In most situations, planning for the traditional nuclear family is straightforward. When a husband and wife with children come in for estate planning, chances are that their wishes will be the same. Each of them will want to leave their estate to the survivor after the first death, with the assets to be left to the children after the second death (the so-called “sweetheart” disposition).
But second marriages are more difficult, especially when there are children from prior marriages. The spouses will often (but not always) want to make provision for the surviving spouse. But at the end of the day, they want to be sure that the assets end up with their children (and not the surviving spouse’s children).
In this situation, the client’s concern is usually that leaving everything outright to the surviving spouse could effectively disinherit their children. Husband wants to take care of Wife, but knows that if he leaves everything to her, she might leave it all to her children (and not his) at her death. Wife has the same concerns. Here are a few ways to address this situation.
Set Up a Trust
The preferred strategy in this situation is a trust. The trust could be established at death through a Last Will and Testament (a testamentary trust) or during the creator’s lifetime (an inter vivos or living trust).
The use of a trust allows each spouse to control how the assets will be handled after their death. Instead of leaving the property to the spouse outright, the spouse only has the use of the property during his or her lifetime. At death, any unused property is distributed to the children of the predeceased spouse.
If both plans are set up this way, the predeceased spouse’s children will end up with the predeceased spouse’s assets at the death of the surviving spouse. At the same time the surviving spouse’s children will end up with the surviving spouse’s assets. This usually mirrors the intent of the parties.
Of course, there is still the possibility of wrongdoing. The surviving spouse could hoard all of his or her own assets and drain the predeceased spouse’s trust. This would effectively shift assets away from the predeceased spouse’s children to the surviving spouse’s children.
Opportunities for wrongdoing can be minimized by careful drafting. A well-drafted trust could provide, for example, that the surviving spouse is to use his or her own resources before dipping into the trust assets. An independent third-party trustee could be appointed to oversee distributions. Precautions like this can help assure the clients that their wishes will be honored.
Note: Some probate avoidance techniques, such as co-ownership and beneficiary designations can be particularly dangerous in a second-marriage situation. When spouses hold property jointly with rights of survivorship or are named beneficiaries on each other’s accounts, the property involved will pass automatically to the surviving spouse at death. The surviving spouse can then freely disinherit the predeceased spouse’s children, and there isn’t anything they can do about it.
Agreements can also help second-marriage estate plans. The most common is a contract to make a will. In this arrangement, the spouses would agree with each other to make both sets of children the beneficiaries of both estates. No matter who dies first, the children of both spouses will share equally in the estate at the death of the second spouse.
Written agreements are a somewhat clumsy solution when compared to a trust. There are too many possibilities for asset shifting during the surviving spouse’s lifetime. For example, the surviving spouse could shift assets to his or her children while still alive, reducing the amount to distribute at death. Because there is no opportunity for a third-party trustee or fiduciary accountability standards, malfeasance of this nature can be difficult to police.