Estate Planning in a Second Marriage
Providing for a new spouse and protecting children from a first marriage are not naturally compatible goals. A QTIP trust, updated beneficiary designations, a marital agreement and attention to the house are how a plan does both.
About four in ten new marriages in the United States involve at least one spouse who has been married before.1 Each of those marriages brings a question that a first marriage usually does not: how do you take care of your spouse and still leave what you intended to your own children? The default rules of a Will, of state law and of the retirement account forms do not answer that question well. A tailored plan does.
The problem with leaving everything to the spouse
In a first marriage, leaving everything to the survivor and trusting her to pass it to the children is usually fine. In a second marriage it is a gamble. The surviving spouse may remarry, may change her Will, may spend more than expected or may simply favor her own children. Nothing in the law prevents any of that once the property is hers outright.
The usual answer is a qualified terminable interest property trust, or QTIP. The surviving spouse receives all of the income for life, and principal if the document allows it, and at the survivor's death the remainder passes to the children the first spouse named. The trust qualifies for the marital deduction, so there is no estate tax at the first death, and the first spouse controls where the property ends up.2 The trustee should be someone both families can accept, which often means a corporate trustee rather than a stepchild.
The elective share
Every separate property state gives a surviving spouse a right to claim a share of the estate regardless of what the Will says. Florida's elective share is 30 percent of an elective estate that reaches well beyond probate assets, including revocable trusts, joint accounts, retirement accounts and certain lifetime transfers.3 A plan that leaves the second spouse less than that share, without a waiver, invites a claim the children will have to defend.
A prenuptial or postnuptial agreement can waive the elective share, homestead rights and other spousal entitlements if it is signed with the formalities the state requires and, for a postnuptial agreement, with fair disclosure of each spouse's assets.4 In a second marriage, a marital agreement is not a sign of distrust. It is the document that lets each spouse protect his or her own children while providing for the other on agreed terms.
The house
Real estate causes more second marriage disputes than any other asset. In Florida the homestead cannot be devised at all if the owner is survived by a spouse or a minor child, except to the spouse. If the owner tries, the surviving spouse takes a life estate, or may elect a one half interest, and the children take the rest.5 Couples who want the survivor to stay in the house, with the house ultimately going to the owner's children, generally need a waiver in a marital agreement, a trust arrangement or a deed that creates the intended result in advance.
Beneficiary designations control
Life insurance, IRAs, 401(k) plans and transfer on death accounts pass by their designation forms, not by the Will. An ex-spouse who is still named receives the money, subject to state revocation statutes that do not reach every account.6 A 401(k) has an added rule: the plan must pay the surviving spouse unless she signed a written consent to a different beneficiary.7 A plan that names the children on the 401(k) form without the new spouse's consent will not work.
The rest of the checklist
- Life insurance as the equalizer. A policy payable to the children, ideally through an irrevocable trust, lets the house and the investments go to the spouse without shortchanging anyone.
- Stepchildren. A stepchild has no inheritance rights under intestacy and is not included in a gift to "my children" unless the document says so. Name them if you mean to include them.
- Personal property. The items with sentimental value cause the fights. A written memorandum listing who gets what, which Florida and many other states honor, prevents most of them.8
- Powers of attorney and health care directives. Decide, in writing, whether the new spouse or an adult child makes decisions if you cannot, and tell both.
- Talk about it. The plan that nobody explained is the plan that gets contested.
A second marriage is not a reason to delay planning until things settle. It is the reason to plan now, while both spouses can sign what the plan requires.
Notes
- Pew Research Center, Four-in-Ten Couples Are Saying "I Do," Again (Nov. 14, 2014). ↩
- IRC section 2056(b)(7). ↩
- Fla. Stat. sections 732.201 to 732.2155; the 30 percent figure is in section 732.2065. ↩
- Fla. Stat. section 732.702. ↩
- Fla. Const. art. X, section 4(c); Fla. Stat. sections 732.401, 732.4015. ↩
- Fla. Stat. section 732.703 revokes most designations in favor of a former spouse on divorce, but it does not apply to accounts governed by federal law such as ERISA plans. See Egelhoff v. Egelhoff, 532 U.S. 141 (2001). ↩
- 29 U.S.C. section 1055(c); IRC section 417(a)(2). ↩
- Fla. Stat. section 732.515. ↩
Terry L. (T. L.) Turnipseed, J.D., LL.M., CTFA, is a tax, trust and estate attorney in Fort Lauderdale, Florida, and Head of Estate and Tax Planning at Alta Trust Company. He is a former tenured professor of law at Syracuse University. Reach him at tl@turnipseed.law or on LinkedIn. This article is general information, not legal advice.