Estate planning for the second marriage: Protecting the kids

What is one of the things that kids from a first marriage worry about when their parent re-marries? The “evil” step-parent getting it all, of course. Many parents struggle with the problem of alleviating the fears of their children in this regard. There are steps you can take to ease their minds and your own.

Prior to re-marrying, if you entered into a pre-nuptial agreement in which both spouses waive their rights under the law to receive a portion of the other spouse’s estate upon death, you may have already addressed these issues. If you have not, you may wish to consider a post nuptial agreement, providing the same waiver. With this agreement in place, you could leave a significant portion or all your assets to your children. Even if it’s not possible to obtain such an agreement, there are alternatives to effect your wishes.

Absent an agreement to the contrary, spouses have the right under New York law to receive one-third of the deceased spouse’s estate outright, regardless of what the deceased spouse’s Will says. This is called the spousal “right of election.” One way to make sure your children will eventually benefit from your accumulation of wealth is to create a marital trust (technically called a “Qualified Terminable Interest Property Trust”, or QTIP). The trust’s terms provide that all ordinary income earned by the trust (that includes interest and dividends, but not capital gains) must be paid annually to the surviving spouse, and then, at the surviving spouse’s death, the balance remaining in the trust must be paid to your children (preferably in further trust to protect the assets from each child’s creditors, including from an ex-spouse, or outright to each child directly). The trust can also give the trustee the flexibility to make payments to the surviving spouse from the principal of the trust in the event he/she needs additional funds for certain specified purposes. This is sometimes enough to satisfy the surviving spouse. Remember, however, that absent a waiver by the spouse, the surviving spouse is still entitled to one-third of your estate outright and can exercise his or her right of election against your Will to get it. In that case, the spouse gets one-third outright and the balance passes to the children, as set forth in the Will.

Another way to protect your children, and ease your and their minds, is to create a lifetime trust for the benefit of your children, funded with life insurance on your life (an Irrevocable Life Insurance Trust, or ILIT). Structured properly, upon your death, the insurance proceeds can pass to your children (in further trust or outright) free of any estate taxes, and the proceeds can replace monies that are made available to (or paid to) your surviving spouse.

There are numerous ways to keep everyone feeling happy and secure in a second marriage situation. The important thing is to address the issues while both spouses are still living.

This article appeared in the March 2023 issue of Stroll Lloyd Harbor.