Planning Is Crucial if You Have Children With an Ex
Written by Craig Wisnom
How do you choose between your spouse and your children? It may sound like a tough hypothetical in a philosophy class or an embarrassing question on a game show. But it’s a real issue many must face when creating an estate plan, especially for people who have children from a prior relationship.
Estate planning is never a one-size-fits-all process. Some clients’ situations involve more difficult questions than others. For a client still married to the parent of his or her children, an estate plan is frequently some variation of leaving everything to the spouse, and if he or she has died, to the children in equal amounts. But when you are balancing benefits for your current and your prior children, there is seldom an easy answer. The estate planning process is more challenging in this situation, and because of that, clients are more likely to put it off. The one thing we know is it’s even more important to think through and execute a plan when you have a blended family, because if you don’t plan carefully, it’s far more likely to be a disaster after you die than in the “simple” scenario.
What Happens If You Fail To Plan?
If you die without a will, and your spouse is not the parent of all your children, then you end up in one of the most complicated “intestate” arrangements. First, assets must be assessed to determine what is the deceased person’s community property with his or her spouse, and his or her separate property. Community property is divided evenly, with the surviving spouse “keeping” his or her half, and the other half divided among ALL the children of the decedent. Separate property of the decedent is also broken in half, with half of it passing to the surviving spouse, and the other being divided among the children.
As complicated as this sounds on paper, imagine how it is in real life. If there are any tensions between the spouse and the children, a horde of issues can arise. Your spouse would be suddenly forced to account for everything he or she owns with you to your children, determine how assets should be divided up, determine values for your property, etc. The spouse essentially becomes a partner with all the children, and that is a situation that seldom works smoothly, even for people who were amicable prior to the death. This all occurs when presumably all parties are under tremendous emotional strain. If there was already animosity and tension, look out!
So, no matter WHAT you decide, it is better to face the tough questions and get some plan in place.
When a married client has children from prior relationships, the estate plan can be more complicated. Tensions between stepchildren and stepparents can become exacerbated after a spouse dies, especially where there is confusion or disagreement as to who gets what and when. The client has to determine how best to balance important, competing interests, while taking into account how complicated they want to make their plan and then how to communicate the plan with clarity. While every situation is different, there are a few basic ways these interests can be balanced.
The individual married client, generally, has the right to determine where his or her separate property passes at death and how his or her ONE-HALF share of community property is distributed at death. This can be changed by premarital agreements and property agreements, and spouses can consent to others being named beneficiary on accounts in which they have an interest.
Outright to the Surviving Spouse
The simplest plan, but the plan that provides the least protection for the client’s own children, is to leave all assets directly to the survivor. Whether the assets pass via beneficiary designation, joint tenancy, or “P.O.D.,” or under the provisions of a Will or Revocable Trust, they pass legally to the survivor. Both spouses can execute Wills providing that at the survivor’s death, assets will pass to the deceased spouse’s children, but the survivor is not legally bound to that plan and can always change it simply by changing his or her Will. The surviving spouse has complete legal freedom and flexibility, and the children of the deceased client have no legal rights or protection.
I leave all my assets to my spouse, if she survives me, and if she doesn’t survive me, in equal shares to my children.
Outright, But Split Between the Surviving Spouse and Children
Another relatively simple method is to leave the surviving spouse assets outright, but also leave some share directly to the children outright as well. (The children’s shares could be held in a trust for creditor protection purposes, but the important part is that they receive the benefit at the same time as the spouse.) This leaves less flexibility for the surviving spouse, because the amount he or she receives is less, and if unexpected expenses arise, there’s no way to increase the share. This strategy effectively severs any financial interest the surviving stepparent has with their stepchildren right away, so there are no continuing tensions during their lifetimes.
I leave one-half of my assets, outright and free of trust, to my spouse, if she survives me, and the remainder of my assets, or all of them if my spouse does not survive me, in equal shares to my children.
Outright, but with a Contract Not to Change
Another option is to leave the surviving spouse assets outright, with plans to go to both spouse’s children at the survivor’s death, like the first option listed above. However, to ensure the surviving spouse does not change his or her Will, the couple can enter into a “Contract not to Change Wills,” which Arizona law recognizes. The survivor owns the property outright during his or her lifetime and could spend it all if he or she needs to. But the survivor can’t change his or her Will to cut out the deceased spouse’s children without possible legal repercussion, so whatever is left at the survivor’s death will be distributed as both spouses originally planned and agreed to, together.
Will: I leave all my assets outright and free of trust to my spouse, if she survives me, and if she does not survive me, one-half to my spouse’s children in equal shares and one-half to my children in equal shares.
Contract: We, both spouses, agree that when one of us dies, the survivor will not change his or her Will, but will leave at least half of his or her estate to the deceased spouse’s children.
In Trust for the Survivor’s Benefit
The most complex but also most flexible arrangement would be for the client to leave assets for the survivor’s benefit, in a continuing Trust. This could be part of the terms of a Revocable Trust, but also could be created under a Will (a/k/a “Testamentary Trust”). After the person dies, how it is created doesn’t matter.
A typical Trust could provide that the survivor can be his or her own Trustee; that he or she receives all the income from the Trust, or a certain fixed amount, each year; and that he or she could receive principal if their own assets are used up. The document then could provide that, when the survivor dies, the Trust assets go to the deceased client’s own children, or maybe children on both sides. This way, the money is more protected while the survivor is alive, and there’s the assurance that whatever is left when the survivor dies will be distributed how the deceased spouse wished. However, if the survivor’s needs exceed funds available or there’s an emergency, the decedent’s share can be tapped.
Although that is a typical Trust arrangement, the Trust can be highly customized to suit almost any situation. For instance, a client could require that someone besides the spouse be Trustee, so the survivor isn’t in charge. Or the document could spell out very specifically how and when money can be distributed to the survivor.
I leave all my estate to my spouse, as Trustee, if she survives me. The Trustee shall pay all income from the trust share to my spouse during her lifetime, and shall distribute to her principal for health or maintenance, but only if she has no liquid assets of her own. When my spouse dies, the trust shall pass to my children in equal shares.
Planning like this can be mean a peaceful transition after the death of a spouse and parent, instead of all-out war. If you love either your spouse or your children (and chances are, you at least do not want any of them to suffer), just do it.