Can’t Wait to See How the Senate Votes on This! October 2023
“In her last days, Feinstein’s daughter and stepdaughters battled in court over the Senator’s access to assets left by her very rich late husband, Richard C. Blum. It got nasty, with accusations of elder abuse.”[i]
Diane Feinstein’s first marriage to Jack Berman lasted three years, but that marriage produced Diane’s only child, a daughter, Katherine Feinstein. Feinstein remarried in 1962 to Bertram Feinstein, who died of cancer in 1978, and she again remarried in 1980 to Richard C. Blum, who had three daughters of his own, Annette Blum, Heidi Blum Riley, and Elleen Blum. Katherine is married to Rick Mariano who is a real estate investor, but previously worked at Blum’s company.
Adding to the cast of characters are Michael Klein, a lawyer and partner with Blum; and Marc Scholvinck, the former CFO of Blum Capital Partners. Both men serve as trustees for Blum’s estate.
Richard Blum founded Blum Capital Partners, LLP. His net worth, separate from Diane’s, has been estimated in the billion-dollar range, but speculation is it fell below that during the pandemic. According to court filings, Blum had no assets in his personal estate as they were held in a variety of separate trusts. One of those many trusts is a joint trust for Blum and Feinstein that owns a beach home at Stinson Beach in northern California. A marital trust also owned some of the couple’s community property. Both trusts provide that Diane can access the income produced from the assets when Richard predeceased her for as long as she lives, and then the assets go to Blum’s three daughters, not to Katherine Feinstein.
At 90-years old, Diane gave her daughter, Katherine, a retired Superior Court judge, limited power of attorney over her assets and health care as Diane’s health was failing. The Blum trustees in a court filing are challenging the appropriateness of Katherine acting on her mother’s behalf.
Needless to say, fights around settling any estate can be contentious when one family is involved. When a blended family exists, especially when the children of each spouse are already adults having never lived together under one roof, and the number of zeros behind the dollar sign are six to nine digits, complexity and self-interests can multiply problems tenfold.
Lawsuit #1: The Stinson Beach home, valued at $5.6 million, was held in a joint trust for both Feinstein and Blum. Assuming the trust represented 50/50 ownership of the home, it stated that Blum’s interest, if he predeceased Diane, would benefit Diane and then pass to his children when Diane dies. The problem is the home produces zero income but plenty of expenses that Diane had to cover from her half of the ownership, and she had no desire, partly because of her health situation, in maintaining the residence. Katherine Feinstein, while her mom was alive, attempted to put the home on the market since she had power of attorney for her mom’s half ownership. Katherine’s husband, Rick Mariano, even undertook contracting for some improvements to prepare the house for sale.
There is just one problem. Blum’s three daughters do not want to sell because they feel the house will continue to appreciate and gain more value for them the longer it can be held. It is also to their benefit that they enjoy the appreciated value while Diane has to pay the expenses. Now we introduce the trustees, Klein and Scholvinck, into this drama because they are the final decision makers. While they are supposed to be neutral, we must remember whom they represent. Both were involved with Blum in his business dealings and Blum appointed them as the trustees. We must at least consider the fact they may have a bias towards Blum’s daughters.
Lawsuit #2: The marital trust. Typically, in estate planning, when one spouse dies, sufficient assets go into a decedent’s trust to use up whatever current lifetime unified credit is still available, then the deceased person’s remaining personal assets and their share of the community property goes into the marital trust for the benefit of the survivor until that person dies, and then to whomever the designated beneficiaries are, in this case Blum’s three daughters. Katherine receives nothing from this trust. Now we must focus on who has what incentives. Similar to the Stinson Beach trust, the three Blum daughters quickly recognize any distributions from the marital trust going to Diane is money they will not inherit. Motivation: don’t make distributions. Here also, Klein and Scholvinck are the “theoretical” trustees. On the other side, Katherine wants the distributions made, even if not expended for Diane’s health, because those unspent dollars would stay in Diane’s estate and then to Katherine.
Lawsuit #3: Elder Abuse! Katherine is suing the daughters and the trustees for elder abuse because, supposedly, money Diane needed for medical expenses as her health deteriorated was not available because the trustees were not selling the Stinson Beach home nor making distributions from the marital trust. Evidently the $5 million marital trust failed to make the required $1.5 million annual distribution to reimburse Diane for medical expenses as Blum intended. One more tidbit is Katherine is claiming Klein and Scholvinck are not named as the trustees in the 1996 marital trust document and have therefore been improperly appointed by the Blum daughters as the trustees, so Katherine is petitioning the court to appoint her as the trustee. This may seem reasonable, but we should note Diane has a fairly substantial personal net worth from her years in politics. One article said she was sitting on $70 million of cash on the date of her death. This raises the question of whether she really “needed” the marital trust to make distribution to her.
So, what are the problems here, and how might they have been avoided? The first obvious problem, as it often is, is greed. The mistake too many high-net-worth families make is assuming their family is different and the kids won’t fight over the wealth. They almost always will, especially in a blended family! It is also true parents, knowing there are problems, will avoid the conflicts now, preferring to let the children “fight it out” after they (the parents) are gone so they do not have to deal with those problems.
A second problem is also too common; doing estate planning in secret so the heirs will not know who is getting what until the family is assembled around the attorney’s conference room table. It is a misnomer that telling the children what they will be inheriting ahead of time will disincentivize them. I use a family airplane to describe the dangers of secrecy. Dad is in the pilot’s seat, mom in the copilot’s seat, but she does not know how to fly the plane, and five children are passengers, but they too have never flown a plane. Dad has had a heart attack. What is going to happen to that family? Would it not have been better to have all the children trained and know how to fly that plane? Would having Katherine and her husband, Rick, and the three Blum daughters involved in creating the estate plan along with Richard Blum and Diane helped avoid these lawsuits and kept the battle out of the news, at least as it pertains to the community property?
Secrecy leads to the third problem, unmet expectations. Implied in secrecy is the family has poor or non-existent communications and when people are not communicating, they will almost always assume the worst, or they will assume their expectations will be met even if that is not true. When expectations are not met, the attorneys win, and the heirs lose both in dollars and relationships. Two major factors in families losing their wealth and destroying their relationships is (1) a breakdown in trust caused by (2) a lack of good productive communication.
A fourth problem is documents. Tasha Dickenson, a Florida estate planning attorney, “called the arrangement a ‘recipe for disaster.’ When different family members benefit depending on the actions taken by the trustees, you create a power struggle. Separating assets in the beginning might have been a less divisive move. For example, rather than creating a joint trust, Blum could have chosen to give Feinstein a discrete bucket of assets, with the rest going to his kids.”[ii] Attempting to control people and their actions using legal documents almost ensures there will be legal battles in the future because it is impossible to know what the future holds. Trustees are bound by the trust language and have very little latitude to adapt to situations that could not have been predicted when the documents were drafted.
The fifth problem is trustee selection. Being a trustee, especially for a large estate, can be hazardous work. It is usually a no-win task. Putting a child or friend in that situation will almost assure that child or person will be ostracized from his or her siblings and the family.
While Blum at least went outside the family for his trustees, the relationship of the trustees favored the Blum children with no representation for Katherine. Ignoring the possible bias, if you were the trustee, how do you decide what to do with the house since legally you represent both sides, but the two major beneficiaries have conflicting motivations regarding what should be done with the assets. A corporate trustee might have been a better solution, but even then, if the previous four problems exist, there could still be contention and lawsuits.
Finally, a major problem in the Feinstein family and most families is a lack of anticipation and not working with professionals trained to know what problems to anticipate. I suspect that as you are reading this article there is a part of you saying, “Duh, what did they expect would happen?” Some attorneys, like Tasha Dickinson whom I’ve quoted, will anticipate these issues, but in the end the attorney must do what the client instructs them to do. This is not the first family to go through this scenario and it will not be the last. It is not a case of not being able to anticipate the problems, it is a case of not wanting to acknowledge and deal with them. Having the children involved in the initial estate planning and creation of the trusts in this story may have been combative with raised voices, some anger, and some tears; but would it not have been better to deal with those issues while everyone is involved and can voice their respective expectations, needs, and desires even if they do not get everything they want? No one gets everything they want!
I will close with the attorney, Tasha Dickinson, reenforcing my solutions:
“Plan meticulously. Planning should include not only the distribution of your assets but who will carry out those details. That means, she says, thinking big picture, including whether assets should pass to heirs together or separately, and considering the practical aspects of beneficiaries being forced to work together. Often, she explains, “rifts between family members are so great, they don’t always make the best decisions.”
“Set expectations early. “You can’t always choose when you’re going to die,” she says, “so it’s important to set expectations early.” That’s true not only with respect to assets but also your choice of fiduciaries.”
“Remember that communication is key. “Did they [Feinstein and Blum] ever have conversations about the beach house?” Dickinson wonders, suggesting that the answer is no.”[iii]
“What causes fights and quarrels among you? Don’t they come from your desires that battle within you? You desire but do not have, —. You covet but you cannot get what you want, so you quarrel and fight.”[iv]
[i] After Sen. Feinstein’s Death, Family’s Fight Over Assets Likely to Intensify, Forbes, Kelly Phillips Erb, October 7, 2023
[ii] Ibid, Tasha Dickinson, Florida bar board-certified wills, trusts and estate lawyer at Day Pitney LLP
[iii] ibid
[iv] The Bible, James 4:1-2, New International Version
Kip Kolson is the president of Family Wealth Leadership, a multi-family office and family coaching firm, and author of You Can Have It All; Wealth, Wisdom, and Purpose—Strategies for Creating a Lasting Legacy and Strong Family. You can order your copy at Amazon. Click on the FWL website below to learn how we help families create a legacy, or email kkolson@familywealthleadership.com or call us at 949-468-2000 to arrange a call or meeting to discuss your family’s situation.
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