By: Jim Dossey, MS, MBA, JD, Patent Attorney
Families with children from prior relationships are some of the most difficult estate planning scenarios that we contend with. They often require special planning to ensure that estate plan deals with all the children and the new spouse equitably.
In general, we advise our clients to provide for children from a prior relationship outside of the Will if possible. We do not want to put a new spouse in an adversarial position with the child's biological parent. Does the new spouse really want to deal with the child's biological parent for the rest of their life?
The situation is even more complicated when the second marriage also produces children. The new spouse often will feel closer to their biological children than to their spouse's children from the prior marriage. How does the spouse with children from a prior relationship ensure that the new spouse will provide appropriately for the child?
There are no silver bullets here... all the options below have advantages and disadvantages. Also note that this is not an all-inclusive list. Often the best strategy depends on the unique circumstances in each family.
|
Options |
Advantage |
Disadvantage |
|
Make the child from a prior relationship a primary beneficiary on an IRA or 401k. |
This is the easiest option and guarantees that the child from a prior marriage will be provided for. The new spouse is also not put in a position where they have to deal with the biological parent. |
It is very difficult to ensure that the distribution of assets between the children is equal. Distribution of assets through a 401k or IRA is not controlled by the Will. On one hand, this provides a guarantee that the child from a prior marriage will be provided for. However, it also means that there is no inherent mechanism for ensuring that the distribution of children through the Will is equal to the distribution to children outside of the Will. |
|
If the Will includes a credit shelter / bypass trust, use a corporate trustee and give the new spouse only rights to the income generated from the trust, not the principal. |
This accomplishes the goal of providing for the prior child while separating the new spouse from the biological parent. |
A corporate trustee will typically charge 1-3% of the principal per year. Also, the second spouse would not be able to use the principal from the Bypass Trust (which may be OK given the size of the estate) |
|
If the estate is not taxable, make the child from a prior marriage a primary beneficiary of a life insurance policy. If the estate is taxable, make the child from a prior marriage the primary beneficiary of an Irrevocable Life Insurance Trust (ILIT). |
This accomplishes the goal of providing for the prior child while separating the new spouse from the biological parent. Additionally, the ILIT will not be included in the estate and will not incur estate tax. |
Similar to making the child from a prior relationship the beneficiary of an IRA or 401k, it will be very difficult to ensure an equal distribution between children. The administration of an ILIT can be difficult. You will need a trustee (not the husband or second wife) to pay the premiums of the insurance policy and a mechanism to provide money for the trustee to pay the premiums. Not too difficult, but you have to know what you are getting in to. |
|
Create a revocable trust just for the child from a prior relationship and transfer assets into it now. |
This accomplishes the goal of providing for the prior child while separating the new spouse from the biological parent. |
Similar to the insurance, IRA, and 401k options above, it will be very difficult to ensure equal distribution between the kids. |
|
Set up irrevocable gift trusts for the kids right now and start gifting $28k per year into the trusts. |
This is an add-on to any of the other strategies. If the estate is taxable, this should be part of the overall plan anyway. Each parent can give away $14k per year per donee tax free and it will not be included in your estate. |
Not much of a downside to this option besides the initial cost of creating
the Trusts plus tax returns must be filed each year for each trust.
|
|
Make a specific bequest to the child from a prior relationship in the Will |
This accomplishes the goal of providing for the prior child while separating the new spouse from the biological parent. |
It is often difficult to determine what the appropriate gift should be. If the gift is in terms of a percentage of the estate, the second spouse may be put in an adversarial position with the biological parent during the probate of the estate. |
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