YES! Second marriages present special challenges in estate planning, especially where the spouses have children from prior marriages. Estate planning for such couples is a balancing act between the needs of the surviving spouse and the wish to leave a legacy to one’s natural children. The surviving spouse must be assured that he or she will be able to maintain the lifestyle the couple enjoyed while both spouses were alive. Biological children must be properly remembered.

Multiple marriage spouses cannot afford to take the “do nothing” approach, or the joint ownership approach to estate planning. The messiest probate battles almost always involve step parents, step children and step siblings. Parents who “don’t care what happens after I’m gone, I’m dead!” leave a legacy of hurt feelings and anger. Families are often permanently divided into warring camps. Worse yet, expensive and emotionally draining probate litigation can sometimes diesel on for years. If you love your family, don’t leave them to sort out your mess. With proper planning, the estates of multiple marriage spouses can be administered in an orderly, mature fashion, with provision made for all interested parties.

The wishes of couples in second marriages vary widely, depending on the age of the spouses, their net worth, the length of their marriage, the age of their children, and their relative contributions to the marital estate. In most cases, separate Revocable Living Trusts (one sponsored by each spouse) with QTIP provisions will accomplish the varied needs of the couple. Prenuptial and Postnuptial agreements are needed where the spouses make little or no provision for each other at death.

ETHICAL CONSIDERATIONS

Sometimes, the interests of the couple are so independent and diverse that one attorney cannot represent both spouses. Ethically, an attorney acting on behalf of both spouses cannot keep confidential information disclosed by one spouse from the other spouse. The attorney must either withdraw representation from both spouses, or, with prior approval, disclose the information to the other spouse. By law, one attorney cannot represent both spouses in the preparation of a Prenuptial or Postnuptial agreement. It is the attorney’s responsibility to recognize conflicts of interest. The spouses should nevertheless discuss ethical issues with the attorney up front in order to avoid any inadvertent partiality on the part of the attorney.

PRENUPTIAL AND POSTNUPTIAL AGREEMENTS

Prenuptial (sometimes also called “Antenuptial”) and Postnuptial agreements are essential estate planning tools. Prenuptial or Postnuptial Agreements (prenuptial before marriage and postnuptial after marriage) override state law with respect to the division of marital assets on death or divorce (see Michigan Statutory Rights below).

Prenuptial agreements have long been enforceable with regard to the division of assets upon the death of a spouse.106 In recent years, Michigan has joined the growing number of states that recognize the validity of premarital agreements in divorce.

Spouses may agree to leave all of their assets to their children at death, and little, if any, to each other. This might be the case where a couple, married later in life, each brought substantial assets to the marriage. Without a Prenuptial or Postnuptial agreement, the wishes of such a couple may not be achieved. Michigan law would allow the surviving spouse to take his or her “marital share” of the deceased spouse’s estate, at the expense of the deceased spouse’s children.

A surviving spouse may assert his or her statutory rights even where the spouses had informally agreed otherwise during life. Estate planning documents which fail to address statutory rights can also be challenged. Only properly drafted Trust documents and valid Prenuptial or Postnuptial agreements can prevent the surviving spouse from taking up to one-half of the amount intended to pass to the children of the deceased spouse.

Several conditions must be met for a Prenuptial or Postnuptial agreement to be valid under Michigan law:

1. The agreement must be in writing;
2. each party must make full disclosure of his and her personal financial information, including assets and income;
3. each party must be represented by separate independent legal counsel;
4. the agreement must be voluntarily entered into without fraud, mistake or duress (to prevent the appearance of duress, the Prenuptial Agreement should not be executed on the eve of the marriage); and
5. the agreement must be fair when entered into.

Prenuptial and Postnuptial agreements allow spouses to agree on a number of important issues including:

1. how to segregate assets brought into marriage;
2. how assets acquired during the marriage will be owned;
3. who will be responsible for debt acquired during the marriage;
4. how living expenses will be shared;
5. how assets will be distributed at the death or divorce of the spouses; and
6. who will be responsible for income tax.

SEPARATE TRUSTS

Revocable Living Trusts are a valuable tool in preserving the wishes of the Grantor. Only the Grantor of a Revocable Living Trust may amend the agreement. Upon the death or disability of the Grantor, the Trust becomes irrevocable, since the only person who had the right to amend the Trust is unable to do so. Since each spouse in a second marriage situation has separate and distinct wishes, each spouse should have a separate Revocable Trust to memorialize their wishes.

Each spouse’s Revocable Trust should be funded with that spouse’s separate assets. Even without a Prenuptial or Postnuptial agreement, spouses can protect their separate interests in assets brought into the marriage. Separate assets funded in each spouse’s separate Revocable Living Trust, and subsequently maintained in that Trust during the course of the marriage, often remain separate in divorce. Even after passage of EPIC, Michigan law does not consider assets funded in a Revocable Trust to be part of the decedent’s estate for purposes of calculating the surviving spouse’s elective share. Thus, a funded Trust will frustrate, if not defeat, a surviving spouse’s right to a statutory share.

CHOICE OF TRUSTEE

Trustees have a fiduciary obligation to strictly implement the terms of the trust over which they are appointed. Deliberate misuse or mismanagement of trust assets can result in civil, and even criminal, penalties. Revocable Trusts prepared by the author typically appoint spouses as Co-Trustee, with both spouses acting together while both are alive and able. Upon the death or disability of one spouse, the surviving or non-disabled spouse acts as sole Trustee.

The surviving spouse may, however, not be a suitable successor trustee in second marriage situations. For instance, if the relationship between the children of the deceased spouse and the surviving spouse breaks down, who will monitor the actions of the surviving spouse/Trustee? The children may not learn of the surviving spouse’s misuse of Trust assets until after the surviving spouse’s death, when it’s too late. Although certain statutory reporting requirements would require the surviving spouse to account to the children annually, enforcement of these rights would require the children to take their step parent to court.

To avoid conflict, a neutral third-party, like a bank or brokerage house, should be considered as Trustee. The surviving spouse could also be appointed as Co-Trustee with a family member of the deceased spouse. The question of who will act as Successor Trustee can only be answered by the spouses. The spouses will have to come to a suitable solution based on their level of trust in each other, and their relationship with their respective step children.

QTIP TRUSTS

QTIP trusts were legislated specifically to address second marriage situations. A QTIP trust allows the surviving spouse to enjoy the income from the Marital Trust during his or her lifetime, with no power to appoint the balance remaining in the Marital Trust at his or her later death. The result is that the Grantor may provide for his or her surviving spouse, and be assured that the balance of the Marital Trust assets remaining at the surviving spouse’s death will pass to the Grantor’s children. The surviving spouse, having no control over the future distribution of the Marital Trust assets, cannot divert trust property away from the Grantor’s children. Without the power to appoint assets, the Marital Trust will also be secure from the claims of a subsequent spouse, if the surviving spouse remarries.

RETIREMENT PLAN ASSETS

In many cases, retirement assets (such as company sponsored pension, profit sharing and 401(k) plans and IRAs) are the most significant marital asset. Special planning is required since retirement plan accumulations are subject to both income and estate tax. To achieve the best income and estate tax result, it is normally advisable to name the surviving spouse as the primary beneficiary of retirement benefits payable at death. Only a surviving spouse may roll over the deceased spouse’s retirement plan interest. Therefore, naming the surviving spouse as primary beneficiary allows for the greatest income tax deferral. Although naming the surviving spouse produces the best income tax result, it may defeat the client’s objective of assuring that his or her children receive an interest in the decedent’s largest asset. Therefore, choosing a retirement plan beneficiary necessarily involves a tradeoff between the best possible income tax result and assurance that the participant’s children will inherit the retirement plan proceeds.

MICHIGAN STATUTORY RIGHTS

Michigan statutory rights are designed to recognize the contributions of both spouses to the marital estate, and to protect the economic well being of surviving spouses. A surviving spouse seeking to obtain the benefit of statutory elections must do so in court. Statutory rights of election are enforced by the Probate Court. Statutory rights may be amended or waived with a properly drafted Prenuptial or Postnuptial agreement.

The following rights are accorded to a surviving spouse under Michigan Law:

1. The right to receive a family allowance, the amount of which is in the discretion of the Probate Court;
2. The right to receive a homestead allowance in the amount of $10,000 (under EPIC, the homestead allowance is $15,000);
3. The right to receive exempt property, such as personal and household items, in the amount of $3,500 (under EPIC, the exempt property allowance is $10,000);
4. The right to remain in the marital home for one year after the death of the other spouse or until the share of the deceased spouse is assigned;
5. The right to either abide by the terms of the Will of the deceased spouse, or elect to take one-half of the amount he or she would have taken under Michigan Law if the deceased spouse had died without a Will (intestate share), reduced by one-half the value of the property received by operation of law (i.e. joint ownership, beneficiary designations, etc.), or, if the surviving spouse is a woman, elect to take her dower rights (a life estate in one-third of land owned by her late husband;
6. The right to control organ donation and disposition of the spouse’s body; and
7. The right to priority consideration as the deceased’s Personal Representative in an intestate estate.

CONCLUSION

Second marriage estate planning involves mature discussion between the spouses and their attorney. With the benefit of properly funded separate Revocable Living Trusts, and QTIP Marital Trusts, spouses should be able to satisfy the needs of the surviving spouse and their respective biological children. Prenuptial or Postnuptial agreements are advisable where the spouses agree to bypass the survivor and leave their estate directly to their children. All planning must consider the surviving spouse’s elective rights under Michigan law.