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Money July 2016

Legal Ease

How to Anticipate Trust Traps for His Kids, Her Kids and Second Marriage Issues

By Jonathan J. David

This is a common concern among people in second marriages who have children from prior marriages. Most people want to make sure that their own children receive a portion of their estate and that the surviving spouse honors the agreed-upon plan of disposition that both spouses put together while they were alive.

Dear Jonathan: I have three life insurance policies which have combined death benefits of $500,000. My wife was the named beneficiary on those policies but she passed away last year. Who will receive the death benefits of those policies at my death since my wife is no longer alive to receive them?

Jonathan Says: If you have named a contingent beneficiary on any of the policies, the contingent beneficiary named will receive that policy’s death benefits. If you have not named a contingent beneficiary on any policy, then the death benefits of any such policy will be paid to your estate and will be subject to probate. I recommend that you check to see whether you have named a contingent beneficiary on any of those policies. If you have, you will want to determine whether the contingent beneficiary you have named is still the person or persons you want to receive those death benefits. If you have not named a contingent beneficiary on any of those policies, then for each such policy you should prepare a change of beneficiary designation form naming a new primary beneficiary(ies), as well as a contingent beneficiary(ies) to receive those death benefits upon your death.

 

Dear Jonathan: My husband and I are in our second marriage and we both have children from our first marriages. We are finally getting around to preparing our estate plan and are stuck on what type of trust to prepare. We have been advised that having a joint trust makes the most sense because it is less costly to prepare one trust then to prepare separate trusts for each of us, and it is easier to administer. We are mostly on board with that concept, but the one sticking point is knowing that the joint trust remains revocable so long as one of us is still alive, which means the surviving spouse could change the terms of the trust and deviate from the disposition plan set forth in the trust. If that happens, then the deceased spouse’s children could end up being cut out or get less than what we agreed to at the time we prepared the trust. Are we over-thinking this? If not, do you have any recommendations?

Jonathan Says: No, you are not over-thinking this and in fact this is a common concern among people in second marriages who have children from prior marriages. Most people want to make sure that their own children receive a portion of their estate and that the surviving spouse honors the agreed-upon plan of disposition that both spouses put together while they were alive.

It is true that preparing a joint trust is less costly than preparing two separate trusts and easier to administer, and unless there are estate tax planning issues that have to be taken into consideration, joint trusts are routinely implemented by married couples, especially in first marriage situations. The problem, however, as you stated, is that unless you make the joint trust irrevocable at the first death (which I do not recommend), the surviving spouse has the ability to amend the terms of that trust at a later date, and the children of the first spouse to die could end up getting nothing or a reduced share. The following are a few ways this issue may be addressed:

  • Rather than prepare a joint trust, each of you could prepare separate trusts naming the surviving spouse and the decedent spouse’s children as the beneficiaries. At each spouse’s death, that individual’s separate trust becomes irrevocable and cannot be changed by the surviving spouse, and the assets held by the trust will be distributed to the surviving spouse and the decedent spouse’s children pursuant to the terms set forth in that trust. To make this work, however, each of you will need to allocate a certain portion of your assets to your respective trusts.
  • Prepare a joint trust, as well as separate trusts for your respective children. The joint trust would hold certain of your assets while your separate trusts would hold those assets that you want to make sure go to your respective children.
  • Prepare a joint trust only but name your respective children as beneficiaries of certain of your assets, i.e., life insurance policies, certificates of deposit, brokerage accounts, etc.

I recommend that you meet with an estate planning attorney in your area who can further discuss with you how to make sure that each of your children receive a certain portion of your respective estates regardless of whether the surviving spouse changes the agreed upon plan of disposition after the first spouse’s death. Good luck.

 

Jonathan J. David is a shareholder in the law firm of Foster, Swift, Collins & Smith, PC, 1700 East Beltline, N.E., Grand Rapids, Michigan 49525.

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