a spouse, providing long-term finan -
cial support, and ensuring that assets pass to the intended recipient(s), as opposed to a third party – not just a potential unknown creditor or a spouse in a divorce, but also to others who may capitalise on a lack of ability by the beneficiary to adequately safe - guard themselves. Trusts can achieve the nuanced goals of the settlor, providing comfort in knowing the child will be guided by experienced professionals for investments and long-range financial planning. Trusts can also segregate assets among children and between children from a prior marriage, as opposed to a subsequent spouse. Funding trusts can be tax efficient, using discounts to leverage available exemp - tions, reduce or eliminate state income tax and select a state which permits a long-term trust to maximise the GST tax savings. The attached chart shows a review of trust planning considerations in various trust jurisdictions – see link for Comparison of Trust Laws. Use of life insurance in a trust can reduce transfer and income taxes. Similarly, a marital trust for a spouse, even one who is the parent of the children – who often are the remain - derman – can be important to protect the spouse in a later marriage and ensure the remainder passes to the intended beneficiaries, such as the children. Careful analysis should be given to the amount of principal to be paid to the spouse/income beneficiary; for a sec - ond marriage, a unit trust or fixed overall percentage payout (if greater than the accounting income) can provide clear boundaries and also a tax benefit within the context of a Qualified Domestic Trust. Care must be taken when creating an irrevocable trust. The recent Murdoch case, where a Nevada Court held that later amendments to existing irrevocable trusts were not allowed, illustrates the importance of care - fully considering the terms of, and assets to be funded into, irrevocable trusts before finalising them. In Mur- doch the patriarch wished to modify the allocation of interests in a series of family companies, seeking to consolidate control in one trust, but the beneficiaries of the other existing trusts objected. In this case, con - sideration of long-range tax matters could potentially
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