The picture perfect second marriage for the couple was one of the prevailing themes of this successful sitcom. Mike, a successful architect, and Carol, a “stay at home Mom”- seemed have had it all figured out in the blended family scenario, and everyone that tuned in was blissfully spared of the behind the scene details – not from the camera crew, the writers, wardrobe or make-up assistants – but from the attorneys that guided Mike and Carol through the estate planning process that will hopefully maintain family harmony following the death of either Mike or Carol. Yes, only an Estate Planning Attorney can envision that a well thought out legal framework would be instrumental after the death of the first spouse. We often refer to the Brady Bunch as a “blended family” – that is, a second or subsequent marriage where one or both spouses come into the marriage with wealth and/or children from a prior marriage – and these family units have increased dramatically since the Brady Bunch days. Ignoring the estate planning issues that are inextricably connected to such a dynamic will most assuredly lead to discord, litigation and expense, emotional as well as financial, that will tear the family asunder. This blog post will hope to shed some light on some of the basic, foundational issues that attorneys for Mike and Carol addressed or should have addressed.
The recent developments in the federal estate transfer tax arena have resulted in less focus on federal estate taxes (several states still have a separate inheritance tax – North Carolina repealed it’s inheritance tax) and more on family planning. If a couple’s combined net worth is less than the “exemption amount,” currently at $5,430,000 there will be no federal estate tax liability when the surviving spouse dies, even if that spouse were the sole owner of all other combined assets. (The situation may require additional planning if their combined net worth exceeds that amount.) However, in the “blended family” the issue of asset control will determine the appropriate estate planning strategy and dictate something quite different than “all to surviving spouse” simple plans.
Hopefully, Mike and Carol each have Wills (or Revocable Living Trusts) and importantly, a pre-martial agreement. It is common for a spouse bringing his/her separate assets into the marriage to want to ultimately leave his/her assets to his/her children after providing to some degree for the surviving spouse. Of course, Mike and Carol can “agree” that whoever dies first, all assets will pass to the survivor without any restrictions and that the survivor will make sure that his/her will or revocable trust provides adequately for the children of the first deceased spouse. Absent some formally binding arrangement, like a pre-martial or post-marital agreement, contract to make a will or “joint and mutual wills,” the surviving spouse is not required to actually follow through with that agreement. Also, what if the surviving spouse remarries, experiences financial troubles or becomes subject to claims of creditors, or he/she simply changes his/her mind, the assets that were promised would pass to the deceased’s spouses children may be dissipated or simply redirected.
A typical marital agreement (pre-marital, if executed before marriage; and post-marital, if executed after the marriage) will address the rights of each spouse in the estate of the deceased spouse and may include (i) a total waiver of any right to inherit or (ii) provisions requiring the spouse to make some provision for the surviving spouse, such as requiring that each spouse make a will that provides for some benefit to the surviving spouse, whether in a separate trust or with no restrictions, execute (and not thereafter change) a beneficiary designation naming the other spouse as beneficiary of a life insurance policy or retirement plan or change bank or investment accounts to “payable on death” accounts naming the surviving spouse as payee. The bottom line is that having such a martial agreement provides each spouse with the greatest flexibility to plan for the disposition of his or her assets at death with the sense of security that the plan will not, in essence, be amended after death by the surviving spouse. Please be mindful, the marital agreement does not prevent a spouse from providing for the surviving spouse; rather it merely defines the extent of the rights of the surviving spouse in the assets of the deceased spouse. It is critical that these agreements be prepared and executed in such a fashion that they are enforceable. Among the factors that will result in enforceability include separate legal representation of both spouses, full disclosure of assets by both spouses and if a premarital agreement, providing sufficient time before the marriage for the spouses to obtain legal representation, if so desired and if not, time to fully consider the terms and provisions.
Now that the pre-marital agreement has been negotiated, Mike and Carol can proceed to design their respective estate plans with confidence that his/her assets will pass to the intended beneficiaries. A word of caution: An estate plan is a living, breathing set of documents. What is appropriate now may not become so as life experiences shape families, goals and objectives.
Assuming Mike dies first and ultimately wants to leave his assets to his children, after providing to some degree for Carol, a simple vehicle for accomplishing this objective is for Mike to have all of his assets pass to a trust for Carol where she can enjoy the economic benefit for her lifetime (or until she remarries or other trigger event as Mike determines appropriate – bear in mind if estate tax issues are a consideration, the trust will have to comply with special rules such as provide Carol with a right to income annually for her life ) and the after her death (or other trigger event) the assets pass to Mike’s boys (and Carol’s daughters if that was the arrangement). The trust vehicle serves several objectives; namely, the ultimate disposition is controlled by the terms of the trust and not the surviving spouse (although the surviving spouse can be granted limited powers to re-direct the trust assets among a specific class of beneficiaries chosen by the deceased spouse), the trust can protect the assets from creditors of the surviving spouse and the surviving spouse can have a meaningful economic benefit consisting of all income (interest and dividends) and additional amount for health and support. There is virtually no limit to the types of assets that can be held in this trust (although stock of an S corporation may require additional planning and drafting in order to preserve the S corporation tax status), and the trustee should be afforded a great deal of discretion in determining what assets the trust will hold, provided, the surviving spouse can be given the right to direct the trustee to make the property productive of income.
In many families, the family residence is the largest asset and may also have significant sentimental value to the children of the prior marriage. The residence can be placed in the trust and the trust can provide that the surviving spouse has the right to continue to live in the residence rent free. The trust may or may not require that the surviving spouse pay all utilities, ordinary repairs, taxes and insurance. A particularly sensitive issue when there are minor children, is the issue of who will be the guardian for the deceased spouse’s minor children assuming they were not adopted by the surviving spouse – this should be addressed in the will. It is important to remember that if the residence is owned jointly by the spouses, in most states like North Carolina, the house will pass automatically to the surviving spouse regardless of any will or other agreement that may provide for a trust to hold the house or that contains a different result than passing to the surviving spouse.
Another asset that requires particular attention, and is becoming a substantial asset in many families is the retirement account. Let’s assume Mike works for an architectural firm that provides a 401(k) plan for its employees. Upon Mike’s death, the account will pass pursuant to the beneficiary designation that Mike has filed with the employer. Mike cannot name a specific beneficiary other than Carol without Carol’s written consent. If Mike intends for less than 100% of that account is to pass to Carol (including trust for Carol), he will need her consent. This can be coordinated through a martial agreement. If Mike retires and rolls over his 401(K) account into an IRA, different rules apply and absent a marital agreement requiring a contrary result, Mike can name a beneficiary of his choosing without Carol’s consent. Thus, the beneficiary designation becomes a very important document, and it too can designate a trust for Carol as the beneficiary of the account. Special rules must be followed to achieve the optimal income tax treatment for distributions from the retirement account when a trust is named as beneficiary.
A sensitive issue when establishing a trust for a second or successive spouse is who will be the trustee. In second or successive marriages, especially if there are children of the deceased spouse from a prior marriage, the surviving spouse should not serve as sole Trustee. In most instances, this is a recipe for disaster as even under the best of relationships there will be some element of doubt as to the proper management and administration of the trust. The best choices are an institutional trust company or a trusted advisor of the deceased spouse. Many institutional trust companies have certain minimum asset value thresholds and will not serve if the trust assets are less than this threshold. This may present a practical obstacle for this choice of trustee. The trust should also take into account that a named trustee may not be willing to serve or may die or resign after accepting the trusteeship, and thus it should provide for a named successor or a procedure to have a successor named.
Again, assuming Mile dies first, the objective to be accomplished via the trust vehicle described above for Carol (or if Carol has significant assets and does not need support from Mike’s assets after death so that he may want to provide a larger benefit for his children) may be thwarted if Carol is unhappy with what Mike’s estate plan provides for her. Absent a waiver of her marital rights via an enforceable marital agreement, under North Carolina law, a surviving spouse has certain rights to elect against the testamentary disposition of a deceased spouse and claim an ”elective share.” The elective share is intended to augment assets passing to or for the benefit of a surviving spouse when such amounts are less than the surviving spouse’s applicable share as specified in the state statute – such share based on the length of the marriage. The trust referred to above can qualify as assets passing to Carol if it contains certain terms that are not unduly restrictive and are common in many such trusts.
The above discussion primarily addressed assets that Mike owns individually and pass via probate under his will or by the terms of his revocable trust. Mike should be careful not to ignore assets that may pass to Carol by operation of law (such a jointly owned property that passes automatically to the surviving joint owner) or assets that pass by beneficiary designation directly to Carol (such as life insurance or retirement plans) since these assets are governed by those documents and not the will or revocable trust. He may have the prefect plan in place that provides for a trust for Carol, but may in fact provide very little in asset preservation for his children if the bulk of his assets pass to Carol by beneficiary designation or survivorship. These assets can be directed via the beneficiary designation to pass in trust for Carol, but the beneficiary designation must be reviewed and changed if appropriate. There are many cases where the effect of the beneficiary designation has been ignored to the surprise (and generally not a happy one) to the intended beneficiaries of the decedent’s estate. As an aside, if Carol has assets of her own, Mike can leave a smaller portion in trust for Carol designed to supplement her individual assets and the balance can pass directly to his boys. A retirement plan is a good asset to leave to children as they will often be younger than the surviving spouse and thus they will have an opportunity to take required minimum distributions over their separate life expectancies and continue to enjoy to some extent the income tax deferral benefit of such plans.
Let’s look and see what could happen if either Mike or Carol died without a will or revocable trust. Also assume no assets pass directly to a named individual by operation of law or by beneficiary designation. In the absence of a will, assets in the sole name of the spouse who dies first pass to the surviving spouse and children from the prior marriage as intestate heirs. The spouse and children will receive shares based on the number of children and whether the marriage was a second or more successive marriage. If Mike died first then, assuming a second marriage, Carol would receive all jointly owned assets and 1/3 of Mike’s sole assets, plus $60,000 of personal property and Mike’s remaining two-thirds would pass to his three children. When Carol dies later all of the assets she received from Mike and her personal assets will pass to her three children. If the Carol and Mike intended for both sets of children to participate equally their wishes should have been specified in the marital trust referred to earlier. Thus, in this instance, Mike and Carol’s equal intent may not be realized. Many couples in second or subsequent marriages may have worried about these issues, but often do not take steps to solve them.
The discussion above provides a glimpse into the complexities of the blended family and several of the issues that a couple should address to avoid costly, financial and emotional, repercussions when the first spouse dies. Mike and Carol were certainly ahead of their time – in spite of their wardrobe selections.