The second marriage problem

Imagine this scenario: Tom met Linda about six years after his divorce. He already had two grown kids, Sarah and Ben, who liked Linda fine and were mostly glad their dad had someone to go to dinner with. When Tom finally sat down to do his estate plan, he did what a lot of people in his spot do. He left everything to Linda, since she'd need the house and the savings to live on, and he trusted her to pass along whatever was left to Sarah and Ben when she was gone. They talked it over at the kitchen table, Linda agreed, and as far as Tom was concerned, that settled it.

Tom died at 70. A few years later, Linda married again, a retired engineer she met through friends, and at some point she updated her own trust to provide for her new husband and a nephew she was close to. When Linda died, Sarah and Ben found out the way a lot of families do, from a trustee's notice in the mail, that none of their dad's money was coming to them. Linda didn't steal anything, and nobody broke a law. Tom had given her everything outright, and once it was hers, the choice about where it went next was hers too. (Tom and Linda are fictional, but estate planners will recognize this pattern.)

Photo by Bin Thieu on Unsplash 

Why the promise doesn't hold

A promise to leave money to someone, even a sincere one made at the kitchen table, usually isn't something anyone can enforce in California. Under Probate Code section 21700, a promise not to change your will has to be backed by the will itself, a signed writing, or strong proof of a real agreement. The same law says a couple who signs matching wills hasn't promised anything just by matching. Most families never write the promise down, because, between two people who love each other, it didn't seem like it needed to be.

In California, a couple can sign matching wills and either spouse can still change theirs later, unless there's proof they agreed not to.

Linda also doesn't have to do anything dramatic for Tom's kids to lose out. She might remarry and never get around to updating her plan, and if that happens, California's omitted spouse rule can give her new husband a share of her estate. That share can reach as much as half of her separate property, which is exactly what Tom's money became the day she inherited it. She might move closer to her own family and slowly rebuild her plan around the people she sees every week. She can also spend it, which she's allowed to do, since it's hers.

There's another version of this, too. A lot of couples sign one joint trust, and many of those trusts say that when the first spouse dies, everything goes into a survivor's trust that the surviving spouse can change whenever they like. That's often a perfectly good setup for a first marriage where both spouses have the same kids. In a second marriage, it can lead right back to where Sarah and Ben ended up, and the couple may never notice, since the document looks like it takes care of everyone.

How the plan can be set up instead

First, it helps to know what Tom actually had to leave. In California, each spouse already owns half of the community property. When one of them dies, only their half, plus any separate property, is theirs to give away. So Linda's half of the community property was hers either way, and the planning question is really about Tom's share.

The usual answer is to split things at the first death instead of handing it all to the survivor. Tom's share would go into a trust that becomes irrevocable when he dies. Linda could still live in the house and get the income, and the trustee could pay for her care if she needed it. Whatever was left when she died would go to Sarah and Ben. She could change her own share as much as she wanted, but she couldn't rewrite Tom's. California also requires the trustee to notify the beneficiaries within 60 days after a trust becomes irrevocable at a death and lets them ask for a copy of the terms. The kids would know where they stood from the start instead of finding out years later.

A trust share that becomes irrevocable when the first spouse dies can't be rewritten by the surviving spouse.

You might hear one version of this called a QTIP trust, which is set up to qualify for a federal tax break for married couples. Property in a QTIP trust counts as part of the survivor's estate, so it generally gets a fresh tax basis when Linda dies. If the kids sell a house that has gone up a lot in value, that can save them a good deal of capital gains tax. Some other versions of this trust don't get that second reset, so it's worth talking through with your planner and your accountant before you pick one.

Who runs the trust matters about as much as what it says. If Linda is the trustee, she has a legal duty to treat herself and the kids fairly. That's a lot to ask of someone deciding whether her new roof comes out of money that would otherwise go to her stepkids. A co-trustee, or a neutral professional trustee, can take some of that pressure off everyone, Linda included.

The other hard part is time. If Linda is 62 and Sarah is 45 when Tom dies, Sarah could be in her seventies before she sees anything, which probably isn't what Tom pictured. A lot of families handle that by giving the kids something right away. That might be a life insurance policy that names them directly, or a set gift at the first death.

Retirement accounts need their own look, because they don't follow the trust at all. Under federal law, a 401(k) generally goes to the surviving spouse. The usual way around that is a written waiver signed by the spouse and witnessed by a notary or a plan representative. A prenup usually doesn't count, since the waiver has to be signed by a spouse, and a fiancée isn't one yet. IRAs don't have that federal rule, but California's community property rules can still give a spouse a claim to part of one, so it's worth asking how yours was funded.

A 401(k) generally goes to the surviving spouse unless that spouse signs a written waiver witnessed by a notary or plan representative. A prenup signed before the wedding usually doesn't count.

The tough conversation nobody wants to have

Most people in Tom's position know this is an issue, and they put it off anyway. Asking your spouse to sign a trust that sends your share to your kids can feel like telling them you don't trust them. It often goes better than people expect. A lot of second spouses are relieved to be taken out of the middle (nobody dreams of spending their seventies as the person standing between the stepkids and their late husband's savings), and the kids usually feel better too. When everyone has seen the plan while both spouses are alive, there's a lot less room for the kind of surprise Sarah and Ben got in the mail.

If you're in a second marriage, or you're the grown child of one, it might be worth pulling out the trust and the beneficiary forms. Read them as if you were the one who outlived everybody. If you'd like a second set of eyes on what you find, you can book a time with our team.