Last month, I began a two-part series about how spouses in a second marriage can protect the inheritances for the children of their previous marriages. I gave an example of Ed and Barbara, each of whom has a son and a daughter from their first marriage. Both parties have close and loving relationships with their own children, all of whom are adults. Ed is close with Barbara’s children. Although Barbara and her step-children tolerate each other, they are not close. The clients’ basic objective is to provide for each other after the first one dies and to leave everything equally to their children upon the death of the survivor. Ed and Barbara agree on all of the details when it comes to designing the provisions of their wills - - except one: Ed is afraid that, if he should die first, Barbara might decide to change her will and either disinherit his children or substantially reduce the amount of assets she leaves to them. Barbara says she would never do that, but Ed does not want to take any chances. Barbara then wonders out loud whether she, too, ought to be concerned. What happens if she dies and Ed meets someone else, and things change???
The parties can execute wills with typical provisions for couples in their financial position to meet all of their objectives, except there is no guarantee that what both agree to now will be carried out after one of them is gone. They know wills are dynamic documents - - they can be changed at any time, but you have to be alive and still have testamentary capacity.
One of the answers is to establish a living trust. Simply stated, a Trust is a writtendocument, established by a Grantor, who gives a Trustee the authorization and power to administer a fund (the Trust Fund for the benefit of a Beneficiary. The Grantor sets the terms and conditions. Anything not provided for is governed by the law of the state selected as the situs by the Grantor. Depending on what the Grantor wants to accomplish, the Trust Agreement may be long and complicated. There is no shortcut when it comes to this type of planning.
The key provisions of this type of Living Trust are:
1. The Trust is revocable as long as both parties are alive. In this way, if the parties change their mind about an important provision, and both agree, they can change the Trust by executing an amendment.
2. When the first spouse dies, the Trust becomes irrevocable. That means the survivor can no longer make changes, i.e. cannot disinherit his/her spouse’s children.
3. Limitations can be established as to how much the surviving spouse can withdraw from the Trust Fund.
4. Who will be the Trustee(s) and how much discretion will the Trustee(s) have? These are important decisions to make sure the intention of both parties is carried out.
5. It is most effective if all assets are transferred to the Trust. This creates a one-time inconvenience while real property, bank accounts, brokerage accounts, securities and other assets are retitled. It also makes it necessary for two more tax returns to be filed (Federal and State). Generally, however, no additional taxes are due.
Much more than what I have just outlined goes into the design of a trust. We addressed revocable and irrevocable trusts in previous newsletters and will do as again in future articles. For now, this is one of the best ways to protect prior families.
Ed and Barbara realize that their life insurance policies, retirement accounts and annuities ()non-probate assets) are not being transferred to the Trust. The General Durable Powers of Attorney they are about to execute might give each of them the right to change the other’s beneficiary designations. A discussion is needed to decide whether to permit, preclude or limit the power of the agent to make changes to the beneficiary designations of the non-probate assets Powers of attorney are not one-size-fits-all documents. They can easily be tailored to suit the needs of each individual and family.