In 2010, “blended” families became the predominant family form in the United States. Couples in such relationship are often conflicted with the desire to not only provide for the needs of the surviving spouse upon the first death, but also to ensure that their own children receive their “rightful” inheritance.
Unfortunately, too often the estate planning done by remarried couples consists of simple “I love you” wills that provide that all the couple’s assets pass to the surviving spouse. Not only does such a disposition forfeit a number of planning advantages – including preserving each spouse’s estate tax exemption, protecting assets from creditors and from a potential remarriage of the surviving spouse – but under this scenario, the first spouse to die (the “Deceased Spouse”) would have no assurance that upon the remaining spouse’s death, the surviving spouse (“Surviving Spouse”) will in fact leave the assets of the Deceased Spouse to that spouse’s children.
A better solution is for each spouse to establish one or more trusts to hold their assets upon their respective deaths. Upon the Deceased Spouse’s death, his or her estate plan may provide that all or a portion of his or her trust assets passes to a “Marital Trust” for the benefit of the Surviving Spouse. The Marital Trust would provide income from the trust to the Surviving Spouse for life, and may provide distributions of principal to or for the benefit of the surviving spouse at the Trustee’s discretion. Upon the Surviving Spouse’s death, the trust assets would be distributed to the children of the Deceased Spouse, either outright or preferably in a creditor-protected trust. One caveat is that the assets in the Marital Trust would be taxable in the estate of the Surviving Spouse; it is critical that the trust instrument provide that the estate taxes, if any, attributed to the Marital Trust assets be payable by the appropriate parties (typically the Deceased Spouse’s children).
If there is a concern that the children of the Deceased Spouse may have to wait too long to receive their inheritance, a portion of the Deceased Spouse’s assets may go directly to his or her children upon death, either outright or in trust. In 2011, the first $1,000,000 distributed to anyone other than a Surviving Spouse will be exempt from both Federal and New York State estate tax.
Trustee selection is critical in these cases. Due to the inherent conflict, it is poor practice to have the Deceased Spouse’s children serve as Trustee of the Marital Trust for the Surviving Spouse. A better choice is typically a professional trustee such as a trust department of a bank or other financial institutions. Regardless of Trustee selection, it is important that the Marital Trust include explicit instructions describing the circumstances, if any, when the Trustee may provide trust principal to or for the benefit of the Surviving Spouse.
One final piece of “blended” family planning is the need for each spouse to sign a waiver of their spousal right of election. In the absence of such waivers, the Surviving Spouse would be able to upend the couple’s planning by simply asserting his or her right to the statutory share of the Deceased Spouse’s assets – which in most states is at least one-third of the Deceased Spouse’s assets, and often more.