All posts in Second Marriage

08 Apr

Maintaining a Delicate Balance — The Second Estate Plan for the Second Marriage

In Second Marriage by admin / April 8, 2013 / 0 Comments

Estate Planner Jul-Aug 1997

Estate planning is more than merely arranging to dispose of money and property — it involves people, with all their emotions, virtues, failings and idiosyncrasies. Nowhere is this more evident than in estate planning for the second marriage, particularly when children from a prior marriage are involved.

The objective of your estate plan is an orderly administration and disposition of your estate. The last thing you want to do is create family issues, hurt feelings or conflicts between your current spouse and your children from a prior marriage. Unfortunately, resentment and jealousy over the terms of an estate plan are not unusual. However, if you consider all of the issues now, you can reduce conflicts after your death and help ensure your estate plan will be carried out as you wish.

Marital Trusts To Defer Estate Tax

A marital trust provides cash flow to a surviving spouse during his or her lifetime and defers estate tax until the spouse’s death. But, it has drawbacks in the context of a second marriage:

  • If your spouse is close to the age of your children from a prior marriage, your children may have to wait until old age to enjoy their inheritance.
  • If your spouse has the right to convert non-income-producing property into income-producing property, he or she may sell a family business or other non-income-producing property to the detriment of your children.
  • If the children are the remainder beneficiaries, conflict over investment decisions, such as how much income will be generated by the trust for distribution to your spouse, may occur.

Trustees and Executors

Your fiduciaries may need the skills of a tightrope walker to balance the wants and needs of your children and your second spouse. Besides investment decisions, your executors and trustees also will make property and tax elections, and funding allocation decisions.
Unless your spouse will bring something valuable to the trusteeship, such as investment know-how or a good relationship with your children, you probably shouldn’t name him or her trustee or co-trustee. Also consider whether special provisions should be established for voting authority over closely held business interests, or business- or family-related real estate.

Trust Distributions

Under your estate plan, your second spouse generally will be a trust beneficiary and your children from a prior marriage will be either additional discretionary beneficiaries or remaindermen. You may want to limit the trustee’s discretion, especially if hostility or competition between your spouse and children may arise.
Examine the trustee’s standards for trust distributions to see if they are subject to abuse and to ensure adequate safeguards are in place. For example, mandatory income to the second spouse can reduce constant challenges to the trustee’s use of discretion and spell out specific standards covering when principal may be distributed. If principal distributions are to be limited to emergencies, say so.

Homes and Personal Effects

Make clear provisions if your second spouse is to continue to live in the family residence. This may take the form of a joint tenancy survivorship arrangement, a life estate, specific trust authority, or a lifetime gift through a qualified terminable interest property trust or qualified personal residence trust. Be specific about what costs related to the residence, if any, are your spouse’s obligations.

Do you want specific items from the household to either go to your children or stay with your second spouse? Be careful with the division of your personal effects. Decide how to allocate your art collection or antiques — a trust arrangement may be helpful.

Explain the Reasoning Behind Your Estate Plan

Some of the concerns relating to an estate plan for the second marriage may be addressed in a premarital agreement. A letter to your children and wife explaining your thought process also may reduce conflicts, but make it separate from your will to protect privacy. By addressing second marriage estate planning issues now, you can reduce potential conflicts after your death.


Have You Broken All Estate Plan Ties To Your Prior Spouse?

Double check that:

  • Your former spouse is not still named as the beneficiary of any of your life insurance policies, employee benefit plans or individual retirement accounts (IRAs);
  • Joint tenancies with your former spouse have been terminated;
  • Old powers of attorney have been revoked.
08 Apr

A New Spouse + Children From a Prior Marriage – A Premarital Agreement Can Help You Create an Estate Plan To Meet Everyone’s Needs

In Prenuptial Agreement,Second Marriage by admin / April 8, 2013 / 0 Comments

Estate Planner Nov-Dec 1997

A premarital agreement not only can ease family tensions that often occur in second (and third, fourth, fifth …) marriages, especially when children are involved, but also can help reduce estate taxes. How? The new spouse can agree to use his or her lifetime unified credit to transfer assets to the children from a prior marriage and agree to split annual exclusion gifts to them. Let’s compare this strategy with other options.

Because Terry, age 55 with two children from a prior marriage (ages 25 and 30) and an estate worth $6 million, plans to marry Leslie, age 45, with no children and a modest estate, Terry is creating a new estate plan with three primary goals:

1. Pass enough to Leslie to ensure that Leslie can maintain their lifestyle.
2. Pass more of the estate to the children.
3. Minimize estate taxes payable on Terry’s death.

Planning Without an Agreement

Distribute estate directly. Terry’s estate can be distributed equally among Leslie and the children on a pre-tax basis. This will reduce total taxes but leave more for Leslie than for the children. Leslie’s $2 million will qualify for the marital deduction, but the $4 million passing to the children will be included in Terry’s taxable estate. This will result in estate taxes of about $1.6 million and leave the children with only about $1.2 million each.

Distributing the estate so that Leslie and the two children will receive equal shares after taxes — about $1.33 million each — may be more appealing to the children, but will mean less for Leslie and about $400,000 more for the Internal Revenue Service, because the marital deduction is smaller.

Use a QTIP trust to defer estate taxes. Terry can create a qualified terminable interest property (QTIP) marital trust for Leslie and maximize estate tax deferral by allocating $5.4 million to the QTIP trust. The remaining $600,000 will go to the children. Leslie will receive all income from the QTIP trust and may receive distributions of trust corpus. On Leslie’s death, the remaining corpus will pass to the children. But, because of Leslie’s life expectancy, the remainder may pass to the children so far in the future that it will have a minimal present value, again, upsetting the children.

Purchase life insurance benefiting the spouse. Terry can purchase a life insurance policy to provide for Leslie and leave the $6 million estate to the children, who will receive $3.25 million after taxes, the same as if Terry had not married.

Purchase life insurance benefiting the children and use a QTIP trust. Terry can use the unified credit to fund an irrevocable life insurance trust (ILIT) for the benefit of the children. This may support a $4 million insurance policy on Terry’s life that will be out of the estate for estate tax purposes. As in the previous QTIP trust example, Terry can then leave $5.4 million to a QTIP trust for Leslie, thereby deferring all estate taxes and benefiting the children on Leslie’s death.

Planning With an Agreement

Agree to use the unified credit. Leslie can agree to use all or part of the unified credit (and perhaps the generation-skipping transfer tax exemption as well) to split gifts to the children. If Terry uses both unified credit amounts to fund an ILIT for the children, the $1.2 million can support an $8 million life insurance policy. Terry can then leave $4.8 million to a QTIP trust for Leslie, and no estate tax will be payable on Terry’s death.
Agree to make joint gifts. If Leslie also agrees to split annual exclusion gifts to the children, Terry can double the amount that can pass to the children each year tax-free.

Balance the Needs of Children and Spouse

With proper planning and a well-designed premarital agreement before a second marriage, you can meet the needs both of your children from a prior marriage and of your new spouse, and pass on more to your children at a lower tax cost. The agreement is not magic, but it does ensure everyone is on the same page. If you’d like to learn more, give us a call.