Avoid Second Marriage Estate Planning Problems

A second marriage can create estate planning challenges for the family business owner. Tension between the desire to pay estate tax only on the death of the second spouse and the desire to benefit children of a previous marriage can often create an awkward estate plan.

A family business owner may defer the payment of estate tax on his or her estate by leaving all but $600,000 (currently) to the surviving spouse. If the surviving spouse is not the parent of the children, it’s possible that the children from the prior marriage may never receive their inheritance.

A QTIP Trust to the Rescue
One solution is to use a qualified terminal interest property (QTIP) trust. Generally, a QTIP trust provides that income must be paid to the surviving spouse, but the principal is preserved for the other heirs. A QTIP trust is useful when the surviving spouse is of the same generation as the family business owner, because it increases the probability of the children and other heirs receiving the intended assets from their parent.

When the children from the prior marriage are the same age or older than the surviving spouse, using a QTIP trust may defer the payment of estate tax, but will not help the children get the use of the property for any significant time during their lifetimes.

Strategies to combat this problem depend on each situation. One strategy may be to purchase life insurance on the single life of the family business owner to pay estate tax on death and allow the family business owner’s children to inherit at that time. Make sure that if the estate tax is to be split between the surviving spouse and the children from the prior marriage, that additional insurance is purchased to cover the extra estate tax that may be due resulting from taking part of the tax out of the marital share.

Charitable Lead Trusts
Another strategy is to use a charitable lead trust, which may be a good tool when the decedent has wealth and the second spouse cannot help in the use of of the marital deduction. Here, the family business owner may place appreciating assets in a trust paying an annuity to charity for a period of years. After this term is up, the appreciated assets go to the heirs. The charitable gift will reduce the portion of the assets subject to estate tax to possibly zero. The heirs then get the property back.
In addition, a family business owner may strike a deal with the surviving spouse to use the deceased partner’s unified credit during his or her lifetime to give tax-free assets to the heirs in exchange for future considerations or for no consideration if he or she otherwise would not need it.

Gift-Splitting
Though the second spouse may not have a relationship with the business owner’s children, that spouse should agree to gift-split on present-interest gifts to them. This will allow the owner to double gifts made (up to $20,000 per donee) without a tax detriment to the second spouse. With early planning, a significant amount of wealth can be directed from the parent’s estate to the children and grandchildren. Gift-splitting avoids the need for transferring assets prior to gifting.

GST Planning
If the owner wishes to skip a generation in gifting, the second spouse can give the $1 million generation-skipping exemption to the business owner so he or she can make the gifts. Though this may create a tax detriment to the second spouse, it generally won’t pose a problem if that spouse is not independently wealthy enough to use the exemption.

Prenuptial Agreements
Finally, you may want to consider prenuptial agreements. They can play an important role in how assets are distributed to the surviving spouse of a second marriage.

Call us for more information on the many options available.