Blended families provide estate planning challenges.

In 2001, William and Helen Collins prepared wills that were identical, except for the name of the testator. Helen had a son and William had three children from prior marriages. Each "mutual" will left all assets to the surviving spouse. On the survivor's death, all assets would be distributed equally to the four children.

After William died in 2002, Helen executed a new will leaving all of her assets to her son. She died in 2003. Her son received all of her assets and all of William's assets; William's three children received nothing.

Was Helen obligated to leave her assets to all four children, rather than just to her son? No. The North Carolina Court of Appeals held that Helen's second will was valid, because the mutual will placed no contractual obligation on her to refrain from executing a new will; see Est. of Helen J. Collins, 619 SE2d 531 (2005).

Previous Cases

In an earlier case, the North Carolina Supreme Court recognized the general principle that a mutual will may be revoked, unless made in pursuance of a contract. However, the court found that distribution according to the original wills was required when the spouses had set up a trust to receive their assets, and each will referred to the trust. The mutual wills showed the existence of a contract and the beneficiaries named in those wills were entitled to the assets; see Godwin. Trust Co., 131 SE2d 456 (1963):

Similar results obtained when there was contractual language in a joint will. The joint will stated that it was the result of a contract and that neither party to the agreement would revoke, alter or amend the will; see Robison v. Graham, 799 P2d 610 (OK 1990). The surviving spouse executed a new will, and placed his funds in certificates of deposit that were held in joint tenancy with his new wife. Transferring the funds into joint tenancy did not defeat the terms of the earlier joint will.

Strategy

CPAs should be aware of these issues when assisting clients with blended families. Tax advisers should encourage clients to obtain good legal advice, to ensure that their children or other relatives will receive estate assets in accordance with their wishes.

by Howard Godfrey, Ph.D., CPA, University of North Carolina-Charlotte, Charlotte, NC, and member, AICPA Tax Division's International Tax Technical Resource Panel