Sunday, August 9, 2009

Estate Planning For Second Marriages: His, Hers and The Children From Prior Marriages

In a prior article, we discussed that second or multiple marriages are a factor in increasing the risk of probate litigation after either the husband or wife passes away. Married persons with children from a prior marriage must plan carefully if they want to minimize the risk of probate litigation and ensure that those children receive the assets intended for them.

As we mentioned before, as estate lawyers, we have an optimistic attitude that our clients’ marriages will work out. However, we have a pessimistic attitude when it comes to death since all of us will die someday. At that point, what happens to the estate if the surviving spouse remarries? What happens if the entire estate is left to the surviving spouse and he or she leaves the estate to only his or her children and disinherits your children? This is where good estate planning can be useful.

What are potential solutions to these issues in estate planning? Remember that each case is different and there are no cookie cutter or form solutions that work for every family. To create a legal and financial safety net for your family while honoring your choices is what we help our clients achieve.

1. Prenuptial/Premarital Or Postmarital Agreement. The prenuptial agreement (pre-nup) is one of the best ways to avoid probate litigation on death. If you are already married, a postmarital agreement can also be drafted. These agreements can also help avoid an expensive “forensic accounting” on the death of the first spouse.

Many people mistakenly believe they own certain assets as their separate property (perhaps simply because the asset was in existence before the marriage and/or is titled solely in their name) when, in fact, their property may have become community or marital property, in whole or in part, during the marriage. It is better for living persons to create the necessary documentation regarding the ownership of their assets, even if it involves a pre- or postmarital agreement, than to have family members fight over these matters on the death of their spouse or parent.

Although it is a personal decision, it may not be wisest financial decision for persons who own any significant assets to enter into a second marriage without a pre-nup. Even if the spouses in a second marriage are themselves happy to treat all assets on hand on the death of the first spouse as joint or community property, unless the proper legal documentation is in place, there is nothing to prevent one or more children of the deceased spouse from claiming otherwise after the death of their parent.

This is the classic probate court litigation case: children of the first marriage versus the spouse of the second marriage. If assets are not cleanly divided between the surviving spouse and the children from the prior marriage, problems can arise. Life insurance can sometimes be the best way to separate the interests of the deceased spouse’s children from the surviving spouse and provide for both of them. The use of trusts can help, but the trust must be carefully structured.

2. Use Life Insurance To Fund Children's Inheritance. One way to address this issue is to give the children of the first spouse to die a significant portion of their inheritance at the first death. In some cases, this benefit is funded by life insurance. The survivor can then leave all or most of their estate to their own children.
There may be reasons not to use this method where there are not enough assets in the estate to care for the remaining spouse for their lifetime or where there are estate tax issues at the death of the first spouse.
3. Trust For Surviving Second Spouse and Children
One method is to create a trust for the surviving second spouse which has significant assets. There are safeguards to prevent the trust from being depleted during the surviving spouse's lifetime.
The problem here is that the children and second spouse are both beneficiaries. Often, the surviving spouse is made the trustee or given the power of appointment of the trust. Probate litigation is more likely with plans that create a trust for the surviving second spouse:
(1) with the children of the first marriage as permissible current beneficiaries of the trust along with that spouse;
(2) that gives the surviving spouse a power of appointment over the trust, especially if the trust assets can be given to beneficiaries other than the decedent’s children; and
(3) in which either the surviving spouse or a child of the deceased spouse (or both together) is the trustee(s).
The stepchildren in these types of trust are generally unhappy unless the family relationship is harmonious and the planning and communication are idea. It is not an ideal to create a situation where the stepchildren are waiting around for the stepparent to die in order to receive their inheritance. If there is this type of trust, it is usually better to have an independent trustee, such as a bank or trust company, appointed rather than the second spouse or one of the children.
4. Other Solutions
We have created a myriad of solutions for our clients. The key is to have the plan that suits your personal family situation, your financial picture and takes into account your children and the new spouse. It is your choice on how to create a financial and legal safety net for your spouse and children from a prior marriage. We can help advise you on how best to achieve those choices while minimizing any future family infighting or the risk of probate litigation.
Any questions or comments should be directed to: hm@moravecslaw.com or (626) 793-3210.

Henry (Hank) Moravec is a partner at Moravecs, A Professional Law Corporation, in San Marino, California. He focuses his practice on Estate Planning, Trust and Probate Administration, Beneficiary and Trustee Representation, Tax Law, and Nonprofit Law. He represents clients throughout Southern California and his office is conveniently located for clients in the Los Angeles, Orange and San Bernardino Counties. The firm website is http://www.moravecslaw.com/