Revocable Trusts May Help To Protect The Inheritance Of Children In Second Marriage Situations
The decision to get remarried is typically a cause for celebration. But second marriages can also present unique estate planning challenges, especially when there are children from the prior marriage. A careful balance must be struck between providing for one’s spouse and providing for one’s children. Oftentimes, spouses in second marriages, especially those who marry later in life, want to keep their assets separate in order to provide for their respective families in the event of death or divorce. Thankfully, a decision by the Nebraska Supreme Court makes it easier to protect the inheritances of children from the prior marriage from the potential claims of a surviving spouse, as is discussed further below.
The Surviving Spouse’s Elective Share
By way of background, Nebraska law gives a surviving spouse the right to claim an “elective share” of his or her spouse’s estate. The elective share (also sometimes known as a “widow’s election”) is the amount that a surviving spouse can elect to receive from the decedent’s estate if the decedent’s will or trust provides less to the surviving spouse. For example, if a husband leaves $100,000 to his wife in his will, and the elective share amount is $250,000, the wife may elect to disregard the provisions of the husband’s will and receive the full $250,000 from his estate.
The elective share is designed to serve two main purposes. First, it protects the surviving spouse against either intentional or unintentional disinheritance. Second, it prevents the surviving spouse from obtaining more than a “fair share” of the estate when he or she has already received a share of the estate through some other means. To achieve these dual purposes, the elective share calculation is based on the concept of the “augmented estate” and includes the value of certain property transferred by the decedent during the decedent’s lifetime.
The elective share is defined by statute as any fraction not in excess of one-half (i.e., 50%) of the decedent’s “augmented estate.” The augmented estate, in turn, is calculated by combining the value of property subject to court administration (i.e., the probate estate), with such things as the value of certain lifetime gifts made by the decedent, property held with a right of survivorship (such as joint bank accounts), and the value of life insurance policies over which the decedent had the power to name the beneficiary.
Interspousal transfers and gifts made at any time prior to or after the marriage are included in the augmented estate to the extent that they were derived from the decedent for less than full and adequate consideration. As a result, if the surviving spouse has been provided for by the decedent during lifetime through outright gifts, joint tenancy property, life insurance, living trust provisions, annuities or retirement plans, the amount of such property received by the surviving spouse reduces the elective share (and may wipe it out entirely).
Certain assets are excluded, however, for purposes of determining the value of the augmented estate. For example, a 2009 decision by the Nebraska Supreme Court held that assets transferred prior to marriage to a then existing revocable trust will be excluded from the augmented estate for purposes of determining the surviving spouse’s elective share.
The Chrisp Case
Dean E. Chrisp died on September 26, 2004 at the age of 74. Dean grew up the fifth son in a family of six boys near Anselmo, an old railroad town located in Custer County, Nebraska. Following his death, Dean was remembered fondly by his friends as an outgoing, “old cowboy” who never met a stranger. Dean was survived by his third wife, Gail, and his four adult children. All four children were born of a prior marriage.
Back in November 2000, Dean Chrisp created and transferred the majority of his assets to a revocable living trust. Dean’s four children were named as the beneficiaries of his trust. Thereafter, in December 2002, Dean married Gail without a premarital agreement. In 2004, Dean created a new will devising all of his property to Gail; however, Gail was not made a beneficiary of Dean’s revocable trust.
At the time of Dean’s death in September 2004, his total estate was valued at $842,185. Of that amount, $666,503 was held by Dean’s trust and the remaining $175,682 was outside of the trust.
Because Gail was not a beneficiary of Dean’s trust, she was not entitled to any portion of the trust assets. Not happy with this result, Gail filed an elective share claim with the court and argued that she should be entitled to 50% of Dean’s entire estate, including the assets held by his revocable trust.
The Nebraska Supreme Court ultimately held that Gail’s elective share claim did not apply to any portion of the assets held in Dean’s revocable trust. According to the court, the “augmented estate” under Nebraska law includes assets transferred to a revocable trust, but only if such assets are transferred during the decedent’s marriage to the surviving spouse. Since Dean’s revocable trust was created and funded before his marriage to Gail, the trust assets were excluded from her claim.
The court also found that a claim for an elective share did not fall within the provisions of the Nebraska Uniform Trust Code that make revocable trusts subject to certain “enforceable claims” and “statutory allowances.” The court explained that the Nebraska Legislature made a conscious decision to exclude assets transferred to a revocable trust before marriage, and that such exclusion was intended to permit a person “to provide for children by a prior marriage, as by a revocable living trust, without concern that such provisions will be upset by later marriage.” Thus, under this decision, assets transferred to a revocable trust established before marriage are completely excluded from the surviving spouse’s elective share.
In spite of the favorable holding in Chrisp, some important questions remain unanswered. First, it is unclear what happens if, at some point during the marriage, assets are taken out of a revocable trust that was established prior to the marriage. In that situation, it is possible that such assets might then be subject to the surviving spouse’s elective share claim, even if the assets are transferred back into the revocable trust before death. Second, it is also unclear what happens if lifetime gifts to children or others are made from a revocable trust that was established prior to the marriage. While this issue was not addressed by the court, it appears that those gifted assets might be pulled back into the augmented estate calculation for purposes of determining the elective share.
Although a revocable trust established before marriage is one way to protect assets from the claims of a surviving spouse, another method to address these inheritance and related issues is for the spouses to enter into a marital agreement (either before or after marriage).
Marital agreements are generally designed to cover a wide range of situations that may occur during the marriage. In most cases, the marital agreement defines the rights and expectations of each spouse in the event of death or divorce. The agreement can also define the rights and obligations of the spouses with respect to spousal support (alimony), retirement assets, payment of taxes and other expenses, spousal interests in earnings and property of the other spouse. In addition, some marital agreements include a “sunset provision” which specifies alternate (and usually more generous) provisions that apply in the event the marriage lasts for a minimum number of years.
It is also important to note that marital agreements, if properly disclosed and executed, allow the spouses to explicitly waive their “elective share” rights in the event of a spouse’s death. As a result, marital agreements provide a measure of certainty to the spouses and their families about how assets will be divided upon death (or in the event of divorce or legal separation). This approach helps to reduce the potential for conflict between the surviving family members by deciding these issues while both of the spouses are still living. It also avoids the uncertainty discussed above with respect to transfers outside the scope of the Chrisp case.
Revocable trusts are valuable estate planning tools that serve a number of important functions, including the ability to avoid probate, provide support for family members and friends; and, carry out charitable goals. In the context of second marriages, there is yet another great reason to establish a revocable living trust – to protect the inheritance of your children.
If you would like to learn more about estate planning in second marriage situations, or about marital agreements, please contact a member of the McGrath North Tax Practice Group.