The Typical Plan

The typical estate plan involves deferring the payment of any estate taxes until the death of the surviving spouse. You accomplish this by leaving assets equal to the applicable estate tax exclusion amount to a separate trust for the benefit of your spouse and children and leaving the balance of assets to your surviving spouse.

In a typical plan, the surviving spouse has significant access to the family trust, including distributions of principal and income pursuant to a defined standard. The surviving spouse may even be the trustee with discretion to make distributions and may have the right to withdraw the greater of 5% of the trust principal or $5,000 each year (a 5-and-5 power). Surviving spouses may also have a limited power to appoint assets to persons other than themselves.

The balance of the assets left to the surviving spouse is often placed in a marital trust providing that all income is paid to the spouse for life. The spouse’s access to principal in a marital trust may range from very broad to no access at all. The surviving spouse may also be given a limited power to appoint assets of the marital trust to others with default to your children if the power is not exercised.

The Expanded Family Plan

When planning for an expanded family, you may need to make several changes to the typical estate plan:

• You may want to consider having an independent trustee (as sole trustee or as a co-trustee) for the family trust and the marital trust to minimize conflict between your children from your prior marriage and your second family.
• If your intent is to primarily benefit your second spouse, then the trust should indicate that distributions are to be made to your surviving spouse without regard to the remainder beneficiaries. In the context of a second marriage, the typical family trust may make adequate provision for your spouse but conflict may result if he or she appears to have too much control.
• If you intend that the trustee should make no distributions of principal to your spouse because his or her other resources are adequate, then the trust should highlight that direction and make clear what is adequate.
• You should evaluate whether a 5-and-5 power in the family trust should be given to your spouse. He or she could use such a power to remove much of the growth from the family trust and provide for his or her own children. You will need to decide if you intend for the family trust to possibly be used in this manner.
• Providing your spouse with a limited power of appointment may be inappropriate in the family trust and the marital trust. Such powers can allow him or her to effectively rewrite your estate plan.

The “Disinheritance” Problem

If you decide to defer the payment of any estate taxes until the death of the surviving spouse, and your spouse is much younger than you, your children may be more likely to not survive your spouse and could wind up effectively being disinherited. Even if your children do outlive your spouse, they may be well into retirement by that time. Your children may not understand why their inheritance will be delayed until your spouse’s death.

One solution is to simply leave a portion of the estate to your spouse outright and to leave the remainder of the estate to your children upon your death. Another is to acquire life insurance through an irrevocable trust to provide for your children, leaving your entire estate to your spouse on your death. The advantage to your spouse is the complete control available over the assets received without tax depletion. The advantage to your children is that they receive their inheritance sooner rather than later (also tax-free), avoiding future conflicts with your spouse.

Being Logical -- and Fair