The couple is married or is about to enter into marriage. This is a second marriage for both of them. He has kids and she has kids. How do we make sure that their estate plan is fair to both sets of children?
This can be a big issue for couples entering a second marriage. Furthermore, what is fair today may not be fair tomorrow. For instance, one spouse comes into the marriage with substantially more wealth than the other spouse. Thus, it may be fair that the wealthier spouse’s children receive more than the children of the less wealthy spouse. However, if the parties are married for a long time, perhaps their calculation of what is fair might change. Maybe the less wealthy spouse contributed services to marriage that allowed the appreciation of the wealthier spouse’s assets or the accumulation of other assets. Thus, what was agreed to originally by the couple needs to be revisited from time to time to make sure it is still fair.
There is also the issue of support for the surviving spouse. It may be desirable to allow the surviving spouse the use of the deceased spouse’s assets to provide for his or her support. However, upon the death of the surviving spouse, the couple may wish to ensure that their plan for their respective children is put into place. They may wish to set up a trust for the surviving spouse. In that way, the spouse can be supported during lifetime and upon his or her passing, the assets will be distributed in accordance with the terms of the trust.
Both estates must be coordinated completely so that the couple’s estate plan is put into place. All assets must be accounted for in the estate plan. For instance, joint assets and assets with beneficiary designations do not pass through a Last Will and Testament. Every asset must be looked at to see how it will be distributed upon death.
Perhaps, the best way to coordinate the couple’s estate plan would be through the use of a living trust. However, a living trust only applies to those assets that are retitled in the name of the trust. There are certain assets, such as qualified retirement funds, that would not become a part of a trust. These assets must be considered in the context of the couple’s overall estate plan.
I have seen extreme cases where couple’s estate plans were not coordinated at all. I had one lovely couple come in and the husband’s Last Will and Testament gave all of his assets to his children and the wife’s Last Will and Testament gave all of her assets to her children. This made sense to the couple until I pointed out that all of their assets were in joint names, which meant that they would go to the surviving spouse upon the death of the first spouse. Then, upon the death of the surviving spouse, that spouse’s children would receive everything. We changed their estate plan so that both sets of children would be treated fairly.
How do you ensure that the couple’s estate plan will be honored by the surviving spouse?
One possibility may be to put the assets into trust. You can set up the terms of the trust so that the surviving spouse will have enough money for his or her support while at the same time ensuring that upon the death of the surviving spouse, the couple’s estate plan will be put into force. A trustee can be chosen who will ensure the surviving spouse is properly supported and upon the death of said spouse, the couple’s estate plan will be carried out.
Another consideration is a prenuptial (before marriage) or postnuptial (after marriage) agreement. This agreement will contractually obligate the parties to their estate plan.
The prenuptial or postnuptial agreement can also deal with the issue of the right of election. Under New York law, when a spouse passes away, the surviving spouse has a right to the greater of $50,000 or one third of the net estate. In general, the net estate includes everything except for life insurance proceeds. However, a spouse can waive his or her right to the elective share. A prenuptial or postnuptial agreement is often used for this purpose.
What if you trust your spouse to do the right thing and carry out your estate plan? Do you really need an agreement? I helped a couple set up an estate plan that would fairly distribute their assets to their respective sets of children. I had spoken to them about the possibility of doing a postnuptial agreement but they both said that they “trust” each other. Unfortunately, before the funeral was held for the first spouse to die, the surviving spouse called me and wanted to change the Last Will and Testament to give all of their estate to that spouse’s children. I refused to draft the new Last Will and Testament but no doubt this individual was able to have another attorney, who may not have been aware of the situation, draft a new Last Will and Testament.
I would note that even if the spouse can be trusted, life circumstances may intervene to cause the estate plan to not be honored. For instance, as we age, we may not understand the consequences of marriage and whether the individual we are marrying has our best interests at heart. There are more and more instances of predatory individuals who will marry people who do not have the capacity to understand the consequences of marriage to themselves and to their property. Once the parties are married, the predatory spouse will often transfer assets into his or her name or have the person’s Last Will and Testament changed to benefit them. Thus, the carefully crafted estate plan of the parties is destroyed.
A second marriage can be a wonderful start of a lifetime of joy for the couple. However, the parties must enter into the marriage with their eyes open and develop an estate plan that works for them and for their respective children.
