Estate Planning for Second Marriages
A recent case (pdf) decided by the Tennessee Court of Appeals highlights the challenges of planning for spouses involved in a second marriage, especially when both spouses have children from a prior marriage. The children of the first spouse to die generally do not fair well.
The case involved Mr. and Mrs. Reinhart, who both had 2 children from a prior marriage. When Mr. Reinhart died, his entire estate went to his widow. Before her husband's death, Mrs. Reinhart had prepared a Will which left her estate in 4 equal shares to the children if her husband predeceased her. After her husband died, Mrs. Reinhart changed her Will to leave her entire estate to her two children. The stepchildren were not successful with their attempt to overturn the change that had been made to Mrs. Reinhart's Will.
I was not involved in the case, but I would venture a guess that the Reinharts had an "understanding" that the survivor would treat all 4 children equally. I have heard this plan many times before. It is a simple and beautiful estate plan when it works. Regrettably, what happened with the Reinharts occurs frequently. It is natural for a widow or widower to spend more time with their own children than with their stepchildren. The children are often successful in persuading their parent to change the parent's Will in their favor.
Another concern is the potential remarriage of the survivor followed by a significant transfer of assets to the next spouse. If this occurs, the children of the survivor can also lose their inheritance.
Estate planners are very well aware of the dangers of planning for couples in second marriages. The problem is that there are drawbacks to all potential solutions that we can recommend.
My preferred solution is to give the children of the first spouse to die a significant portion of their inheritance at the first death. In some cases, this benefit is funded by life insurance. The survivor can then leave all or most of their estate to their own children. This solution might generate estate taxes at the first death and may not be feasible if it does not leave enough assets to take care of the survivor for their remaining lifetime.
Another solution is to put a significant amount of assets in a marital trust for the survivor. There are a variety of safeguards that can be used to ensure that the trust is not depleted during the survivor's lifetime. These safeguards are often disliked by the survivor. The trust arrangement puts the stepchildren in the position of "waiting" for the survivor to die. I have been involved with a lot of these trusts where the survivor and the stepchildren were all unhappy with the arrangement.
My least favorite solution is for the spouses to enter into a contract that requires the survivor to treat the children equally. At best, this gives the children of the first spouse to die a chance to sue their stepsiblings if they are not treated as outlined in the contract.
Married persons who have children from a previous marriage must plan carefully if they want to provide for their children and spouse without pitting them against each other.