We all want the best for our loved ones after we’re gone. For many, that’s the whole point of doing estate planning. And it’s why you seek the advice of a Trusts and Estates professional – to ensure you produce a thoughtfully-crafted plan to provide for the financial wellbeing of your surviving spouse or partner, and after their death, to pass any remaining assets on to the other beneficiaries you’ve designated as heirs to your estate.
But what happens to my estate if my wife, husband, or partner remarries?
Many of us hope our life partners will find love again after we pass, particularly if they’ve nursed us through a long illness or we leave the scene tragically young.
Reasonably though, you may not want the money, property, or other assets you had set aside to take care of your spouse to go to their new spouse, should that person survive them or, unhappily, they divorce. You might prefer the assets remaining in your estate bypass the new spouse and go to your children, parents, siblings, or a charitable cause.
Is there any way to ensure your wishes will be followed long after you are gone? Of course! With careful estate planning tools, like a testamentary trust, you decide who gets what, when.
What follows is a brief overview of testamentary trusts and how they can work for you:
1. What is a testamentary trust?
A testamentary trust is a financial vehicle or a contract that holds your assets “in trust” on behalf of your designated heirs or beneficiaries. Established through your last will and testament, think of your testamentary trust as a box that holds your property and other assets, and from which the contents are dispensed according to the rules you have written.
2. Who benefits?
The heirs you designate, when, how, and in what quantities you decide. You can set up a testamentary trust for the benefit of your children, other minor beneficiaries, or for an heir who may not be capable of owning or managing money or property. It could be your pet, a charity or charities, or, in this case, your surviving spouse or partner.
Testamentary trusts are just one way to distribute your estate as outlined in your will. You can give your assets to your heirs outright, or you can hold those assets in the trust to be used specifically for the benefit of your intended beneficiary.
The trust itself is simply a series of rules that describe where your property should go (to whom) and how it should get there (right away, over time, at a specific age, etc.). In your trust, you can name beneficiaries (first in line recipients) and contingent beneficiaries (those heirs who inherit only after, say, your spouse dies). Your trust can include a schedule of distributions, acceptable uses of trust funds (to buy a Honda Civic, but not a Rolls Royce), and rules for managing any undistributed funds.
You can use a trust to funnel as much money as necessary to support your spouse during their lifetime and then change the direction of the flow to your children or some other beneficiary after your spouse passes. You can do this now in your estate plan and “watch” the action from afar, beyond your grave.
3. Why not give my property to my heirs right away?
Unlike an outright bequest (“Here’s the money. Have fun!”), a trust provides an opportunity to control the disposition of any remaining property after your primary beneficiary passes. To put it plainly, if you die and leave $1 million outright to your partner, when they pass, whatever portion of that million went unspent goes to whomever and wherever their will assigns it. Or, if your surviving spouse doesn’t have a will, any remaining assets will go through “intestate distribution,” which may not align with your goals for the money.
Giving your spouse the money outright might be appropriate, assuming their plans and situation haven’t changed since you passed. But what if your widow has remarried, goes on Medicaid, or has a change of heart about who should get what now that you’re dead? What if they decide to bypass your intended secondary beneficiaries entirely?
If the money has been held in trust for the benefit of your spouse, then after they pass, your intended secondary distribution will not be affected. Additionally, depending on who you have named to be the trustee (the person designated to manage the money), there may be significant asset protection benefits.
4. Who oversees my trust?
Your trustee will oversee/administer your trust. They are the person you’ve selected to manage and disperse the money in your estate held in trust for the benefit of your spouse. Your trustee should be a person whose judgment with money management and investing you trust, and who you believe will be sensitive to the needs of your beneficiary (your spouse or others).
Generally, I advise my clients to name their surviving spouse as their trustee. The expectation is that your spouse will know what they need and when they need it. Plus, it removes the potential for awkwardness if your spouse has to ask someone else for money (even when the money is there for their benefit).
However, sometimes, assigning your spouse to oversee their trust isn’t always the best option. Trusteeship exists on a spectrum of accessibility and asset protection. Having a third party serve as your trustee can afford some additional protections – like the firewall protection on your computer. For example, the more easily some trust beneficiaries can access the funds, the more susceptible they may be to potential plaintiffs, creditors, or other ne’er-do-wells. The more controlled access to the funds is, the more protected they are. This is a decision balancing pros and cons that each client must make for themself, but it’s one that I’m more than happy to discuss and help you evaluate.
Some alternative choices for a trustee might be a sibling of your spouse, an adult child, or even an institutional trustee. Each of these comes with its own set of benefits and drawbacks, but you’ll almost certainly be able to find an option that works for your needs. Whichever you choose, one thing is clear, as with every person you appoint to some task in your will, it is critical to name a successor. A successor trustee can help manage the funds for your spouse’s benefit if they become incapacitated or if they need to step down to create more asset protection. We do not know what the future holds, but one way we can fight against the chaos is to anticipate the monkey wrench thrown into your plans that will come. Helping you anticipate where those wrenches may fly in from is precisely why one retains the counsel of a skilled trusts and estates lawyer.
If you have more questions about how a testamentary trust works, who to consider when deciding on a trustee, or the general process of creating an estate plan, let’s talk. Our team is happy to discuss any aspect of the estate planning process and assist you through every stage. Give us a call at 212-867-9120 or use the contact form below to schedule a no-cost consultation today.