Articles Posted in Blended Families Estate Planning

A common provision in wills and trusts, where one of the couple in a second marriage owns the marital home, goes something like this “My surviving spouse shall have the right to reside in the home for so long as he/she desires, provided he/she pays all taxes and insurance premiums thereon and shall maintain the premises in good order and repair. Upon his/her vacating the premises, the same shall be sold and the net sale proceeds distributed to my children in equal shares, per stirpes.”

Sounds fair, doesn’t it? After all, the surviving husband or wife gets to live in the house as long as they like, rent-free, subject only to payment of the carrying charges. In practice, however, the plan carries a significant defect. It puts the surviving spouse in a “Catch 22”. If they find the house is too large, too difficult or too expensive to maintain they have the choice to leave, but then face the prospect of a significant expense to purchase another residence out of their own funds or, in the alternative, the cost of rental which may add thousands of dollars in monthly outlay.

For this reason, we recommend that the surviving spouse gets not only the use and enjoyment of the home for life, but also the use and enjoyment of the proceeds of sale of the home for life, to either purchase a smaller home or condo or use the income from the sale of the home to pay for a rental apartment. In our view, the children of the previous marriage lose nothing. The surviving spouse could have lived in the house for life so why not give him or her the flexibility to trade down as they get older? If there are excess sale proceeds, these can be invested to provide additional income to the surviving spouse. The co-trustee, perhaps the attorney as previously suggested in these pages, makes sure the funds stay intact for the deceased spouse’s children after the second spouse dies.

Pioneered by Ettinger Law Firm, the IRA Contract solves a technical problem that arises when a spouse in a second marriage wishes to leave their IRA, or other qualified plan, to the husband or wife but also wants the unused funds to go to their children from a previous marriage after the spouse dies.

Many lawyers recommend a trust for this purpose. For example, husband dies and leaves the IRA to a trust which names the wife as beneficiary for her lifetime and, after her death, to his children from the previous marriage. Although leaving an IRA to a trust is perfectly legitimate and solves the problem, it has one major drawback. Since a trust has no “life expectancy” on which the IRS can calculate the required minimum distribution (RMD), when you leave an IRA to a trust, the Service looks through the trust to find the oldest trust beneficiary. They then calculate the RMD based on the life expectancy of that person, usually the second wife. The first issue is that even if the wife is under 70 1/2, the age at which you are required to start withdrawals, she cannot wait until then. Since the IRA was left to a trust, it is not a spousal rollover and does not become the wife’s IRA. As such, she cannot defer taxes until 70 1/2 but must start withdrawing the year following her husband’s death. The larger problem is that the IRS will establish a “term certain” for the payout based on her life expectancy which may be two decades or more less than the husband’s children. In other words, when she dies, his children must continue to withdraw based on her life expectancy, instead of based on their own life expectancies. Two decades or more of deferred taxes on the IRA are lost.

To solve this problem, we prepare a fairly simple contract. Wife agrees, in consideration of husband’s naming her as beneficiary on his IRA, to name husband’s children irrevocably as her beneficiary when the IRA rolls over to her. She also agrees not to take any more than the RMD, except on consent of the attorneys appointed by the husband. This prevents someone perhaps unduly influencing the wife in her later years to simply withdraw all the funds and give them to her children or others.

By Michael Ettinger, Esq.lawyer-as-trustee.gif

One of the situations that call for the lawyer to recommend himself as trustee is in second marriage planning.

It is a firmly established legal principal that there is no ethical prohibition against the attorney recommending himself to act as a trustee on behalf of a client or client’s estate. And for good reason. In many situations the counselor can provide invaluable assistance that no one else is able or willing to provide.

by Michael Ettinger, Esq.

extended-family.gifWith people living much longer than in the past, the frequency of remarriage is increasing, even in later years. This latter phenomenon is raising a host of elder law estate planning issues. On the other hand, we are also seeing with increasing frequency the blended family with “his, hers and theirs” children, creating another set of potential pitfalls.

Most of these estate planning issues can be resolved with thoughtfulness on the part of the clients and the compassionate guidance of their estate planning attorney.

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