You may have been widowed or divorced, so you are now in a second or even third marriage. You both came to the marriage with your own separate property. However, you also may have property that you have accumulated during your current marriage, such as a house that you bought together. You and/or your spouse may have children from prior marriages.
If you are like most people, statistically 70%, you have done no estate planning. Most of the couples that I see in this situation have a hodgepodge of names on their accounts and other assets. Some assets are in her name. Some are in his name. And others are in both names jointly with rights of survivorship. The kids may be joint owners on some of the accounts. Some people have named their spouse as a beneficiary on some of their assets, while the kids are named on others.
Oftentimes these couples want some form of estate plan in which her separate property goes to her family, his separate property goes to his family, and the joint property gets split between the families after they are both gone.
However, because there has been no planning, what they have would not go to whom they want when they want the way they want. If you are in this situation and you die first, all the joint property you own with your spouse will go to him or her. After your spouse’s death, this previously joint property will go to your spouse’s heirs, not yours.
After you are gone, your spouse could remarry, this time to Thor or Bambi. Because Thor or Bambi is so much younger than your surviving spouse, your surviving spouse probably dies first. Your property could end up with Thor or Bambi.
All of your property with beneficiary designations will go to your named beneficiaries. With beneficiary designations, you must regularly review them to keep them up to date with births, deaths, marriages, divorces, etc. Most beneficiary designations I review have not been changed since they were first set up, sometimes even 30 or 40 years ago. I have had a number of situations occur, that when we found out who were the named beneficiaries, the account or policy holder did not know who those named persons were.
With your separate property, it is an even different story. The first $136,000 of your separate property in 2011 will go to your surviving spouse. This amount is adjusted annually for inflation. The remainder of your separate property will be split 50/50 between your surviving spouse and your children from prior marriages. This typically is not the result that most people want.
So what are your options? One option is to have what is commonly called reciprocal wills. You and your spouse each set up a “Honey, I love you, I leave it all to you” will. In both spouse’s wills, you name each of your families 50/50 after you are both gone. In order to make sure each family gets its fair share, you both agree by contract to not change your will after it is signed. This agreement not to change your wills can be in the will itself or in a separate document.
There are two main pitfalls of reciprocal wills. Firstly, in most second or third marriages, each spouse does come to the marriage with the same amount of assets. I have seen couples try to remedy this by adjusting the percentages between the families. However, over time the percentages can get out of whack. What if you had stock that appreciated and your spouse had real estate that did not?
The second pitfall of reciprocal wills is the surviving spouse who changes his or her will. Your surviving spouse may not remember the reciprocal wills or may just want to change it to leave it all to his or her own children, or to Thor or Bambi. The original reciprocal will is still enforceable over the newer changed will. However, it will require a court proceeding and most likely a will contest that consumes tens of thousands of dollars or more in legal fees.
If the only marital property of your second or third marriage is a home, you and your spouse could set up separate trusts. You each would put your own separate property in your own trust along with one-half of the marital home. If you die first, your separate property could be distributed to your family immediately and your surviving spouse would get a life estate in your half of the marital home. After your spouse’s death, the home would be sold and your share of the proceeds would be distributed to your trust beneficiaries. Your spouse’s separate property along with the other half of the house proceeds would go to your surviving spouse’s trust beneficiaries.
When there are more marital assets than a home, you may want to consider a joint trust for the marital assets, together with separate trusts for each of you for your separate property. The assets of each separate trust would be distributed to each trust’s beneficiaries upon each of the trustmakers’ deaths. The surviving spouse would get a life estate in the marital assets in the joint trust, which cannot be changed after the first death. The joint trust property would be distributed 50/50 to each family after the second death.
If you and your spouse have a combined taxable estate of $1 million or more in 2013 ($5 million or more in 2011 & 2012), there is an option to prevent estate taxation on the first death. You each could set up two separate trusts. One of your separate trusts would hold your separate property and the other would hold one-half of the marital property. The same would apply to your spouse.
With the proper language in each trust, you then could pass a total of $2 million free of estate tax in 2013 ($10 million in 2011 & 2012) to your families. There would be no estate tax on the first death and up to $1 million in 2013 ($5 million in 2011 & 2012) would go to the deceased spouse’s beneficiaries. After the second death and payment of any estate tax, the remainder of each separate trust would go to the trustmaker’s named beneficiaries. With additional planning, you could pass all of your trust assets to your beneficiaries free of estate tax, even if your taxable estate is over $1 million in 2013 ($5 million in 2011 & 2012).
When you are in a second or third marriage situation, you have lots of options for your estate plan. It just depends upon the goals you want to accomplish and the nature and extent of your and your spouse’s separate and marital property.
By: Matthew M. Wallace, CPA, JD
Published edited March 20, 2011 in The Times Herald newspaper, Port Huron, Michigan as: Planning for second marriage tricky