The Need For Proper Estate Planning In Second Marriages
Researched and written by Tammy Chavez, third year law student at the University Of Dayton School Of Law, and a former law Extern for our Firm.
Estate planning Plays A Crucial Role For Second Marriages
Nowadays, second marriages are not uncommon. In fact, 40% of all new marriages involve remarriages. Regardless of the reason for remarriage, estate planning is more important than ever for second marriages. Estate planning plays a crucial role for second marriages, in ensuring a person’s assets are distributed according to his/her wishes.
In order to relieve some of the confusion surrounding estate planning with second marriages, I had the opportunity to discuss this confusing topic with Holzfaster, Cecil, McKnight & Mues’ very own specialist in Estate Planning, Trust and Probate Law, Mr. Joseph Balmer.
In interviewing Mr. Balmer, he stated “three things that I always want to look at are: (1) are we looking to take care of the spouse during her lifetime while also preserving assets for the children of a prior marriage? (2) How do we need to title assets to accomplish our objectives? (3) Do we need to consider estate tax issues?”
With those three things in mind, we will follow our friends Gary and Linda through their estate planning issues. Gary and Linda were married in June 2016, for both their second marriage. Gary has a $100,000 estate by which he intends to provide Linda with $10,000 and the remaining $90,000 to be divided amongst his three adult children from a previous marriage.
Let’s take a look at some pitfalls Gary may face and ways to accomplish his goals.
- Surviving Spouse Statutory RightsGary dies without a will.
Let’s assume Gary died January, 2017 without a will. What happens to Gary’s $100,000 estate? Who is entitled to receive money from Gary’s estate? And how much?
We have two main issues to tackle in order to determine how Gary’s estate will be distributed: family allowance and intestate succession.
Under §2106.13, Linda and/or Gary’s children are entitled to a family allowance of $40,000. The family allowance is to help support the surviving spouse and children. Since Gary’s children are adults, under §2106.13(B)(1), Linda is entitled to the entire $40,000. The family allowance is taken from the total estate first.
Now what happens with the remaining $60,000? Let’s find out!
O.R.C. § 2105.06 dictates what attorneys refer to as intestate succession, which simply means the distribution of a person’s assets when the person dies without a will. There are several ways assets can be distributed under this statute mainly dependent on whether the second spouse, in our case Linda, is also the natural or adoptive parent of any of Gary’s children. For example, § 2105.06 (D) provides the surviving spouse with “the first twenty thousand dollars if the spouse is the natural or adoptive parent of none of the children, plus one-third of the balance of the intestate estate to the spouse and the remainder to the children equally.”
What does this mean for Gary and Linda?
Under the statute because Linda is not the natural or adoptive parent of Gary’s children, Linda is entitled to the first $20,000 plus one-third of the estate balance. So if we calculate the math correctly, Linda would be entitled to $20,000 plus $13,333 (one-third of the remaining $40,000), a total of $33,333 under this section.
What is the end result?
At the end of the day, Linda is entitled to receive $73,333, which includes the family allowance. This means Gary’s children would have to share the remaining $26,667, leaving them with approximately $8,900 each. If this is what Gary wanted, that is great; if not, proper estate planning could have prevented this result.
Gary dies with a will.
Now let’s assume Gary dies with a will. Gary’s will provides Linda with $10,000 and the remaining $90,000 to be divided amongst his three adult children from a previous marriage.
It all seems great now, right? Wrong!
Ohio law grants Linda a number of statutory rights which may provide financial resources over and above those that may be available to Linda pursuant to Gary’s will, or the laws of intestate succession.
For example, Linda has the option to elect under or against the will. This means that the surviving spouse can elect to receive (1) according to the provisions of the will or (2) according to Ohio’s elective share statute, §2106.01.
Linda elects against the will.
If Linda elects against the will, Gary is treated as having died without a will, which means the intestate succession statute applies subject to the limits set in the elective share statute. Ohio’s elective share statute creates a number of problems for those who die without a proper estate plan. Gary’s and Linda’s situation is a common example.
What is the result?
Linda and/or Gary’s children are entitled to a family allowance in the amount of $40,000. In this case because Gary’s children are adults, Linda is entitled to the entire $40,000. Therefore, the total estate amount after the family allowance is now $60,000. Thus, Linda is entitled to receive one-third of the remaining $60,000 in addition to the family allowance. As a result, Linda would receive a total of $60,000 ($40,000 family allowance plus $20,000).
The remaining estate of $40,000 would then be distributed to Gary’s three children. Each child would receive approximately $13,000. As a result, Gary’s children will receive less than half of the money Gary intended to leave them. This is clearly not what Gary intended, however because Ohio’s elective share statute this result is quite possible.
Linda takes under the will.
By Linda taking under the will she is entitled to $10,000 plus the family allowance. Therefore, Linda is entitled to a total of $50,000 ($40,000 family allowance plus $10,000), and Gary’s children would share the remaining $50,000. Gary’s children would receive approximately $16,600 each, when Gary clearly intended for them to receive $30,000 each. Again, Gary’s intentions are defeated.
As both examples make clear, whether the surviving spouse takes against or under the will, Ohio law provides the surviving spouse with a number of statutory rights that can defeat a person’s wishes. Gary could have avoided these undesired results by properly titling his assets and having an estate plan.
Let’s look at two options: titling assets and QTIP trust.
- Titling AssetsTitling and estate planning is key in order to avoid undesired results. For example, assets that are owned “joint with right of survivorship” will automatically pass directly to the survivor. So if Gary and one of his children, Paul, owned a property as “joint owners with right of survivorship”, upon Gary’s death, Paul automatically becomes the sole owner.In addition, assets with a beneficiary designation will go directly to the named beneficiary. These assets will in fact not become part of the probate estate and process. As discussed in the previous section, assets do not always end in the hands of the will’s intended beneficiary. Titling eliminates this risk and ensures that the asset will be transferred to the intended beneficiary.Let’s use Gary and Linda to help us break this down. Again, Gary has a $100,000 estate upon death. However, this time, Gary set up payable on death accounts (PODs) for his children, $30,000 each. Gary’s will again devised $10,000 to Linda. In this case, the $90,000 will not go through probate and will be out of Linda’s reach. Therefore, even if Linda elects against the will, she would not be able to acquire any of the $90,000 as that money has technically, upon Gary’s death, been transferred to Gary’s children and is not part of the probate estate or process.
Gary would be very happy with this result!
Titling can truly help parents protect their children and ensure that they will be provided for as intended.
- QTIP Trust and Estate TaxesAnother option Gary has is to create a Qualified Terminable Interest Property (QTIP) trust. QTIP trusts are commonly used in second marriages. QTIP trusts allow spouses to provide for their current spouse and children from a previous marriage.With a QTIP trust, the surviving spouse receives a life estate in the assets that are titled and left to the QTIP trust. This means that the surviving spouse is entitled to any income the assets produce and to use the real property. However, the surviving spouse does not inherit the assets or property, rather the surviving spouse only has the ability to use the property and receive benefits from the assets for the remainder of his/her life.It is important to note that these assets do not become part of the surviving spouse’s estate. The children from the first marriage can and often are the final beneficiaries. Upon the surviving spouse’s death, the assets would be transferred to the children instead of the “stepparent’s” estate, family or new spouse.
Wow, what does this mean?
Let’s assume that Gary created a QTIP trust. In addition to his $100,000 estate, Gary titles his rental property to the QTIP trust. Linda will not become the owner of the rental property. Rather, Linda will receive the income, payment of rent, for life. Upon Linda’s death, the rental property would be transferred to Gary’s children. The rental property does not become part of Linda’s estate because she is not the owner. This arrangement provides children and parents with security that the children and surviving spouse will be taken care of.
In addition, QTIP trusts provide estate tax benefits, such as marital deductions, and can help reduce the overall tax paid between both spouses. As of 2016, the estate and gift tax exemption is $5.45 million per individual, meaning $10.9 million per married couple. However, “more than 99.5% of all estates are not that valuable and do don’t owe any estate federal tax.” Thus, the most essential purpose of a QTIP trust is to provide parents with the confidence their children will be taken care of.
Adequate Estate Planning Plays Crucial Part In Second Marriages
Estate planning is crucial, even more so in second marriages. As Gary and Linda’s examples made evident, without adequate planning or no planning at all, the results can be contrary to YOUR wishes.
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Robert L. Mues
Robert Mues is the managing partner of Dayton, Ohio, law firm, Holzfaster, Cecil, McKnight & Mues, and has received the highest rating from the Martindale-Hubbell Peer Review for Ethical Standards and Legal Ability. Mr. Mues is also a founding member of the "International Academy of Attorneys for Divorce over 50" blog.