When Death Do Us Part

This one is for married folks (or those who may be married, or re-married, some day). It’s a topic that comes up every time we prepare an estate plan for a married couple. For some people, it’s the main reason they have sought out an estate planner; for many, it’s something they didn’t even think about until we brought it up during the planning session. But for ALL married couples, it’s something (and often, the most difficult thing) that must be decided as part of crafting the estate plan.

What happens when ONE spouse dies, and the other survives? And particularly, how much control should the surviving spouse have over the couple’s assets – particularly the jointly built and preserved assets, but also any assets that the deceased spouse may consider his or her “own” or “separate” property (for example, things that the deceased spouse brought to the marriage, or inherited from his or her family members) – after the other spouse has died? Do you think the surviving spouse should have COMPLETE control over all assets remaining in your combined “estate” (and by this, I mean everything that both or either of you own), or do you want the survivor to be constrained in some way(s) regarding the use or disposition of those assets?

Many people’s initial response is, “Of course, s/he can have complete control; our intention is for the surviving spouse to have full use of all of our assets, and then for them to go to our children (or other desired beneficiaries) after we are BOTH gone.”

And then we delve a little deeper: “So, what you are saying is, if you die, and your spouse survives, it’s OK with you if they remarry, or get a new partner, and then turn around and give all of the remaining assets to THAT person (their new spouse/partner)? Or leave the assets to their new mate for his/her life (even if s/he is much younger), and THEN it goes to the kids – if there’s anything left – when they are 75 or 85 years old and the new, younger spouse finally dies?”

“Oh.” (People say.) “Gee, I hadn’t thought of that.”  Or, “Of course not! I want it to definitely go to our kids when we are both gone!”

Or one spouse says, “Yeah, sure, I trust him/her completely, s/he would never do that” (or “I won’t care, I’ll be dead,” or “Whatever s/he wants to do is fine with me”), and then the OTHER spouse says, “Oh, honey, it’s not that I don’t trust YOU, but who knows what kind of jerk/golddigger/evil person you might marry or hook up with? I want to be SURE the assets go to our kids! Don’t you?” And the discussion begins.

Before going any further, I will tell you that there is no perfect solution to this problem, that will work for everyone. If there were, we’d just tell everyone to do it, and that would be that. (If your estate planner doesn’t ask you about this, and present you with different options, you should be concerned that they are making decisions for you that should at least be discussed.) There are trade-offs, pros and cons to each option, and ultimately YOU have to make the decision on this one. So, where do we begin? Let’s look a little more at some of the possibilities.

First, you could elect to give the surviving spouse complete control over everything. This is the easiest plan for the survivor to carry out, from a legal/paperwork standpoint. However, it also carries some (and possibly a lot) of risk. The survivor could completely rewrite the plan after one of you dies, and change where the assets go at the survivor’s death. This actually happens. I have known of actual cases where a surviving spouse left nothing to the deceased spouse’s kids (from a prior relationship), instead leaving everything to his own children from a prior relationship, or where the surviving spouse remarried, and made a new plan leaving everything to their new spouse for life, and then splitting everything between that new spouse’s own kids and the survivor’s kids. Many times, of course, the survivor doesn’t change a thing, and at his or her death, the original plan is carried out (as the original couple intended).

This (“survivor has free rein”) plan is adopted most often by older couples, who have all of their children in common, and are not at all worried about a possible remarriage or change in the plan. This is, as I’ve noted, the easiest for the surviving spouse to implement at and after the first death. There is usually no retitling of assets, no additional tax returns to complete, and no need to divide the couple’s assets between separate trusts. The surviving spouse simply “carries on” with things as they have been – at least until he or she decides to give the house away to a new ‘best friend’, or to make a new will or trust.

The other options all involve protecting, or “locking down,” some assets after the first spouse dies. The benefit of this is that the surviving spouse will NOT be able to change where those assets (or whatever is left of them) go, at his or her death, or at least will not have complete freedom in making such changes. Once you decide to adopt one of these plans, you must make several more choices:

• What assets to “lock down”;

• How much freedom to give the surviving spouse to manage, invest, and spend the assets during his or her life;

• Whether to add restrictions if the surviving spouse remarries, and if so, whether to loosen those restrictions if they execute a protective prenuptial agreement; and

• How much freedom to give the surviving spouse to shift the ultimate distribution between or among agreed-upon beneficiaries (for example, to shift among children and grandchildren, or among charities).

I’ll address these one by one. But the important thing to remember is that ALL of these plans require that the surviving spouse take certain steps after the first spouse dies, including placing the protected assets into a new, irrevocable trust, which must obtain its own EIN (tax ID number) and – if there is any income generated by the protected assets – file its own tax return every year (usually, the trust itself won’t pay any tax, but a return must be filed and a ‘K-1’ generated for the surviving spouse to report the income on his or her own returns). This is the most significant ‘downside’ of adopting one of these “protective” plans. Everyone must decide whether these “complications” are worth putting up with, to obtain the protections that they provide. For some people, the decision will be an easy one; for others, it might be more of a close call.

(There is one other way to ‘protect’ assets at the first death that does not involve these ongoing administrative steps – leaving those assets DIRECTLY to the children or other beneficiaries at the first spouse’s death. However, this means that the survivor won’t have any ability to access or use the assets, so for many couples, this is not a viable option (at least, not for the majority of their assets). If the estate is large enough, it should be considered – for example, adult children could be protected against complete disinheritance (or undue delay in receiving their inheritance) by being named as the primary beneficiaries on a large IRA or 401(k), at the death of its owner, even if the other spouse survives, or they could be given a large cash gift at the first death.)

A word about “separate property”: when crafting your estate plan, you get to decide (with one restriction) which of your assets are considered your “joint” property, and which are each spouse’s “separate” property. It doesn’t matter who earned the money, who brought the asset to the marriage, or where it came from – you can place it into any of the three categories (joint property, one spouse’s separate property, or the other spouse’s separate property). As you will see, this division will be important in several ways when you implement one of the ‘protective’ plans. (The only rule that you cannot change is that each spouse’s own IRA/401(k)/403(b) or other ‘qualified’ retirement accounts must be considered their own separate property, and therefore they can always change the disposition of those assets, even after the other spouse has died. This can be restricted by a contract between the parties, such as a prenuptial or antenuptial agreement, or a court order such as a divorce decree, but not within the scope of a traditional estate plan.)

What Assets to ‘Lock Down’: The first decision that must be made is which of the couple’s assets to ‘lock down’, i.e., protect from redistribution by the surviving spouse. There are several common patterns to choose from, but in all of these, the surviving spouse will NOT be restricted AT ALL with respect to his or her OWN “separate” property (remember, this includes that spouse’s own retirement accounts, along with anything else you decide should be considered his or her separate property). You can:

• Restrict the surviving spouse’s ability to give away (during life or after death) only specific assets, e.g., the family home. Survivor has complete control over all other assets.

• Restrict the surviving spouse’s ability to give away the deceased spouse’s separate property only. The survivor has complete control over his or her own separate property and all joint property.

• Restrict the surviving spouse’s ability to give away the deceased spouse’s separate property, and half of the couple’s joint property.

• Restrict the surviving spouse’s ability to give away the deceased spouse’s separate property, and ALL of the couple’s joint property. (Depending on the way in which it is implemented, this plan may have undesirable tax consequences for very large estates.)

• Technically, the surviving spouse could restrict his or her ability to control his or her own separate property (other than retirement accounts), but if that were desired, that property would probably be classified as joint property, not as separate property. Separate property is usually categorized as such because the “owner” feels they should be able to maintain control over that property after the death of the other spouse.

The determination of what to protect/lock down is an individual one, and usually depends more on how the couple view and think about their assets, how the assets were acquired, how large the estate is, how long they’ve been married, their relationships with children and grandchildren, and other factors.

How Much Freedom to Give the Survivor to Manage/Use Assets: Once you’ve decide WHAT to protect, you have to consider HOW to protect it, and from what. Often, people want the surviving spouse to be free to USE any assets that he or she needs, and (usually) to be able to sell and buy property (to “downsize” or move to a different locale), determine investments, manage real estate and businesses, etc. Sometimes people want to restrict a survivor from selling the family home or other property before the children are grown, or without the consent of all or a majority of the children, or want to have an independent advisor decide on (or advise on) the investments for a large estate, manage real estate or sell a business or specialty property.  Sometimes people want to allow a surviving spouse to use or spend only a certain amount of the liquid assets, except in case of emergency or substantial need.

Most often the surviving spouse is left as the sole Trustee of the “Family Trust” (the trust that holds the ‘protected’ assets after the first death). But if you want to restrict the survivor’s USE or MANAGEMENT of the assets, you should appoint someone else as Trustee, or as a Co-Trustee with the spouse, in order to enforce these limitations. If the spouse is the sole Trustee, s/he will practically (if not technically) be able to manage, and use or spend, the assets as s/he desires. The ultimate beneficiaries (children or others) could bring a court action if the surviving spouse violated the terms of the trust, but (1) are they going to? and (2) do you want to put them in that position?  So you not only have to decide on what the restrictions will be, but also who is going to become the Trustee or Co-Trustee to be sure those restrictions are enforced. You may also appoint an investment advisor, trust protector, or other individuals to provide oversight or ‘checks and balances’ on the surviving spouse’s administration of the trust.

Additional Restrictions Upon Remarriage: Another option that many people prefer is to allow the surviving spouse to be the sole trustee, and to use and manage the trust assets without limitation, but IF the surviving spouse remarries, THEN to impose additional restrictions. These can be blanket (survivor gets only income, no principal, during remarriage; surviving spouse gets a maximum of $x,xxx/month (or year) during remarriage; surviving spouse is no longer Trustee, or a Co-Trustee is added, during remarriage), or they can come into effect ONLY if the surviving spouse and his or her new spouse do not execute a protective prenuptial agreement, which will protect the trust assets. This has the added benefit of encouraging the remarrying widow/er to seek a prenup, and gives them a “reason” for insisting on one that is not their “fault” (“Honey, of course I love and trust you, I’d never need a prenup, but my trust requires it or I’ll lose my access to my money…”).

Requiring a prenup is not foolproof; it protects against some things, but not others. For the ‘tightest’ remarriage protection, a Co-Trustee and/or limits on distributions are required. But many couples are not comfortable limiting themselves in this way, and the prenup option provides a ‘middle ground’.

Possible Changes in Disposition at Second Spouse’s Death: Finally, there is the issue of whether the surviving spouse will have NO ability to change who gets the protected assets at his or her death (for example, they will go to the couple’s children, in equal shares), or will have SOME – but not unlimited – ability to make changes. Some common options allow the survivor to change the distribution among the couple’s descendants only (e.g., to leave a portion directly to grandchildren, to leave more to one child than another, or to write out a child entirely); allow descendants’ spouses to be included (survivor could provide that if a child dies, his or her share goes to the child’s widow/er); allow the survivor to distribute a percentage of the assets to one or more charities; or allow distributions to any blood relatives of either spouse, or to any relatives of the deceased spouse (in case the couple has only one or two children, and they have all died without leaving any children of their own). Basically, you can allow the survivor some flexibility, without giving them the option of leaving assets to their own new spouse or friends, relatives of new spouses, their own kids (who aren’t the deceased spouse’s kids), etc.

Once you have decided all these things – whether to restrict assets, which assets to restrict, how to restrict the survivor’s use of the assets, and whether to allow them to shift the ultimate distribution with limits – and are still speaking to each other, you are definitely ready to complete your estate plan! Even if you can’t agree, it’s still possible for you each to make the choices you want with respect to YOUR own assets; a couple’s choices do not need to be the same for them to plan together, as long as they are both willing to respect the other’s decisions and carry them out if they happen to be the survivor.