How Second Marriages Can Legally Affect Estate Planning
In a second (or third or subsequent) marriage, a spouse may feel torn between the needs of their current spouse and the needs of children from an earlier marriage. These children may worry that the parent’s current spouse will exhaust their inheritance, especially if your spouse does not have a good relationship with their stepchildren. Fortunately, you can meet the potentially conflicting needs of your spouse and your children from a prior marriage by creating a certain type of trust. This will name your spouse as the life beneficiary for the assets in the trust, while naming the children from your prior marriage as the final beneficiaries of the trust assets.
A QTIP (“qualified terminable interest property”) trust allows an individual to name their second spouse as a life beneficiary of the property in the trust and children from a prior marriage (or any beneficiary whom the individual chooses) as the final beneficiaries. The property in a QTIP trust qualifies for the unlimited marital deduction, but it does not avoid estate tax when the second spouse dies.
As a result, your spouse will have a limited set of rights to use the property in the trust during their lifetime. They will not be able to leave the property in the trust to anyone else. Meanwhile, your children will receive all of the property in the trust once your spouse dies. (In the event that your spouse dies before you do, the property in the trust will pass directly to your children or the other final beneficiaries of the trust without needing to make any adjustments.) This arrangement also can work for people who are not married when they have children from a previous relationship.
Restrictions on Your Spouse’s Rights
You have substantial discretion to determine how much to restrict your spouse’s rights. This might involve naming someone other than your spouse to be the trustee of the trust, such as one of your children. Alternatively, you might want to allow your spouse to receive income from the trust property but prevent them from being able to spend trust principal.
If you own real estate with a spouse in a second marriage, you might want to allow your spouse to live in the house for the rest of their life if they survive you. You also might feel just as strongly that you want the house to belong to your children from your first marriage once your spouse has died. You can accomplish both goals by putting the house in a trust that allows your spouse to use it but does not allow them to sell it. Some related issues that you may need to address include whether your spouse can rent the house and use the income from rent, as well as who is responsible for paying for maintenance and taxes on the house.
Often, each spouse in a second or subsequent marriage will create this type of trust. The trusts may or may not mirror each other. If each spouse leaves their one-half interest in a shared asset to children from a previous marriage, the two sets of children may need to work out some way to divide its value after both spouses die, since they may not know or trust each other. This can lead to complications down the road.
Choosing the Trustee
As with any trust, a trustee will have substantial authority. They will manage the trust property, make sure that your spouse is complying with the restrictions on their use of trust property, and determine whether payments to your spouse from trust funds are appropriate. For example, you may not want to give this power to a child who does not get along well with your spouse because this could cause family tension. At the same time, you should recognize that your spouse and your children may have fundamentally different goals and needs, and conflicts may prove unavoidable. You should strongly consider retaining a lawyer to help you make the trust documents as clear and fair as possible. However, your priorities are ultimately yours to decide.