The most common estate planning scenario we see is the “joint will” between spouses. For example, husband gives everything to wife, unless she predeceases him, in which case everything goes to the kids. Likewise, wife, in her will, gives everything to husband, unless he dies first, in which case everything goes to the kids. Often, this plan works as flawlessly as an estate plan can work; however, implicit in this plan lurks a risk – what if the second spouse to die changes his or her will? This is especially a problem (and a frequent one) for “mixed” families where one or both of the spouses has a child or children that are not the child of the other spouse, usually because it is the second marriage for both parties. Here, the temptation often exists for the surviving spouse to revise his or her will to cut out the children of the deceased spouse. To put it simply, stepchildren of the surviving spouse are at the mercy of the surviving spouse’s estate plan.
How do you avoid this problem? One planning method is to provide that upon the death of the first spouse, everything goes into trust for the benefit of the surviving spouse for the remainder of his or her life. Thereafter, the assets are distributed to all of the children of both spouses when the second to die of the spouses passes on. The use of this trust mechanism removes the ability of the surviving spouse to re-direct the disposition of the property upon his or her death. That disposition scheme is basically “locked-in” when both spouses are alive to establish it and any changes to the surviving spouse’s will often will not have any effect on the property received from the first spouse.
In theory, the use of the trust should take care of the problem. In reality, it often falls short for a number of reasons. First, the most common way to title property for married people is as “husband and wife” or “by the entireties.” This method of titling property is used for real estate, bank accounts, brokerage accounts, etc. Additionally, assets like retirement accounts and insurance usually have a beneficiary designation that names the spouse as beneficiary. In both cases, unless lifetime asset planning is done, the transfer of the property goes outright to the surviving spouse; the trust never gets utilized, and the surviving spouse can do whatever he or she wants with the property – including cutting out the stepchildren.
Other reasons exist why a trust might not work. Trusts can be expensive and cumbersome to manage and they may make no sense from a cost perspective if the trust contains less than a substantial amount of assets. As a result, a decision might be made when the first spouse dies to ignore the trust and give the property outright to the surviving spouse. This is often not right (ethically) or correct (legally), but it happens frequently. Finally, the lawyer who drafted the wills simply may not have recognized the mixed family issue and thus not given any thought to including a trust in the will. For most lawyers drafting wills, trusts are ways of providing for children during their minority or a method of reducing taxes for very large estates. Long term distribution issues or the potential for a devious client are not always in focus.
As a practical matter, there must be something in the will or a formal written agreement outside the will to give our beneficiary a winning argument.