2nd Marriages-Part 2 — Use of Trusts to Support Spouse and Protect for Children
July 26, 2012
This edition of the Koldin Report E-Newsletter is the second in a series on planning considerations for second marriages.
The first newsletter in this series dealt with disastrous consequences and unforeseen results that can occur without proper long term planning. Very often the spouses in a second marriage postpone issues that could result in conflict at a later time. Some of those issues that need resolution are:
1. The need for a prenuptial agreement
2. Joint or separate checking and other financial accounts
3. The right of one spouse to claim up to 1/3 of the deceased spouse’s estate… Right of Election Law.
4. Providing income and/or principal for the surviving spouse.
5. Providing where each spouse’s assets are distributed on the death of the first spouse and later on the death of the surviving spouse.
6. Maintaining the family residence for the surviving spouse when the family residence was owned by the deceased spouse.
7. Determining the ultimate distribution of assets between children and step-children.
A properly designed Trust could be created to avoid probate and carry out the spouse’s financial objectives after death. These objectives could involve providing for the surviving spouse and distributions to children and step-children.
John and Sally have a long term second marriage. John has three children and Sally has two children, both from prior marriages. John’s estate, including the family residence, is valued at $900,000. Sally’s estate is worth $50,000. They do not have a prenuptial agreement. John and Sally are both 82 years old.
John wants to make sure Sally is provided for in the event he predeceases her. He wants her to be able to continue to reside in the family residence for her lifetime. John is very close with Sally’s children and he wants to leave a portion of his estate to them. He wants the bulk of his estate to go to his three children.
Since John and Sally do not have a prenuptial agreement, each has a Right of Election against the deceased spouse’s estate. This Right of Election allows the surviving spouse to claim the first $50,000 or 1/3 of the deceased spouse’s estate, whichever is greater. If John dies first, Sally could exercise her Right of Election and be entitled to 1/3 of John’s estate and would receive $300,000. If Sally dies first, John could exercise his Right of Election and be entitled to her entire estate of $50,000.
John and Sally review all their options and agree (with appropriate legal safeguards) to execute the following documents:
1. John and Sally execute waivers of the Right of Election to eliminate claims against the deceased spouse’s estate.
2. Sally creates a properly designed Trust that avoids probate, terminates on her death, and designates her two children as her beneficiaries. They will inherit her estate currently valued at $50,000. John supports this plan since he is financially independent and does not need Sally’s assets.
3. John creates a properly designed Trust that avoids probate but will not terminate on his death if Sally survives him. The Trust provides that Sally is to have the life use of the family residence together with the sum of $25,000 annually which when combined with her social security and pension will allow Sally to maintain her same standard of living. Upon Sally’s death or if she predeceases John, then upon his death, John’s Trust shall terminate and the estate distributed 25% to Sally’s children and 75% to John’s children.
The above example of John and Sally illustrates how complex planning can be. Doing nothing or guessing can be a recipe for financial disaster. The wrong family could end up with your life savings.
The next edition of this Koldin Report E-Newsletter Series will review Powers of Attorney and Health Care Proxies in second marriage situations.
The Koldin Law Center, P.C. works with families of second marriages to utilize estate planning options to meet their objectives of supporting each other and protecting each spouse’s children.