Protect Heirs from 2nd (and later) Spouses

Protect Heirs from 2nd (and later) Spouses

By: Martin M. Shenkman, CPA, MBA, JD

Anna Nicole Smith, widow of 89-year-old Billionaire J. Howard Marshall, continues her battle for a piece of his estate. The Supreme Court recently ruled in favor of Anna Nicole, and she will likely have a new hearing in front of a lower court to address the substantive issues of her case. Although everyone is focused on the glitz and dollars (all $1.6B) there are valuable lessons in this case.

There are specific steps even average families can learn from this case to protect themselves and their heirs. While Anna Nicole may be the most talked about case, these issues affect women and non-married partners as well, and so caution is the recommendation for all:

  • Sign a pre-nuptial agreement and do it right: each party should have his or her own attorney. When discussing the terms of the pre-nuptial agreement, there should be complete financial disclosure between the parties. If an engaged couple is hesitant to share all information, this may be a sign of problems to come. All financial information should be discussed and dealt with well in advance of the wedding.
  • Sign a will clearly stating what is intended for the new spouse. Wait six months. Re-visit the will, making changes to other provisions, but leaving the bequest to the new spouse intact. Sign the new will. Save the old wills to demonstrate a consistent pattern of distributions to the new spouse.
  • Have a trust set up for your new spouse. This can give him/her the right to distributions from the money, but assure the remainder reverts to your family. Consider using a uni-trust payment arrangement (e.g., 5% of principal paid to your new spouse each year). This approach can protect your new spouse and children who receive the trust assets on his/her later demise, while enabling your trustees to invest using an asset allocation model that benefits all parties.
  • If there is a change from the pre-nuptial agreement, e.g. favoring the new spouse, have your matrimonial counsel amend the prenuptial agreement, using all appropriate formalities. Revise your will and other estate planning documents to confirm these wishes. It's important that all documents are consistent to minimize future problems and to ensure that your intentions are fulfilled.
  • Have your new spouse waive any rights under state law to claim a specified portion of your estate (called spousal waiver of right of election).
  • Don't video tape your will signing. Contrary to popular belief, video tapes can often be used by a forensic expert to undermine your position!
  • Sometimes, there are easier steps to keep everyone happy. If health and age permit, insurance can be used as the great equalizer. Example: Set up a life insurance trust to own enough life insurance to provide for your new spouse, and then leave your estate to your children. That way, you know that after you die, everyone is taken care of.
  • Don't forget, it's not only about a will. What if you designate your new spouse in a form durable power of attorney as your agent? Some form powers of attorney permit gifts without limit, and the right of the agent to change beneficiary designations. If you become incapacitated, might your new spouse make gifts to himself /herself and name himself/herself as sole beneficiary on your retirement assets. Powers of attorney can be very powerful documents.
  • Watch the title to assets. If you change assets to joint with your new spouse, your will won't affect those assets.
  • The tax allocation clause in your will could be critical to the ultimate disposition of your estate. Example: You bequeath half of your estate to your new partner and the remaining half to your children, but they pay the state and federal estate tax on their receipt. The taxes might shift the net effective allocation to 2/3rds your partner, and 1/3rd your children.
  • If you are already married and do not have a pre-nuptial agreement, or if time just ran out before you got married and you couldn't get the document signed, don't worry, it is not too late! Once you are married, you can sign a post-nuptial agreement to the same effect as a pre-nuptial agreement. Alternatively, you can begin more comprehensive estate planning with an attorney or financial advisor.

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