The Balancing Act for Second Marriages
Written by Craig Wisnom
When a married individual has separate children from prior relationships, estate planning becomes much more complicated, as the client has to balance his or her wishes to provide for their surviving spouse with the goals to protect the long term interest of their own children. While every family situation is unique, frequently tensions between step-children and step-parents become exacerbated after the client dies, especially where there is confusion or disagreement as to who gets what and when. The client has to determine how best to balance these important, competing interests, while taking into account how complicated they want to make their plan. 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 sometimes IRA or qualified plan forms, or other beneficiary forms, which require a spouse to sign off if other beneficiaries are being named.
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 they pass via beneficiary designation, joint tenancy, “P.O.D.”, or under the provisions of a Will or Revocable Trust, they pass legally to the survivor. While both spouses may execute Wills providing that at the survivor’s death, assets will pass to the deceased spouse’s children, the survivor is not legally bound to that plan, and can always change it, by changing their 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 does not survive me, in equal shares to my children.
Outright, But Split Between the Surviving Spouse and Children
Another relatively simple method can be to leave the surviving spouse assets outright, but also leave some share directly to the client’s children outright as well. (The children’s shares could be held in a trust for creditor protection purposes, but the important part is that the real benefits pass to them at this time.) This leaves less flexibility for the surviving spouse, because the amount they receive will be less, and even if unexpected expenses arise, they only have so much. But it effectively severs any financial interest the surviving step parents have with the children right away, so there are no continuing tensions during the survivor’s lifetime.
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 the 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” that 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. However, at least the survivor can not change his or her Will to cut out the deceased spouse’s children, so whatever is left at the survivor’s death will be distributed as both spouses originally planned out, and agreed to, together.
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 wife’s children in equal shares and one-half to my children in equal shares.
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 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 it can also be created under a Will (Testamentary Trust), and after the person dies, how it is created does not matter.
A typical Trust could provide that the survivor is his or her own Trustee, and they receive all the income from the Trust, or a certain fixed amount each year, and they can receive principal if their own liquid assets are used up. Then, when the survivor dies, the trust assets go to the named beneficiaries, the deceased client’s own children, or maybe children on both sides. This way, the money is actually more protected, even while the survivor is alive, on top of the assurance that what is left when the survivor dies will go to the children of the first spouse to die. However, if the survivor’s needs are more than expected, they will have the availability for all the assets in the event of emergency need.
While that is a typical Trust arrangement, the client can choose all of the variables. They could require someone else be the Trustee, so the survivor is not in charge. The document can change how and when money is distributed, who will receive the assets, how they will receive the assets, and when they will receive them after the survivor dies.
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.