Q. My fiancé and I will soon marry. This will be the second marriage for each of us and we both have children from previous marriages. We want to arrange our estate plan to make sure that the survivor of us is financially secure, but we also want to leave something to our own children. Any thoughts about how we might do this?
A. Each couple’s situation is unique, but here are just a few thoughts:
Name A Neutral Person As Your Successor Agent or Trustee? If you become disabled or die, would you want your new spouse, on the one hand, or your children, on the other, to be in charge of your health care, your assets, or your other affairs? Financial decisions made by your spouse may adversely affect your children, and vice versa, sometimes creating tension. In a remarriage situation, it is sometimes best to designate a neutral person to serve, such as a mutual friend, a professional fiduciary, or even your bank’s trust department, and thereby minimize the risk that one generation might make financial decisions that “shortchange” the other.
Use a Bypass Trust to Provide for Both Generations: in the past, many couples included in their “Living Trust” something called a Bypass Trust, designed to minimize estate tax. Upon the death of the first spouse, a certain portion of the couple’s trust estate would transfer into the ByPass Trust in order to shelter those assets from the estate tax. This trust was a useful tool when the value of the couple’s assets was greater than the estate tax exemption amount. However with the recently enacted “American Taxpayer Relief Act”, which has now permanently enlarged the estate tax exemption starting at $5,250,000 per person (for 2013), the need to use a Bypass Trust to minimize estate tax is no longer necessary for most couples. However, in a remarriage situation, the Bypass Trust can still have an important role, albeit for non-tax purposes.
Here is how it might work for you: if you predeceased your spouse your share of assets would not go directly to either your spouse or your children but, instead, would go into a Bypass Trust to be managed by your successor trustee. The trust would provide that all income earned from your assets goes to your surviving spouse who would also be given a limited right to access principal, but only if her own assets were insufficient for her support. Upon her later death, all remaining principal balance would go to your children. She could do likewise with respect to her share. In this manner, you and your spouse can provide for each other while, at the same time, preserve a legacy for your own children.
Other Strategies: Other techniques might include naming your own children as death beneficiaries on selected life insurance policies, IRA’s and/or bank accounts. You might also purchase long-term care insurance so that these expenses do not unnecessarily deplete your estates. If you cannot afford or qualify for that insurance, you might include advance Medi-Cal planning in your revised estate plan so as to protect your assets against the devastating cost of nursing home care. A prenuptial agreement might also be a good idea.
Your plan should be customized to your particular circumstances. Seek the advice of an estate planning or elder law attorney to assist in this effort. Careful planning now will go a long way toward creating peace of mind and preserving family harmony.