Dear Jonathan: My husband and I have been married for 10 years and it is a second marriage for both of us. We both have adult children from our first marriages. We have recently been talking about putting together an estate plan, but we are having difficulty deciding how to provide for each of our respective children at either of our deaths. We each want to provide our own children with a certain portion of our assets when we die, but are not quite sure how to accomplish that. Do we just leave it to the other spouse and trust that he or she will do the right thing, or do we specifically need to leave certain assets to our children? Any recommendations will be appreciated.
Jonathan says: You could do as you suggest, i.e., have the surviving spouse provide for the deceased spouse’s children in the manner agreed upon. The problem with that approach, however, is that the surviving spouse would not be legally obligated to do anything regardless of what he or she agreed to do.
Further, even if the surviving spouse honors his or her obligation to distribute a portion of the assets to the deceased spouse’s children, upon doing so, he or she will be deemed to have made a taxable gift to each of the children if the value of each gift exceeds $14,000, which is the current annual gift tax exclusion amount.
Also, if the surviving spouse dies prior to making the distributions to the children, then those assets will be part of that spouse’s estate and will never be distributed to those children unless that spouse included them as beneficiaries of his or her estate.
The two of you could set up a joint trust which would state that upon the death of the second one of you to die, your assets are to be divided between your respective children in the manner indicated in that trust. The advantage of having a trust is that probate can be avoided on any assets that are retitled to the trust during lifetime or assets that name the trust as the beneficiary upon either of your deaths.
The one problem with this type of trust, however, is that so long as one of you remains living, that spouse would have the ability to amend the terms of that trust, or even revoke that trust, which means that he or she could have a change of heart and change the dispositive provisions so that the deceased spouse’s children get nothing or get less than what was originally intended. This is a common occurrence when the surviving spouse remarries and diverts assets originally earmarked for the children of the deceased spouse to his or her new spouse.
One way to address this problem is to have each of you purchase a life insurance policy naming your respective children as the beneficiaries of the proceeds. By doing this, each of you guarantee that your children will at least receive the proceeds from the life insurance policy even if the surviving spouse were to change the terms of the joint trust at a later date.
If you want to avoid the possibility of the surviving spouse changing the terms of a joint trust, each of you could instead create your own separate trust and name your respective children as beneficiaries of that trust. The surviving spouse could also be a beneficiary of that trust or be provided for in other ways, i.e., through life insurance or as a joint owner of certain assets. By utilizing a separate trust, this eliminates any concern that the surviving spouse might change the terms of the trust at a later date because he or she will not have the ability to do so because that separate trust becomes irrevocable at the first spouse’s death.
I suggest that you meet with an estate planning attorney in your area to further discuss these ideas and see what makes the most sense to the two of you as to how best to provide for each of your children. Good luck.
Jonathan J. David is a shareholder in the law firm of Foster, Swift, Collins & Smith in Grand Rapids, Mich.
