Gideon Rothschild, Esq., partner, now retired, with the New York City law firm Moses & Singer LLP. He is a past chair of the Real Property Trust & Estate Law Section of the American Bar Association. MosesSinger.com/gideon-rothschild
Given the high incidence of second (and third) marriages nowadays, today’s families often include stepchildren. That can lead to potential conflicts in the transfer of wealth. These families, often referred to as blended families, require more complex estate planning than traditional families in order to avoid such conflicts. For example, a simple “I love you will” leaving everything to a spouse might end up with the inherited wealth going to the spouse’s children, effectively disinheriting the decedent’s own children. Although promises to take care of the decedent’s children may reflect the best of intentions, they are not guaranteed to be carried out. The surviving spouse may get remarried or have a falling out with the decedent’s children.
The inherent conflict may mean that it makes sense for the two spouses to have separate representation for estate planning since each spouse may have different (and potentially adverse) objectives. In addition, consideration should be given to prenuptial or postnuptial agreements. Oftentimes, if such agreements do not exist, a person’s wishes can easily be undone by the surviving spouse’s right to elect against the will, which most states provide for. Under these elective share statutes, the surviving spouse can choose to receive one-third of the estate outright. If, however, the parties enter into a prenuptial or postnuptial agreement, such rights can be waived.
One of the most important provisions has to do with the primary home and its contents. If one is inclined to leave his/her tangible personal property (which includes furniture, silverware, art, automobiles, jewelry, etc.) to his/her children, the surviving spouse may end up living in a house that has been stripped of all its contents. Or even worse, if the house and contents are left to children from the prior marriage, the widow(er) will need to move out so that the home can be sold. One option is to place the home and contents in trust and provide the spouse with the right to reside therein for life or until such time as he/she wishes to move out provided that the spouse pays all the expenses of maintaining the home.
With respect to other assets, a marital trust could be established. How it works: The decedent’s assets are moved into the trust, and the income that is generated from those assets goes to the surviving spouse. Then, when that spouse dies, the remaining assets in the trust are distributed to the decedent’s children.
Such a trust would ensure enough resources for the spouse during her lifetime and would also defer the estate tax until the surviving spouse dies. Although this is a common approach, it’s important to consider the age difference between the surviving spouse and children. As we are living longer, it is very likely that the children could be in their retirement years by the time that spouse dies and the children receive the balance. One solution to this problem is to purchase life insurance on the first spouse’s life and name the children as beneficiaries. This would provide some funds to them before the trust remainder is distributed to them. Alternatively, consider leaving some portion of the estate to the children so that they do not have to wait until the spouse dies.
Another consideration when establishing such a trust is who the trustee(s) will be. Naming a child or children as co-trustees together with the spouse may present a recipe for disaster. Appointing a more neutral, independent person or bank might avoid litigation and conflict.
Finally, consider how you choose a health-care proxy and power of attorney in the event that you become incapacitated. Generally, you can appoint only one person to make health-care decisions but can designate multiple agents for a durable power of attorney, which provides the agent(s) with authority to act regarding financial matters.
As the foregoing discussion illustrates, the risks are high if the plan is not carefully thought out, given its likely challenges and complexity. When the plan is finalized, consider conducting a fire drill that would invite the executor, trustee and estate planning attorney to role play how the estate will be administered when you’re gone. And if challenges to the will are a concern, consider a no-contest clause in those states that enforce such clauses. The clause may act as a deterrent to any will contest by a beneficiary. Alternatively, consider the pre-mortem probate procedures that laws in a few states provide for, which I will discuss in my next blog.