The "Octomom" Quagmire

PRIVATE WEALTH magazine July/August issue, July 8th, 2009

PRIVATE WEALTH - July/August 2009 Issue

By Sam Ali 07/8/2009

The case of Nadia Sulaiman, the so-called “Octomom,” whose delivery of octuplets earlier this year galvanized so many people, has spurred outrage and debate over the use of in vitro fertilization.

But Dennis I. Belcher, a partner in the Richmond, Va., law firm of McGuire Woods, hopes it will also start a dialogue among trust attorneys and estate planners about the ever-changing and burgeoning world of genetics and reproductive technology and its impact on their clients.

The laws of parentage and inheritance rights resulting from the use of artificial reproductive technology is murky and difficult to predict, says Belcher, a past chair of the American Bar Association’s Section of Real Property, Estate and Trust Law and president-elect of the American College of Trust and Estate Counsel.

Issues involving advances in genetics and reproductive technology require trust attorneys and estate planners to consider thorny issues like the inheritance rights of children conceived and born after the death of the father, or the ownership rights of frozen embryos or sperm, and other topics that were unheard of a mere 20 to 30 years ago, Belcher says.

To illustrate his point, Belcher notes that with today’s technology, healthy sperm can be extracted within a day after a man’s death, frozen and then used to conceive a child years later. Could a mother, then, produce an heir to a large estate well after the death of the father? Can children produced by using frozen sperm or embryos–after a parent has died–claim an inheritance? What if the father didn’t give his permission before his death? Do children who are artificially conceived after the death of a parent have the same inheritance rights as their siblings?

These are just some of the pressing questions facing trust and estate practitioners today, Belcher says. Right now, there is no uniform rule book; laws are being created from jurisdiction to jurisdiction and local courts are making decisions based on individual cases.

But with thousands of babies being born each year as a result of assisted reproductive technology, Belcher says it’s important for planners to talk to their clients about their reproductive game plan and their dispositive plan for any child born of science.

We recently spoke to Belcher about the brave new world of reproductive technology and other issues facing trust and estate practitioners today.

Q: How does assisted reproductive technology impact estate planning? A: It’s now possible for individuals to have children born after their death. Think of the circumstance of a newlywed couple and let’s say one of the spouses is diagnosed with some form of cancer but they want to have children and they know that when the husband goes through radiation treatment he will not be able to father children. Healthy sperm can be frozen for years and then used to conceive a child, so the husband goes to a sperm bank and donates sperm and goes through with his treatment. In several of these instances, the husband has died and because the couple had previously talked about having children, the widow impregnated herself with her deceased husband’s sperm and has had a child.

Q: What are some of the issues this raises from an estate planning perspective? A: The child’s deceased father had no control over the birth of that child. He deposited the sperm, but is that sufficient indication that he was releasing all control over that donation? These are discussions we are currently not having. Think about it. If the mother can go in and keep having children fathered by a deceased individual, you have an open door and the door never closes. It creates all sorts of issues. What has happened is the law has not kept up with the science And it’s not until people start talking about these issues that we can start figuring out what the norm is. It’s a hot topic on the seminar circuit. It’s being talked about at high level but not in the mainstream. But we don’t talk to our clients about this stuff–whether they have stored genetic material or written instructions about [whether they want any children conceived] to inherit from their estates, because it hasn’t happened to us yet. But it is out there and sooner or later it’s going to be a problem with one of our clients and we are going to wish we had spoken to them about it. A perfect example of this is the area of adoption and inheritance. When I first graduated 30 years ago, adopted children did not inherit with natural born children. But today, the law has moved so far along so that now adopted children inherit the same as natural born children unless there is a prohibition. That is the uniform rule and I can see in the future that children born after the death of a parent will follow the same path. But it will take wide acceptance of the new biology before people and legislatures will get comfortable with the topic.

Q: Have there been any significant changes that have occurred between 2008 and 2009 that would require clients to rethink their estate plans? A: There have been two significant changes that would require clients to look at estate planning. The economic meltdown is one and the second is the significant increase in the estate tax and the generation-skipping transfer tax from 2008 to 2009. The federal estate tax exemption increased from $2 million per person to $3.5 million. That means each person may transfer at death up to $3.5 million of assets without the imposition of a federal estate tax. In addition, the generation-skipping transfer tax also increased to $3.5 million. That means that some estate plans may be based upon assumptions that may no longer be accurate and some may give results a person may not want. For example, let’s say you have a client that has $10 million and last year, in 2008, the estate tax and generation skipping tax was $2 million. The client says at my death I want that exemption amount to go to my grandchildren because $8 million is enough for my wife to live on. But now let’s say that person’s wealth has been reduced to $5 million because of all the financial turmoil and now it’s 2009. The estate generation skipping tax exemption is now $3.5 million, so now, that exemption amount goes to the grandchildren and the surviving spouse will only receive $1.5 million to live on.

Q: As president-elect of the American College of Trust and Estate Counsel, what other hot topic is on your agenda this year? A: Our organization has pushed a concept called portability [of the estate, gift, and generation-skipping transfer tax exemptions]. Portability would allow husband and wife, in effect, to combine their exemption amounts. A deceased spouse could transfer their unused exemption amount to a surviving spouse. Here’s how it would work: This year, each spouse’s estate gets an exemption of $3.5 million before the estate tax is assessed. When one spouse dies, and they leave their estate to the surviving spouse, it passes free of taxes to the surviving spouse. The surviving spouse, however, only gets to use their exemption. So, if I die, I can give $3.5 million to anybody I want and not pay any taxes. If I leave my $3.5 million estate to my wife and my wife has an estate of her own of $3.5 million, she will now have an estate of $7 million, but currently only a $3.5 million exemption. With portability, she could use her husband’s $3.5 million exemption and avoid estate tax exposure. Portability would eliminate the need for complicated estate planning.

Q: In the current economic environment, with significantly lower interest rates and depressed asset values, are there any unique estate planning opportunities? A: Some clients see this time as a great opportunity. If you own stock in a strong company with good long-term prospects and value, until recently, it might have been very expensive to transfer that stock to your children or grandchildren. But now with very depressed values you may be able to transfer many more shares for that same amount of money. One client a few weeks ago said this is a wonderful opportunity to make transfers to his children. You can’t time your death, but you can time the transfer. Rather than wait and let my children inherit the stock, I can transfer General Electric stock at $7 bucks a share because the value is determined when the gift is made. But the first thing is to take care of yourself. One parent can support multiple kids but multiple kids can’t support one parent. The advice I always give is you don’t want to be dependent on your children. It changes the relationship. You don’t want to mess up the fabric of that relationship you have with your children by giving away too much and regretting making the gift. But if you have taken care of yourself and those who are dependent on you like your spouse and children, it can be a wonderful time to make a transfer.

Q: Amid the current financial duress, how have your clients been impacted? A: The financial meltdown has made clients rethink what they should be doing right now. In other words, maybe I shouldn’t be making this charitable gift right now because I need to take care of myself first. I’ve seen a real concern in that area, people saying I wanted to do this for charity but I don’t know if I can afford it now. Also, there were a lot of people depending on and living off the dividends many blue-chip companies were paying and in many cases those dividends have gone to zero. We are just starting to see the sad tales now. If you think about this entire meltdown, it occurred so quickly. When you get to clients who have $100 million in assets and above, this down market hasn’t bothered them as much. It’s at $50 million and below where it has made a huge difference. They don’t feel as wealthy as they did before. This market meltdown is deeper and it happened much quicker and it’s more widespread. Other bear markets in the past never hit the blue-chip stocks like this time. The GMs, the Fords, the Citigroups, the AIGs. This is worse than when the tech bubble popped because that decline was very secularized. It hit certain areas but not mainstream America. It hit those people on the cutting edge. People in mainstream America hadn’t jumped into that bubble wholeheartedly. But this bear market has hit mainstream America big time.