Protecting Heirs In A Second Marriage
Since so many people put off Estate Planning until later in life, planners encounter many clients who are in a second marriage, with one or both spouses having children from a first marriage. In this situation, it can be very important to each of the clients that their share of the assets is passed on to their own designated heirs. There are several ways to do this. Which method will be best for your clients will depend upon a variety of factors, including the value of the estate and how much the clients trust each other.
If the estate is small, and simplicity is important, a provision can be added to a Small Estate Trust or Disclaimer Trust specifying that once the first spouse is deceased distribution cannot be changed for the Deceased Spouse’s portion of the estate. The clients can then specify that the Successor Trustees will be a representative from his family and a representative from her family, jointly, to further protect the interests of the two groups of heirs. However, this arrangement does nothing to keep the Surviving Spouse from depleting the Trust assets after the death of the first spouse, revoking the Trust entirely, or amending the Trust to remove the Deceased Spouse’s designated Trustee.
An alternative is to create an Exemption Trust (A/B Trust). In an Exemption Trust, the Deceased Spouse’s portion of the Trust Estate must be allocated to the Bypass Trust at his or her death. The assets and the terms of distribution of the Bypass Trust become irrevocable, thereby ensuring that the Deceased Spouse’s distribution desires cannot be changed. However, the standard Trust language gives the Trustee broad powers to access the funds of the Bypass Trust. These powers are intended to avoid a situation in which the Surviving Spouse’s ability to provide for his or her own necessary expenses are compromised by an inflexible arrangement of assets, but the powers could be used by an unscrupulous or careless person to deplete the assets of the Bypass Trust, while leaving the Survivor’s assets intact for the Survivor’s heirs. If this possibility is a concern, the Settlors can specify that the Surviving Spouse not serve as Trustee of the Bypass Trust, but rather that a relative of the Deceased Spouse shall serve. The downside of this arrangement is the potential unpleasantness that may arise from the Surviving Spouse’s need to ask permission from the Trustee to access any of the assets of the Bypass Trust. Since so much is left to the discretion of the Trustee, there is a potential for the Trustee to deprive the Surviving Spouse of enough funds to live at a level consistent with what the Deceased Spouse would have thought appropriate. Additionally, by law there is a maximum amount of assets that can be allocated to the Bypass Trust. If the value of the Deceased Spouse’s estate surpasses this limit, a Q-Tip Trust will be needed.
As you can see, the desire to both provide for the needs of the Surviving Spouse while protecting the distribution desires of the Deceased Spouse can be a complex problem. The clients will need to give serious thought to their priorities, and then have their attorney explain the best options for their particular situation.