Married clients in second marriages with prior children often have to balance the future wellbeing of their spouse with that of their own children. In California, a community property state, a resident can bequeath (leave) one-hundred percent of their separate property assets and one-half of their community property assets. A resident may only bequeath the entirety of a community property asset to someone other than their spouse with their spouse’s consent or acquiescence. Let’s discuss.
First, does the client’s spouse even need support? Sometimes not. If not, then the client usually leaves his or separate property assets directly to his or her own children. Nonetheless, as the surviving spouse remains an heir of the client, the client’s will and/or trust must acknowledge the marriage and say that that the spouse is not inheriting. Otherwise, the surviving spouse as heir may be entitled either to a one-half or one-third share in the decedent’s separate property and all of the couple’s community property assets. The surviving spouse would inherit if the client died intestate (with no will or trust) or the client died with an old trust or will she signed prior to the marriage that omitted her spouse.
If the spouse needs support then then consider the assets and family relationships involved. Are the client’s assets her separate property either from prior to marriage or from inheritance while married? Do the client’s spouse and children get along? Are the spouse and client’s children close in age? Is it possible for the beneficiaries to inherit separate assets?
If client’s spouse and children often disagree and/or are close in age, and separate assets can go to each party, then perhaps they should inherit separate assets outright and part ways. Otherwise entanglement occurs when the spouse is the lifetime beneficiary and children are death beneficiaries of a trust. Perhaps the client’s house goes to her children and her retirement plan goes to her spouse (who takes required minimum distributions over his life time).
If it is neither possible nor necessary to disentangle the spouse and children then consider making the spouse a lifetime beneficiary of a trust that owns some or all of the client’s assets. Such a trust requires careful drafting. When and to what extent is the spouse allowed to invade the trust principal (in addition to receiving the income)? Is the spouse only allowed if the spouse’s own income and resources are first exhausted? Who will be the trustee that balances the competing interests of the spouse and children?
Next, do the children need support? If so, what support? Do the children receive SSI or Medi-Cal? Are the children able to manage an outright inheritance? Perhaps either a special needs or a support trust is needed and appropriate. Alternatively, consider delayed gifting using an annuity to prolong the benefits.
Next, what if the client wants to leave her home to her children but the community property estate has an interest in the residence? That is, perhaps community property money was used to pay down the mortgage. For example, the client owned a home prior to marriage and continued paying off the mortgage with her own earnings while married. If so, the community property estate receives an ownership interest in the home to the extent either spouse’s earnings while married paid off the mortgage or improved the home.
Nevertheless, the client’s estate plan may still leave the home to her children but offsetting assets (like brokerage accounts) to compensate the spouse for his interest in the home. This is a “forced election”: Either the surviving spouse enforces their community property rights (in the home) or the spouse receives other assets (brokerage accounts) left him or her by the deceased spouse.
The foregoing is a brief and limited foray into a much broader and more complex subject. It is no substitute for consulting a competent estate planning attorney.