Estate PlanningAug 05, 2014 09:00AM ● By Margaret A. Badura
The first question I must always address with prospective clients is: "Can I represent both of you or do you need to have separate attorneys?" If there are competing distribution interests, I cannot represent both. This can also happen if there is a big disparity in ages and/or wealth.
Assuming that joint representation is possible and agreed to, we discuss and address what will happen without planning, what does the couple want to achieve, and how can that best be accomplished? We start with what happens if there are no wills. If a spouse dies leaving children of a prior marriage, the decedent's estate will be split 50/50 between the surviving spouse and the children of the earlier marriage. This may produce particularly bad results of co-ownership between the decedent's children and their step-parent. We also talk about the right of a surviving spouse to elect to receive up to 50% of the couple's estate, even if there is a will that would leave less to the survivor. This may lead to discussions about a will contract, the use of a Qualified Terminable Interest Trust (QTIP) that provides income to the survivor for life with trust assets going to the first spouse's beneficiaries after the second spouse's death, and the need to update retirement plan, IRA and life insurance beneficiary designations.
Since one or both of the couple has been through a divorce, we also naturally talk about how estate planning and ownership of assets acquired both before and during the marriage (including increases in value) may affect a future division of marital property if this marriage were to fail.
Having gotten those "pleasantries" out of the way, we can now start getting to the couple's objectives and planning. A common issue relates to the couple's home. Let’s look at my experience with Susan (age 58) and Bob (age 62), who were planning what would be second marriages for both. Susan had two adult children and Bob had one. They were going to buy a home after the wedding, and both were going to contribute equally to the $100,000 down payment on a $200,000, 15-year first mortgage. They said they planned to own it as joint tenants.
But their proposed ownership of the house presented some problems. Both wanted the survivor of them to be able to live in the house for the rest of their life, and they wanted ownership interests to go to their children. Joint tenancy would be okay if there were a future divorce but, at death, it presented problems because the survivor would own 100% of the house. We talked about being tenants in common with both owning 50% of the property. That way, both Susan and Bob could give their half to their children by will, subject to a life estate in the survivor. That might be okay if they were paying cash for the house but, if one of them died before the mortgage was paid off, the survivor would have paid more than the other for the house, causing a windfall for the first decedent's child(ren).
Susan and Bob decided on using a joint revocable trust to own the house with the ultimate beneficial interests being divided based on their respective contributions to the purchase.
The trust dealt with the survivor's occupancy free of rent and responsibility for mortgage payments, taxes, repairs, and utilities, as well as possible sale and replacement property. This approach allowed Susan and Bob to retain maximum flexibility while both were alive, provide for the surviving spouse, and equitably distribute their respective interests in their new house to their children based on their contributions to the purchase price.
I am happy to report that Susan and Bob are happily married to this day.
Guest contributor Margaret A. Badura is an elder law and estate planning attorney.