Question: I am a 71 year-old widow, and I plan to marry a man eight years younger than I. While I have been told by my lawyer and family to get a premarital agreement, I have not brought it up because I am afraid talking about this topic will ruin our relationship. Yet I want to make sure my three children by my deceased husband receive their fair share. My biggest assets are a home, some cash, and several IRA’s that I received when my husband died. I also receive a tax-free amount each month from a structured settlement because my husband was killed in an automobile accident. This money will last for 15 more years at a minimum. Are there ways for me to transfer my assets and prepare a will that protects my children without a premarital agreement yet treat my husband fairly?
Answer: Although premarital agreements are certainly not for everyone, they are sometimes necessary to not only spell out what happens in the event of a separation or divorce, but also if you predecease your new spouse. We do not suggest that you gift your assets to your children because you will lose control and create potential tax problems.
That said, there are a number of ways in which you can position your property to protect it, but the planning process will depend on the law of the state where you live and is much too complex to be covered here. For example, if you transfer your assets into a revocable trust to try to keep your spouse from getting part of your estate, the courts in some states will look through the trust as if it did not exist because you still control the assets. On the other hand, if you transfer assets into an irrevocable trust, you may be able to keep these assets away from your spouse when you die, but you give up control over your properties during your life and could trigger taxation problems you may not expect.
Again depending on where you live and whether or not you will have a taxable estate, a good middle ground might be to consider a will that includes “qualified terminable interest property” (QTIP) trust provisions. In this way, you can not only give your spouse an income interest in certain properties during his life and direct where the balance goes at his death, but also pass the majority of your assets to your children at your death. In this way, you will not only retain control over the final disposition of your assets, but also make sure your children are protected – even if your second spouse remarries after your death. You could also make your children the beneficiaries of your IRA’s.
However, if talking about financial issues before you marry will sour your relationship and if your are looking for ways to preserve your assets which do not need to be discussed with your future spouse, we suggest that you think twice about becoming permanently attached to this gentleman as this does not appear to be a good way to start off a new relationship on the right foot.
Taking the NextStep: Since there are martial deduction and other tax-related issues involved, you should not even think about doing this type of planning without the help of a qualified estate planner, especially true if your largest assets are IRA’s. In order to qualify for the marital deduction, the QTIP trust must distribute all income to your surviving spouse at least annually; however, IRA and 401(k) payout options are usually based on life expectancy. This means that if the retirement plan distributes less than its full annual income to the trust, all the money in the plan is disqualified from the marital deduction, the trust will not qualify as a QTIP trust, and estate taxes will be owed.