Three Stages of Estate Planning – What is Your Plan for Each Stage?

Most of my married clients come to our first meeting with an idea of what they want to happen with their assets when they die, i.e., when they are gone everything goes equally to their kids, or fifty percent to charities and fifty percent to the kids. This is an important part of the planning process, and we eventually have a conversation about how final distribution should occur. However, final distribution is only one of the three stages of estate planning. The most common oversight I see from clients is that they don’t discuss or plan for what can be the most complicated stage; What happens to the assets when one of them dies, and the other survives? What are the options? For many reasons, primarily that it is unpleasant to think about and uncomfortable to discuss. The first time couples address this issue is when confronted with it in that first meeting.

The first stage of Estate Planning for a married couple, and generally the least problematic, is when both are alive. If you have implemented a joint revocable trust as part of your estate plan, assets get retitled to the trust with each spouse as a co-trustee retaining the same control over those assets as they did prior to transferring to the trust. Essentially, the only thing that changes during this stage of planning is the title on the assets transferred to the trust (title to their home), or the beneficiary designation on those assets transferring to the trust at death (life insurance).

The second stage of Estate Planning is when one spouse has died and the other is alive. Statistics tell us that both spouses rarely die at the same time. If that does happen, we skip this stage and go right to stage three, final distribution, but because it is more likely that one dies first, we have to discuss what should happen in that situation.

Have you ever considered what happens to your half of the estate if you are the first spouse to die? Almost always, both spouses answer the question by saying that everything goes to the surviving spouse. While this seems obvious, it doesn’t address the issues. If you are the first to die, what control over your half of the estate does your spouse have and why does it matter? A lack of thorough planning can have many unintended consequences. What happens if your spouse gets remarried or is in a new relationship. Does your spouse have the ability to give your half of the estate to their new spouse or a significant other? What happens if there are children from a previous relationship? How do we keep your spouse from intentionally or unintentionally disinheriting your children, OR how do we keep your children from pestering your spouse because they think he or she is intentionally misusing or wasting what will become their inheritance?

If you leave everything to your spouse in a way that does not protect against these issues, you may be creating a more problematic issue for everybody, and your children may get unintentionally disinherited by your lack of planning. Let me be clear here, it’s not that you do not trust each other, it’s that we do not know if we can trust who could be coming into your lives down the road. Most people know someone, or have seen or heard about a situation, where after one spouse dies, the surviving spouse got into a new marriage or relationship and the assets left behind by the deceased spouse went to the new boyfriend/girlfriend/spouse. With some well thought out planning, these issues can be prevented or mitigated.

As part of our design process we discuss issues of how you can give access to your half of the estate to the your spouse during life, but prevent them from giving it all away to a new spouse or to their own kids; and how you can give your spouse access to the assets and reduce the need for your children to complain about what your spouse is doing with the assets and wasting their inheritance. We address these issues, lay out the potential solutions, and help you evaluate the pros and cons of those solutions. Generally, the solutions include holding your half of the assets in a trust for your spouse that gives your spouse as much, or as little, access and control of the assets that you want them to have, while also making sure to protect the assets so they go where you intend them to when your spouse dies. These solutions may also include having a third party be involved as a co-trustee of this trust to provide assistance to your spouse in managing the trust and provide oversight to make sure the distribution terms of the trust are being followed.

Once we have addressed the potentially complex issues in the Second Stage of Estate Planning, we can address what most clients initially came in for, where all the assets go when they are both gone. While there are many ways distribution could go, there are a few commonly used practices.

The most common is that the beneficiaries get their inheritance outright with no strings attached, or they get it outright, but it’s distributed at various ages (25-30-35). They get a check or wire transfer and go on their way with no additional oversight or guidance from you. There are times when this makes sense and is the best option. But this does not allow for you to protect your beneficiaries from others, or themselves, and it doesn’t allow you to Leave a Legacy, rather than just an inheritance.

Another method is to hold the share for the beneficiary in Trust. This means that your named beneficiary gets to be the beneficiary of a sub-trust (a trust written inside your trust) set up just for them. This allows you to provide some guidelines on how and for what purposes the beneficiary can access their trust, and also allows you to protect the beneficiary’s inheritance from others. This trust has protection from creditors, the biggest of which is an ex-spouse. Some questions to consider when planning for the third stage are: How much do you trust the beneficiary to manage the inheritance, does the beneficiary have any issues that would require limited access to their inheritance (i.e., alcohol, drugs, gambling), is the beneficiary married and how much do you like or trust the spouse?

For additional discussion on planning for this third stage I recommend you review some additional articles available on our website: “Planning with Purpose” and “Passing Wealth to Junior”.

If you have any questions about how we can help you plan for the Three Stages of Life in Estate Planning please call our office to schedule a free consultation 480-515-3716.