Estate Planning for Blended Families
Originally published in October 2014
Copyright © 2014 Knox McLaughlin Gornall & Sennett, P.C.
Pertinent Laws that Affect Blended Families
Most people are aware that when an individual dies, the assets of that deceased individual (the “decedent”) are typically passed on to others by way of a “Will” or other similar document designed to act as a Will substitute (e.g., a revocable trust agreement). Many people are less aware, however, that a Will (or Will substitute) generally only governs those assets that are titled solely in the decedent’s name (or in the name of the decedent’s revocable trust) and which do not otherwise pass by way of beneficiary designations. Assets that are titled both in the name of the decedent and in the names of others may (and often do) pass outside of the decedent’s “probate estate” (i.e., the estate administration process) to the surviving co‑owner(s). Similarly, certain assets do not pass according the decedent’s Will but instead pass automatically to those persons who are designated as recipients on the beneficiary designation forms.
Forms of Co-Ownership
- Tenancy in Common. If two (2) persons, “A” and “B” own property as “Tenants-in-Common,” then they each in effect own a “fractional interest” (i.e., their own individual respective share) in that asset, which can then be gifted during lifetime or passed on at death to family members, heirs or others. So in the example, “A” in effect owns a one-half (1/2) share of the property which A can pass on at death (e.g., through A's Will) to A's children, and “B” can do the same with respect to B's one-half (1/2) share of the property.
- Joint Tenancy with Rights of Survivorship (“JTWROS”). If two persons, “A” and “B”, own property as JTWROS, then when the first of them dies, the property will automatically by “operation of law” pass to the survivor of them. So if “A” dies first, then the property passes automatically at “A’s” death to “B”, without any further action by (or on behalf of) either of them.
- Tenancy by the Entirety. Tenancy by the Entirety is a form of co‑ownership that is specific to two (2) married persons. So “A” and “B” can only own property as Tenants-by-the-Entirety if they are married to one another. As with property owned as JTWROS, property owned as Tenants-by-the-Entirety passes automatically when the first spouse dies to the surviving spouse.
Beneficiary Designations – Common Examples:
- Retirement Plan Accounts
- Individual Retirement Accounts
- Payable on Death Accounts (Bank Accounts)
- Transfer on Death Accounts (Securities)
Family Laws - Equitable Distribution / Alimony / Spousal Support
A basic knowledge of certain domestic relations law (also called “Family Law”) concepts is essential to any individual who wants to assist others in planning for various issues affecting blended families.
First, how assets are titled can have a direct impact on the extent to which the assets become subject to the claims of a former spouse – through property settlement or indirectly through alimony – in the event of divorce.
Second, the ability of an individual who is coming off of a divorce and entering into a new marriage may be limited by obligations that either or both of the spouses bring into the marriage. For that reason, advisors should have some familiarity with basic principles of “equitable division” (i.e., property settlement) and alimony.
Equitable Distribution (Property Settlement)
- Property acquired prior to the Marriage;
- Property acquired in exchange for other property that was acquired prior to the marriage;
- Property that is excluded from equitable distribution under a valid agreement (e.g., prenuptial or postnuptial agreement) that was entered into before, during or after the marriage;
- Property acquired (from a person other than the individual’s spouse) by gift, bequest, devise or descent;
- Property acquired after the parties have legally separated; and
- Property to the extent it has been mortgaged or encumbered in good faith and for value prior to the date of the final separation.
Jointly Title Property. Property that is otherwise treated as “separate” or “non-marital” property (e.g., property received by gift or inheritance, property acquired prior to the marriage, etc.) loses its status as excluded property when it is transferred into the names of both spouses. Similarly, if non-marital property is sold, and the proceeds are titled jointly in both spouses’ names, then the proceeds become marital property. How property is titled as between spouses can therefore be very important in the event that the parties later divorce.
Interests in Trust. The interest of one spouse in a trust will not be considered marital property if the spouse does not have possession or the power to obtain possession of the trust principal.
Factors to be Considered in "Equitable Distribution." “Equitable Distribution” does not necessarily mean that the marital assets will be divided equally as between the divorcing spouses. As a practical matter, an equal division of the assets may be the starting point in determining what is “equitable” under the circumstances. However, ultimately the question is what is fair and equitable in light of all of the surrounding circumstances. The Divorce Code lists a number of different factors to be considered in determining what constitutes an equitable division of the marital estate. Those factors include the following:
- The length of the marriage;
- Any prior marriage of either party;
- The age, health, station in life, amount and sources of income, vocational skills, employability, assets, liabilities, and needs of each of the parties;
- The contribution by one party to the education, training or increased earning power of the other party;
- The opportunity of each party for future acquisitions of capital assets and income;
- The sources of income of both parties, including (but not limited to) medical, retirement, insurance or other benefits;
- The contribution or dissipation of each party in the acquisition, preservation or depreciation of the marital property, including the contribution of a party as a homemaker;
- The value of the property set apart to each party;
- The standard of living of the parties established during the marriage;
- The economic circumstances of each party at the time the division of property is to become effective; and
- Whether the party will be serving as the custodian of any dependent minor children.
In addition to property, a court may also award a spouse the right to receive “alimony” (i.e., the right to receive income from the other spouse).
Modification: An award of alimony may be modified, based upon the changed circumstances of either party.
Remarriage: The remarriage of either party receiving alimony shall terminate the award of alimony to that party.
Factors to be considered in “Alimony." A court may only award alimony to a party if it determines that it is necessary. Similar to equitable distribution, the determination as to whether alimony is “necessary” is made by reference to a number of different factors. Those factors include the following:
- The relative earnings and earnings capacities of the parties;
- The ages and the physical, mental and emotional conditions of the parties;
- The parties’ sources of income;
- The parties’ expectancies and inheritances;
- The duration of the marriage;
- The contribution of one party to the education, training or increased earning power of the other party;
- The extent to which the earning power, expenses or financial obligations of a party will be affected by reason of serving as the custodian of a minor child;
- The standard of living of the parties established during the marriage;
- The relative education of the parties and the time necessary to acquire sufficient education or training to enable the party seeking alimony to find appropriate employment;
- The relative assets and liabilities of the parties;
- The property brought to the marriage by either party;
- The contribution of a spouse as a homemaker;
- The relative needs of the parties;
- The marital misconduct of either of the parties during the marriage;
- The Federal, state and local tax ramifications of the alimony award;
- Whether the party seeking alimony lacks sufficient property; and
- Whether the party seeking alimony is incapable of self‑support through appropriate employment.
Modification by Agreement
Importantly, the rights that a spouse might otherwise have to equitable distribution (assets) or alimony (income) on account of the marriage can be waived or modified by agreement before, during or after the marriage. A pre‑nuptial agreement is therefore often an important planning tool to be considered in the context of a second marriage.
Laws of Intestacy
If a decedent dies “testate” (i.e., with a Will), then the decedent’s Will determines who will receive the decedent’s assets following their death, under what terms and in what manner. If, on the other hand, a decedent dies “intestate” (i.e., without a Will), then the estate representative is without a “roadmap” as to how and to whom the decedent’s assets are to be distributed. Under such circumstances, the law sets up a series of pre-defined rules to determine who is entitled to receive what share of a decedent’s assets following a decedent’s death. These rules are commonly known as laws of “intestate succession” or “intestacy laws”. Under the intestacy laws, who is entitled to a decedent’s assets depends upon who survives the decedent. Loosely speaking, a decedent’s assets typically pass to those persons whom the law considers to be their nearest living relatives.
Surviving Spouse’s Intestate Share: If a decedent dies without a Will and if the decedent’s spouse survives them, then the surviving spouse will be entitled to a share of the decedent’s estate assets. The exact share to which the surviving spouse is entitled depends upon who else survived the decedent – specifically, whether the decedent was survived by descendants (such as children) and/or parents.
Parents but no Children. If a decedent is not survived by any descendants but is survived by their spouse and by one or both of their parents, then the decedent’s surviving spouse is entitled to receive the first $30,000 plus one-half (1/2) of the decedent’s remaining assets.
Children. If a decedent is survived by their spouse and by descendants (such as children), then the amount the surviving spouse is entitled to receive depends upon whether all of the descendants are also descendants of the surviving spouse.
If all of the descendants are also descendants of the surviving spouse, then the surviving spouse is entitled to receive the first $30,000 plus one-half (1/2) of the decedent’s remaining assets.
If one or more of the descendants are not also descendants of the surviving spouse, then the surviving spouse is entitled to receive one-half (1/2) of the decedent’s estate.
Descendants’ Share: If a decedent is survived by descendants, then those descendants are entitled to the entire share not passing to the decedent’s surviving spouse. In other words, if the decedent is not survived by a spouse, then the descendants would be entitled to receive the decedent’s entire estate. If, on the other hand, the decedent is survived both by a spouse and by descendants, then the exact share to which the descendants are entitled will depend upon whether they are also descendants of the surviving spouse. Essentially, the descendants’ share will be either (a) one-half (1/2) of the estate (if one or more of the descendants is not a descendant of the surviving spouse) or (b) one-half (1/2) of the remaining estate assets after the spouse has received the first $30,000 (if all of the descendants are also descendants of the surviving spouse). As between (or among) the descendants, the descendants share on a “per stirpital” basis – in other words, the decedent’s living children share equally, and any share that would otherwise pass to a deceased child is divided equally among the children of that deceased child.
Loss of Spouse’s Intestate Share Rights: A spouse who has, for a year or more, willfully neglected or refused to support the other spouse is deemed to have forfeited their right to a share of the other spouse’s intestate estate. Similarly, a spouse will lose their right to share in the other’s intestate estate if the spouses are legally divorced or if at the time of the deceased spouse’s death, there is a pending divorce action and, even though no divorce decree has been granted, the grounds for divorce have been established.
Surviving Spouse's Statutory "Elective Share" Rights
When a married person dies, the law provides certain protections for the decedent’s surviving spouse. In essence, the law limits a person’s ability to write their spouse out of their Will. Under the law in Pennsylvania, a surviving spouse is statutorily entitled to one‑third (1/3) of the assets that the deceased spouse owned at death or conveyed during their lifetime while still retaining the power or right to use, possess or enjoy the property. This right of a surviving spouse is sometimes called a “statutory elective share” right or “statutory forced share” right.
Election: The surviving spouse's statutory right to a "forced" share of the decedent’s assets is not automatic. The surviving spouse must affirmatively elect to avail themself of such rights. Also, by making the election, the spouse gives up certain other rights (discussed in greater detail below) with respect to the decedent’s property. The election must be made in writing and filed with the clerk of the Orphans’ Court in the county in which the decedent was domiciled at the time of their death. The election must be filed within six (6) months of the date on which the Will is probated. Upon timely application by the surviving spouse, the court may under certain circumstances grant an extension of time. However, if a surviving spouse fails to make a timely election (or timely extension request), they will be deemed to have waived their right to make the election.
Property Subject to the Elective Share: The spouse’s elective share rights are not limited to the assets in the decedent’s probate estate. Generally speaking, the election affects all property which was titled in the decedent’s name at the time of their death, or over which the decedent had the power to withdraw income or principal. By making the election, the spouse is entitled to a one-third (1/3) share of all of the following types of property:
- Property Passing by Will or Intestacy. The spouse’s elective share rights apply to all property of the decedent which would otherwise pass at the time of the decedent’s death by will or intestacy (e.g., property titled solely in the decedent’s name or as tenants‑in‑common with others).
- Property with Reserved Rights to Income or Use. The surviving spouse’s elective share rights also apply to property which the decedent transferred during the marriage under an arrangement in which the decedent retained (and at time of death still held) the right to the income from the property or to otherwise use the property. Under such circumstances, the spouse’s elective share rights are limited to the income or use of the property during the spouse’s remaining lifetime.
- Property with Reserved Rights to Revoke or Consume Principal. The surviving spouse’s elective share rights also apply to property which the decedent conveyed during lifetime subject to a power on the part of the decedent (1) to revoke the conveyance or (2) to otherwise consume, invade or dispose of the principal for the decedent’s own benefit. Thus, for example, property transferred to a revocable trust or over which a decedent retained a general power of appointment would be subject to the election.
- Jointly Owned Property. The surviving spouse’s elective share rights also apply to property conveyed by the decedent during the marriage to themself and another person with right of survivorship to the extent that the decedent at the time of their death had the power to unilaterally convey the property absolutely in fee.
- Annuity Payments. The surviving spouse’s elective share rights also apply to annuity payments made to a beneficiary of the decedent to the extent that the annuity was purchased by the decedent during the marriage and the decedent was receiving annuity payments on the annuity at the time of their death.
- Property Conveyed within One (1) Year of Death. Finally, the surviving spouse’s elective share rights also apply to property “conveyed” (i.e., gifted) by the decedent during the marriage and within one (1) year of death to the extent that the aggregate amount conveyed to each donee exceeds $3,000 at the time of transfer.
Property Not Subject to Election: Pennsylvania law specifically excludes certain types of transfers and property interests from a surviving spouse’s elective share rights. Those exceptions include the following:
- Any transfer made with the express consent or joinder of the surviving spouse.
- Insurance proceeds received on a life insurance policy insuring the life of the decedent.
- Interests in any “broad based, non-discriminatory” retirement, disability or other similar plan established by an employer for the benefit of its employees or their beneficiaries.
- Property passing on account of the decedent’s exercise or non‑exercise of a power of appointment, so long as the power of appointment was created by someone other than the decedent.
Right Personal to Surviving Spouse. The spouse’s right to an election is personal to the spouse. However, an election against the Will can under certain circumstances nevertheless still be made on the spouse’s behalf by the surviving spouse’s agent (power of attorney) or legal guardian. The person(s) exercising such rights on behalf of the spouse could therefore potentially include one or more of the spouse’s children (decedent’s step‑children).
Deemed Disclaimer. An election by a surviving spouse to take their elective share is deemed a “disclaimer” or release of any beneficial interest in certain types of property transfers that the spouse would otherwise have received as a result of the decedent’s death. The types of interests that are deemed disclaimed include the following:
- Property subject to the spouse's election but which was not awarded to the spouse as part of their elective share.
- Property passing by the decedent’s exercise of a general or special power of appointment (except to the extent that the decedent had no power to exclude their spouse from any interest in the property subject to the power).
- Property in any trust created by the decedent during their lifetime.
- Insurance proceeds received on a life insurance policy insuring the life of the decedent in which the decedent or an employer or partner paid the premiums.
- An annuity purchased by the decedent or their employer or partner.
- Any pension, profit-sharing or other similar retirement arrangement established by an employer for the benefit of its employees and their beneficiaries.
- Community property in proportion to the decedent’s contributions or earnings.
- All personal property (tangible and intangible) and all real property owned jointly (or as the tenants-by-the-entirety) by the decedent and their spouse to the extent attributable to contributions by the decedent.
- All property that the decedent gave to their surviving spouse during their lifetime which (or the proceeds of which) is still owned by the spouse at the time of the decedent’s death.
Waiver of Elective Share Rights. As already noted, if a surviving spouse does not timely elect their statutory forced share, then they will be deemed to have waived their elective share rights. Also, importantly, elective share rights may be waived by agreement before the marriage (prenuptial agreement) or after the marriage (postnuptial agreement).
Forfeiture of Elective Share Rights. As is the case with respect to intestacy rights, a spouse’s elective share rights will be forfeited if:
- The spouse for at least one (1) year prior to the decedent's death willfully neglected or refused to support the decedent or willfully and maliciously deserted the decedent; or
- There was a pending action for divorce at the time of the decedent’s death and grounds for the divorce had already been established.
Techniques to Minimize the Impact of a Spouse’s Elective Share. An individual in a blended marriage may desire to lessen the impact of their spouse’s elective share rights. That can be accomplished in different ways, including the following:
- Marital Agreements. The most obvious way to minimize the impact of a spouse’s elective share rights is through an agreement between the spouses (i.e., a prenuptial or postnuptial agreement) that specifically addresses the point.
- Minimizing Counted Assets. A client seeking to minimize the impact of their spouse’s elective share rights might also seek to invest more heavily in “assets” that are not subject to the election. For example, employee retirement plan assets are not counted in determining the spouse’s elective share; and so an employee may therefore want to maximize their retirement contributions if they have not already done so. Similarly, insurance proceeds are not counted in determining a spouse’s elective share. Thus, by converting assets to insurance, a client can reduce the value of assets subject to their spouse’s one-third (1/3) statutory share.
- Allocating Items to (or away from) the Spouse's Elective Share. Even if an asset is counted in determining the value of the surviving spouse’s elective share, the other spouse (who owns the asset) may wish to prevent that specific asset from coming into their spouse’s possession in the event of their (i.e., the owner’s) death. A classic example of this would be an individual’s ownership interest in a small business that they wish to keep within their bloodline. Such assets could be protected, to varying degrees, through the use of different techniques, including buy/sell agreements, trust agreements, and/or Will provisions specifically bequeathing assets or otherwise stating what assets are to be used in satisfying a spouse’s elective share rights. In the latter situation, the spouse would of course still be entitled to their share of the value related to assets that may be earmarked for others. The spouse would, however, not be entitled to the specific assets.
Asset Titling / Beneficiary Designations
Some of the simplest but often most important decisions in second marriage situations pertain to (a) the titling (as between the spouses) of the marital assets and/or (b) the beneficiary designations assigned to spousal assets. That is of course always consequential insofar as it affects who will ultimately receive the assets. However, it is particularly important in the context of multiple marriages, because of the heightened risk that the marriage may someday unwind and because of the natural conflict of interests as between the new spouse and the children from the prior marriage.
Asset Titling. It is not uniformly true that assets should never be moved into joint name in a blended family context. However, spouses in general should be very careful about how they title their assets, especially in a blended family circumstance; and they should only title assets jointly after very carefully considering all of the surrounding circumstances and their overall planning objectives. More often, spouses entering into a second (or possibly even third or fourth) marriage will want to keep those assets which they bring into the new marriage separate and apart from their spouse’s assets, so that the assets can be earmarked for eventual distribution to their children and/or protected in the event of divorce. Asset titling strategies could take many different forms, including titling certain assets in the names of one or both of the spouses, their children, and/or trusts or other entities established by the spouses.
Beneficiary Designations. Beneficiary designations are equally important in planning for blended families. Just how important such designations are depends in part on the particular types of assets that the spouses bring into the marriage. Do either or both of them have retirement accounts, IRAs, life insurance, annuities and/or other assets that are typically subject to beneficiary designations in the first place? Oftentimes, the answer is yes. The specific strategies to be employed will then be a function of their individual concerns and objectives. As an example, if a well heeled spouse wishes to make provisions for children from their previous marriage in a way that is both discreet and also not subject to their new spouse’s elective share rights in the event of their death. One way that might be accomplished is by designating their children as beneficiaries of a life insurance policy on the (first) spouse's life. Alternatively, they might wish to designate their children as beneficiaries of a qualified retirement plan account.
Powers of Attorney
Power of attorney designations and planning through the use of powers of attorney are always important, but they are all the more so in the context of a remarriage, because of the potentially conflicting interests of a new spouse and the children from a previous marriage.
Selecting an Agent. Whom an individual selects as their “agent” (designee under a power of attorney) is often the most important decision an individual makes in executing a power of attorney. However, it becomes an especially nuanced decision when an individual has both a new spouse and children from a former marriage. For example, does the individual designate their new spouse as agent? Or should the agent(s) instead be one or more of the children from the previous marriage? What about designating the new spouse and one of the children to act jointly?
Other Issues Related to Powers of Attorney. Although selecting the right person(s) as agent(s) is critically important, it is certainly not the only difficult question to be addressed in connection with a blended family. Other issues include:
- What specific powers should be given to the agent?
- Should the agent’s authority be limited in any way? If the decision is made to limit an agent’s authority, then by whom should it be limited and in what specific ways?
- Should the agent have any special obligations or duties?
- Should the agent’s liability be limited?
- Should the agent’s duty to account for activity undertaken on behalf of the principal be modified?
Agreements between remarried spouses are often an important part of estate planning for blended families. Such agreements can be executed either prior to or after the marriage. In the former instance, they’re referred to as “prenuptial” (or premarital) agreements and in the latter as “postnuptial” agreements. As a matter of practice, it is for a variety of reasons preferable (and generally more common) to have the agreements executed prior to marriage rather than afterward.
Enforceability. The enforceability (or non-enforceability) of prenuptial agreements is an entire topic unto itself and is therefore beyond the scope of this outline. However, some of the factors that make enforceability of a particular agreement more or less likely include:
- The length of time prior to the wedding date that it is presented to the other spouse;
- The extent of the parties’ financial disclosure and overall transparency to one another;
- The extent to which the terms of the agreement are one-sided; and
- Whether the signatories were represented by counsel at or prior to the execution of the agreement.
Issues. A number of different issues can be (and often are) addressed in marital agreements. Among the most common are those bearing on the spouses’ property rights and rights to spousal support (alimony) in the event of divorce. However, those are by no means the only issues that can be threshed out by formal agreement.
Defining “Marital Property” (in the event of divorce). The rules that define “marital property” as distinguished from “separate property” were discussed earlier. However, those rules are effectively “default” rules: they define “marital property” only to the extent that the parties have not (by agreement) already provided otherwise. Consequently, an important part of any marital agreement is defining those assets that will be subject to equitable division in the event the marriage dissolves at some future point. For example, it was noted earlier that appreciation accrued on separate assets during the course of the marriage is generally considered part of the marital estate. However, that can easily be (and often is) modified by agreement. To that end, a prenuptial agreement could specify that any assets titled in the spouses’ individual names (including any appreciation on such assets that occurs during the course of the marriage) shall be considered separate assets and therefore excluded from the definition of “marital property” in the event of the parties’ divorce.
Defining Alimony/Support Rights (in the event of divorce). Similarly, the parties can by agreement define or limit their respective rights and obligations to spousal support (alimony) in the event of divorce. So, for example, an agreement might delineate how much is owed, for what period of time shall any obligation continue, etc. By way of contrast, child support obligations cannot be contractually waived or limited.
Defining Spousal Intestacy/Elective Share Rights (at death). As noted earlier, if a deceased individual is survived by a spouse, then the surviving spouse has certain rights to the decedent’s assets at death. If the decedent dies without a Will, then the spouse is entitled to a share of the decedent’s intestate estate. Similarly, even if the decedent executed a Will that makes no provision for the new spouse, the surviving spouse is nevertheless entitled, by statute, to a share of the decedent’s assets. However, such rights can also be altered, limited or waived by agreement. So, if an individual in a second marriage wants to leave assets to children from the previous marriage, then they will also often want to limit their spouse’s intestate and/or elective share rights to those assets by so providing in a written agreement prior to entering into the marriage.
Will & Trust Provisions
Drafting Will and trust provisions is probably what most people think of when they hear about “estate planning”. Although estate planning – particularly in the context of blended families – encompasses more than just that, it is nevertheless an important part of any estate plan. Proper planning requires the drafter to take into account many different considerations. Those considerations include not just who will receive the decedent’s assets, but also how and when they will receive such assets. Also, who will see to it that the decedent’s wishes are followed?
Specific Disposition Provisions. In a blended family context, perhaps the most difficult decision a testator must make is to determine who will get what assets and in what manner. Often, a testator will want to make some provision for their new spouse but will at the same time also want to provide for the children from their prior marriage. There is a natural tension between the interests of the new spouse and the children from a previous marriage, and therefore careful planning typically requires a thoughtful balancing of the respective interests and needs of those parties. Different techniques can be utilized to accommodate the competing interests of the spouse and children from a prior marriage. Some techniques involve the use of trusts, while others do not.
Marital Trusts. When a testator has a spouse and children, the type of trust most often utilized is a “marital trust”. In the broadest sense, a marital trust is any trust created primarily to benefit the spouse during the spouse’s lifetime. However, the term “marital trust” is ordinarily used (more narrowly) to refer to a trust that is required, by its terms, to distribute all of the net income earned on the trust’s assets to the spouse each year throughout the spouse’s lifetime. The spouse may or may not be given rights to the underlying trust assets (principal), but during the time the trust is in force, the trust assets cannot be distributed to persons other than the spouse. Usually, the testator’s intent is to benefit their children after the spouse’s death and so typically the ultimate beneficiaries of the underlying trust assets (principal) are the testator’s children. In those situations where a testator remarries and has children from a previous marriage, the goal of ultimately passing assets on to the children of the earlier marriage is likely to be a very important (possibly even the single most important) objective.
Traditional Distribution Standards. As noted earlier, a marital trust is required to pay all of the trust’s income to the surviving spouse. In addition, the trust may (or may not) authorize the trustee to distribute the underlying trust “principal” (assets) to the spouse during their lifetime in order to provide for the spouse’s health, maintenance, and support. When the spouse dies, the trust assets will typically be distributed to the testator’s children from the earlier marriage. Because the children are the “remainder” beneficiaries when the spouse dies, the more the spouse withdraws from the trust during their lifetime, the less there is to eventually distribute to the children. This creates a conflict for the trustee who is obligated to invest the assets to produce income (for the spouse) as well as for growth of principal (for the children) and to also balance the surviving spouse’s need for principal with the interests of the remainder beneficiaries. If the spouse is given rights to the trust principal, it also puts the trust assets at risk should the surviving spouse need skilled nursing care, as the trustee would be required to use trust assets to pay nursing home costs.
Alternative Approach. A simple solution to the investment dilemma is to provide for distributions to the surviving spouse based on a stated percentage of the trust value. This aligns the interests of both the surviving spouse and the remainder beneficiaries. A solution to the problem regarding principal distributions is to clearly state whether the trust should or should not consider other assets and resources that are already available to the surviving spouse. Finally, trust assets can be protected from exposure to nursing home costs by including supplemental needs provisions in the trust. These provisions allow the trustee to provide generally for the surviving spouse’s health, maintenance and support, but preclude the trustee from using trust assets to pay for the cost of skilled nursing care.
Designating Fiduciaries. After the testator has determined who gets what, when and how, then perhaps the next most important question is who will see to it that the testator’s wishes are carried out as stated. Specifically, who will be designated executor of the testator’s estate? Similarly, if the testator’s estate plan calls for creating any trusts, then who will be designated trustee of such trusts? Such questions are especially consequential in a remarriage context because of the naturally conflicting interests of the spouse and the children from the previous marriage.
“In Terrorem” (No Contest) Clauses. The risk that a beneficiary may be dissatisfied with various aspects of the Will (e.g., provisions that the testator made for them) is all the more pronounced in a blended family situation. A disgruntled beneficiary can greatly complicate an estate administration, exacerbate tensions among the affected parties and possibly even thwart the testator’s overall testamentary design. For that reason, where dissatisfaction is anticipated, testators will sometimes see fit to include an “in terrorem” clause (also sometimes called a “no contest” clause) in their Wills. The gist of such a clause is that a beneficiary who unsuccessfully contests a provision in the Will thereby forfeits the share of the estate to which they would otherwise be entitled.
Joint Revocable Trusts
Joint revocable trusts are not that common, but they can be very helpful in planning to limit or avoid a spousal share election. As noted above, assets conveyed with the consent or joinder of the surviving spouse are not subject to the spousal election. Because the trust is a joint trust, both spouses have, by definition, joined and consented to the conveyance upon the first spouse’s death.
Asset Titling Issues. Joint revocable trusts can also help to prevent improper titling of assets. As discussed above, assets that are titled jointly (with rights of survivorship) as between the spouses pass to the surviving joint owner, which may or may not be what the clients intend. By contrast, assets titled in a joint revocable trust will pass according to the terms of the trust. Joint revocable trusts can therefore be used to focus clients’ attention on (and ultimately to better control) how assets will pass at death.
Trust Terms. The terms of the trust can create a marital trust, pass assets outright to children or carry out any other objectives the couple wants.
Successor Trustees. Similar to powers of attorney, the couple needs to give thought to naming successor trustees, and unlike powers of attorney, the couple must agree on the successor trustees.
Various entity structures can be helpful in blended family planning when one of the primary objectives is to protect a business. The governing agreements of the owners should include prohibitions against transfers or required sales to other owners in the event ownership interests are to be transferred to parties restricted by the agreement. In the case of a spousal election, the electing spouse is only entitled to the value represented by subject assets (not to the specific assets themselves). If the deceased spouse’s only asset is a business, then the governing agreement can provide the liquidity for satisfying the spouse’s elective share. For example, a provision in the agreement providing for the purchase of a deceased owner’s interest in the business (upon that owner’s death) may provide the estate with the cash needed to satisfy the surviving spouse’s elective share rights. That may in turn make it possible to avoid a forced sale or liquidation of the business.
Protecting against a Child’s Death or Divorce. Business entities are also useful when protecting a business from child’s divorce or early death.
Originally published in October 2014
Copyright © 2014 Knox McLaughlin Gornall & Sennett, P.C.