Planning for the Second (or third or …) Marriage and Possible Later Remarriage Scenarios
With the rise in divorce rates over recent decades, today’s marriages often result in blended families. That is to say, in addition to children who are born of the marriage, children from prior relationships often come into a marriage. Balancing the need to plan for your new spouse, children and step-children at death can be tricky. Complicating the planning process are divorce agreements that create a legal obligation to support your former spouse and children. In addition to those contractual obligations, all states, with the exception of Georgia, provide your new spouse with rights to receive a certain amount of the your estate at death unless your new spouse has waived those rights under a marital agreement, commonly known as a “prenuptial agreement.”
Most people think of a marital agreement as protecting them in the event of divorce, but these agreements are also extremely helpful with estate planning in second marriages because the agreement can control how the couples’ assets are distributed at death. A couple may choose which assets will belong to the surviving spouse and which will be inherited by children and step-children. When done in contemplation of marriage, a prenuptial agreement can keep the family business or inheritance in the bloodline by having the intended spouse to waive claims to those assets. However, nothing precludes an already married couple from entering a marital agreement provided that contract is supported by adequate consideration under state law. These marital agreements are useful when both individuals in the relationship are equally motivated to provide a legacy for his or her respective children. All marital agreements require full disclose all assets and liabilities. It is best for each party to be represented by his or her own lawyer.
Incorporating a Marital Trust into the plan also provides a way to take care of a spouse while preserving assets for children. Following death, the surviving spouse receives a lifetime stream of income generated from the trust’s assets and the children receive the remainder of the trust assets at the spouse’s death. In addition to receiving the trust’s income, the trust may also allow distributions of principal for a spouse’s health, support and maintenance. Because the assets are held inside of a trust, the assets are kept outside the reach of the surviving spouse’s creditors and his or her future spouses. The selection of the Trustee is perhaps one of the most important decisions to be made when creating a Marital Trust. The Trustee is responsible for overseeing the administration of the Trust, the investment of the assets and the distribution of the income to the surviving spouse. If the Marital Trust allows for additional discretionary distributions to the surviving spouse, it will be up to the Trustee to make the determination as to whether such distributions should be made. Selecting a qualified independent Trustee with experience can insure good trust management and avoids conflicts.
For larger estates the use of a Marital Trust can defer and minimize estate taxes. While typically these types of trusts are testamentary in nature, meaning they don’t exist until one’s death, there are also estate tax advantages to creating these types of trusts during life. The decision of how to apportion any estate tax liability between the assets passing to a surviving spouse and those passing to one’s children can be an important factor to consider in the plan.
In many cases, a life insurance policy can be acquired to provide for the needs of a surviving spouse or minor children. Such may already be the requirement of a negotiated marital agreement or child support agreement. Death benefits of life insurance owned by the insured may trigger an estate tax that could be otherwise avoided if the policy were owned by a Trust. For this reason, if life insurance is to be used as part of planning in a second (or third) marriage, an irrevocable trust should be considered that would be the owner of the policy in order to keep the policy proceeds from being taxed.
Whether considering a Marital Agreement, a Marital Trust or Life Insurance Trust to help with planning for a second or third marriage, it will be important to have competent counsel to draft these important legal documents. A law firm experienced in family, tax, trust and probate law is critical to the development of solid documents that will protect you and your family members in the case of divorce and at death.