Harvey D. Shapiro
11/01/2004
Jeff and Judy Tyler, who live in the verdant Berkshire Mountains of western Massachusetts, spent 20 years in troubled first marriages and another decade being single before they found each other. Now, as husband and wife, they have established a happy balance in their relationship. Jeff says he does not really mind the paintings by Judy’s uncle that she has wedged in with the “real art” on the library walls. She cheerfully indulges him in his hallowed collection of road signs. Judy confides that she does not “think too much of Jeff’s sons,” both lawyers, but, she adds, “We don’t see them very often.” The issue that continues to gall them, however, is how to dispose of their money and possessions after they die.
The Tylers, who have asked Worth not to use their
real names, face a classic second marriage estate planning dilemma: We love our
new spouses dearly, and we want to provide well for them as long as they live.
However, we want the rest of our assets to go to our children, not to our
spouse’s offspring, whom we may barely know. Moreover, we want our heirlooms and
valuables to stay in our family, where their meaning will be understood and
revered, rather than wind up in the hands of our spouse’s heirs, who may care
little for them.We can find safe paths through these emotionally loaded estate planning thickets, but “there are lots of twists and turns, legal issues and tax issues and family issues,” says Carlyn McCaffrey, a partner and cochair of the trusts and estates department at law firm Weil, Gotshal & Manges in New York. Not surprisingly, the first step is to decide what economic arrangements we want. Then we can hammer out the legal structures we need, McCaffrey notes, and ensure our estate plans are immune from legal challenges from our second husband or wife, or from our children or stepchildren.
| TOP VIEW Entering into a second marriage adds several layers of complexity to our estate planning strategy. But experts suggest that making informed decisions about inheritance issues can mitigate potential problems. By crafting comprehensive prenuptial agreements, funding well-designed trusts and selecting savvy, compassionate trustees, we can lay a solid fiduciary foundation for our new family’s legacy. |
Fortunately, a simple prenuptial agreement can form the foundation of an effective second-family estate plan. While many people commonly associate a prenup with the risk of divorce and a will with estate planning, a carefully crafted prenuptial agreement can actually prove a powerful tool for managing the disposition of our assets. Each spouse can spell out specific bequests, while agreeing to forego certain rights of inheritance. The prenup also enables each spouse to bequeath enough funds to support the survivor, while stipulating that wealth be distributed to our chosen inheritors—our own family, school and charities.
If we eschew a prenup, we expose much of our estate to the whims of our second spouse. “If you don’t have a prenup,” McCaffrey says, “it doesn’t matter what your will says: Your surviving spouse has certain rights.” In New York, for example, a surviving spouse is entitled to one-third of our assets, and this is the standard in many states, McCaffrey explains. In states with community property laws, a surviving spouse receives half of all assets, plus the right to stay in the family home.
In addition to our liquid assets, a prenuptial should also specify our preferences for the transfer of valued possessions, such as jewelry, heirlooms, art and real estate. “One of the classic problems is tangible personal property,” says James R. Wade, a partner with Wade Ash Woods Hill & Farley in Denver. We may unthinkingly allocate all of this to the surviving spouse. But if our family treasures slip beyond our blood relatives’ control, they might someday see their legacy turn up at auction, or be forced to endure a group of strangers living on a swathe of what was once their vacation property.
The
prenup should also describe how we want our shares in our family businesses
distributed. If not, individuals whom our business partners barely know, and who
may be unfit managers, such as our second wife or stepchildren, may end up with
the equity.Trusted Tools
A properly constructed trust, when combined with a prenup, remains the best method for controlling how a second family’s wealth is distributed after one spouse dies. A trust will provide income to our surviving spouse for his or her lifetime and, upon death, disburse the remaining funds according to the wishes we expressed in the prenuptial agreement. Practically any type of trust can facilitate this, but many remarried couples turn to a qualified terminal interest property (QTIP) trust to execute their estate plans. The QTIP trust’s primary advantage is the tax-deferred income it provides. Upon our death, our wealth passes to our spouse tax-free; no estate taxes are due until after the surviving spouse dies.
An experienced estate
planner should be able to calculate how much of our wealth to allocate to the
QTIP trust to enable our spouse to continue to live at his or her current income
level. Upon our spouse’s death, any funds remaining in the trust will pass to
our inheritors. However, those of us with young spouses who maintain expensive
lifestyles might have to inject so much wealth into the trust upfront that there
will not be much left over for bequests, notes Michael J. Cenatiempo, a partner
at Cenatiempo & Ditta in Houston. In these cases, he suggests putting a life
insurance policy into the trust, which will fund our bequests when we
die.
| If we die at 75 and leave our wealth in trust to our 38-year- old second wife, she might well outlive our children in their 50s, precluding them from ever receiving their bequests. |
If this is the case, or for some other reason we ascertain that a QTIP trust is not suitable for our family, we can still add flexibility to our estate plan by setting specific parameters for a traditional trust that take into account our new family’s structure. We can stipulate, for example, that our surviving spouse will receive only the income derived from investments in the trust; the principal must remain intact. We can define the income paid in terms of a percentage of the total return on the investments, or even in terms of maintaining a specific lifestyle. We can also empower the trustee to invade the principal if our spouse needs extraordinary financing for something specific, such as an unforeseen medical problem. We can also specify that the income stop if the spouse remarries, or if our spouse moves in with someone after we die.
In Our SteadThe best way to ensure our estate plans are implemented in accord with our wishes is to hire a competent trustee. This is a crucial role, because the trustee will monitor payments to our spouse over his or her lifetime and serve as an arbiter of unusual requests for funds. For example, if our surviving spouse needs to renovate the family home, the trustee can choose to invade the principal of the trust and dispense funds beyond the standard trust payments.
A trustee can be a family member, a trusted professional advisor or an institution. Each type has benefits and disadvantages. Family members might be well suited because they personally know our beneficiaries. Many family members appointed as trustees “do more than someone impartial would because they don’t want to appear to favor themselves,” Young adds. But family members might also be biased. “There can be built-in conflict,” warns Raymond H. Young, a partner in Young & Bayle, a Boston law firm specializing in trusts and estates. Dividing an estate is a zero-sum game, so “if your child is the trustee, he may say, ‘If I don’t distribute much to my stepmother, there will be more for me,’” he notes.
The most useful yardstick we can employ when selecting a family trustee is simply our instinct for judging the individual’s character, he counsels.
Even the most dependable of relatives get old, infirm and die. Our chosen trustee might also be unprepared for the complexities of the job. This is one reason we often turn to personal advisors, such as the family attorney. They are familiar with our loved ones, but are far more likely to remain dispassionate and disinterested. Of course, professional advisors also get old and retire or die, hence the advantage of institutional trustees.
“Some people try to get the best of both worlds,” Young says, by appointing co-trustees. “You give someone from the family a hand in this, but you have a bank or professional trustee for recordkeeping and investing—always with the idea that Uncle Harry is there with the right to say, ‘You’re not doing this just right.’”
Living Documents
As our second marriages unfold, we may want to alter our estate plans. If we have children with our new spouse, we will need to amend the plans to include them. Likewise, when we grow close to our new stepchildren, we may want to include them in our plans; we may even want to adopt them. These changes will require us to seek counsel from seasoned professionals. Our advisors should have expertise in matrimonial and inheritance law.
Photo Illustration by Paul Collin. Section Photography by Claudia Kunin.
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