I have frequently heard from couples who put off estate planning because they couldn’t agree on a plan. I usually say this is the same as not going to the doctor because you haven’t diagnosed yourself.
An estate planning attorney’s job is to guide you through the options available and the techniques that can be used to meet the goals you both have, even if those goals may seem to conflict. There are always options. Here are some …
Separate and community property
Married couples often have estates that vary in size. One partner may have accrued net worth from before the marriage or inherited property from their parents, resulting in a large sum of separate property in addition to their half of the community property accrued during the marriage.
The spouse with more assets may be hesitant to have an estate plan that leaves everything to the surviving spouse, particularly if there are children or other dependents. This may be the case even when the assets are all owned equally.
What if the surviving spouse remarries and leaves it all to the new spouse? What if the surviving spouse has more kids later? What if the cabana boy or girl seduces it all away from the surviving spouse?
These are all concerns that can be handled through the use of trusts. A living trust can provide that on the death of the first spouse his or her share of the community property and all their separate property will be held in a separate trust known as the “decedent’s trust”.
The decedent’s trust can provide that the income and principal are available to the surviving spouse if needed, but the surviving spouse cannot change the beneficiaries, thus giving some assurance that the decedent’s plan for their assets will be carried out.
The surviving spouse could be the trustee of the decedent’s trust — that is, the party responsible for managing the assets and making distributions pursuant to the terms of the trust. Or, for extra security, a third party could act as a trustee.
Another option would be to allow the surviving spouse to serve as trustee unless and until they remarried, at which point a third-party trustee takes over, and perhaps distributions from the trust are more restrictive.
Alternatively, consider having an adult child serve as co-trustee with the surviving spouse in the event of remarriage.
Children from other relationships
“His, hers, and ours” children are not uncommon in modern-day marriages. A spouse generally wishes to care for their surviving spouse but also wants to be fair to their children. We’ve all heard stories of the “wicked step-parent” who took all the assets, cut out the deceased spouse’s children, and left it all to their own (no-good) children.
Again, leaving the first-to-die spouse’s share of assets in a trust, with a carefully designed plan for trusteeship and distribution of those assets, can meet the deceased spouse’s goals, while keeping peace among step-relatives. The trust assets can be available to the surviving spouse under certain conditions, and then distributed to the children (biological, adopted, step, as set forth in the trust) upon the surviving spouse’s death.
With blended families, consideration should be given to a professional fiduciary to serve as trustee. A professional can balance the desire for income to be distributed to the surviving spouse against the need for preservation or growth of principal for the children who are the successor beneficiaries. And, a professional trustee isn’t sitting at the Thanksgiving table, so financial discussions won’t take attention away from the feast.
I also often suggest parents consider life insurance that pays immediately to the children, so there is at least one gift to the kids that isn’t contingent on the death of a step-parent. Sometimes a plan as simple as life insurance to the kids, all else to the surviving spouse, can work well for all parties.
Different heirs
Sometimes the issue isn’t the kids or even the size of each partner’s estate, but simply that each spouse has a different choice for the ultimate beneficiary, be it a charity, nieces and nephews or friends. Again, a trust can work to achieve different goals.
Spouses can agree that upon the second death one-half goes to spouse A’s beneficiaries and one-half to spouse B’s. They can either keep these all in one trust and “trust” that the surviving spouse doesn’t change the terms, or again have the trust split into two at the first death, with half becoming irrevocable.
Other options
When one spouse has significantly more assets or each has significant separate property, spouses may want to consider having separate trusts — one that holds separate property for each and one that holds community property.
It’s also possible, and can be good planning, to gift assets to children during your lifetime through the use of irrevocable trusts.
Each of the options discussed in this article has many variations, and the structure of a trust has estate, income, and property tax consequences, all of which should be discussed with your estate planning attorney. You don’t need to have the answers ahead of time; you just need to have the discussion with a professional adviser.
They don’t call us counselors for nothing.
Teresa J. Rhyne is an attorney practicing in estate planning and trust administration in Riverside and Paso Robles. Reach her at Teresa@trlawgroup.net
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