Q: My husband and I have been married for 30 years. It is a
second marriage for both of us and we both have children from our first
marriages. How can we be sure that after the second spouse dies our estate
will be divided among our combined children and not just the children of the
second spouse?
Estate planning for a husband and wife in second marriages adds additional
complications to the planning process. As with all estate planning, there
is no “one size fits all” approach. The planning process takes into
consideration the client’s estate planning objectives, financial circumstances,
family relationships, values, and interests. The goal is to develop a plan
that best achieves those objectives. The process is complicated by the
fact that we are planning for the future, and no one knows for certain what the
future will bring. In addition, the planning process typically involves
evaluating various options, each with its own advantages and disadvantages.
Unfortunately there is no simple answer to your question.
In planning for clients in a second marriage, no one knows which spouse will die
first, how long the surviving spouse will live, what the surviving spouse’s
needs will be, or what assets will remain after the death of the surviving
spouse. Typically each spouse wants to assure that their children receive
a share of their estate but also that the surviving spouse is not impoverished.
There are numerous approaches that can be considered, but each is subject to
future uncertainties and its own pluses and minuses. If the couple wants
to assure that there will be assets left to divide among all of the children
after the death of the surviving spouse, one alternative is for each spouse to
maintain some assets in their separate name and provide in their will, or by
beneficiary designation, that upon their death all or a portion of their
separate assets will be paid to a trust. A variation of this would be for each
spouse to create a separate trust during their lifetime and transfer some of
their assets to their trust. The couple could hold other assets in joint
ownership, and those assets, upon the death of the first spouse, would pass
directly to the surviving spouse. Each spouse's trust would provide that upon
that spouse's death their trust would continue, and the income from the trust
would be used to support the surviving spouse, but the assets in the trust would
be preserved and would be divided among both spouses' children upon the
surviving spouse’s death. A disadvantage of this approach is that the
surviving spouse might not be able to meet his/her needs with just the income
from the trust.
Another approach would be for the parties to create a joint trust and transfer
some or all of their assets to the joint trust. They would include
provisions in the trust for what happens after the first spouse dies. They
would have to decide whether all of the assets should remain in the trust for
the benefit of the surviving spouse, whether some distributions should be made
immediately to their children, whether the trust should become irrevocable after
the first spouse dies, and how much control the surviving spouse (or a
successor trustee) should have over distributions from the trust. If for
example the surviving spouse (or a successor trustee) had the authority to make
distributions from the trust assets for the support of the surviving spouse,
there may be nothing left for the children after the surviving spouse dies.
In some instances, a couple may decide to execute a prenuptial or postnuptial
agreement in which they agree that upon their death the assets held in their
name would be distributed to their children. Each spouse would also agree to
waive any claim to a share of the other spouse’s estate. They would each
keep some or all of their assets in their separate name or in a separate trust.
They would each write a will that was consistent with their agreement. This
would allow each spouse to leave the assets in their name or in their trust to
their children upon their death. The children of the surviving spouse
would not inherit their parent’s property until some time in the future and,
depending on the circumstances, they may receive a larger share or a smaller
amount that the children of the spouse who died first.
This is only a brief summary of some alternatives. There are also
additional factors that may have to be considered. If either spouse needs
nursing home care at some point and has to apply for Medicaid, the couple may
have to make drastic changes in their financial and estate planning. If
either or both spouses have substantial financial assets that exceed the
exemption amount for federal estate taxes they will also have to consider the
tax implications of any estate plan. However the estate tax exemption is
$5,450,000 for 2016 so for most individuals there is no need to consider complex
estate planning strategies for minimizing or eliminating federal estate taxes.