Trusts for Second Marriages

A common dilemma for many second-marriage couples is how to provide for a surviving spouse while ensuring that assets ultimately go to the deceased spouse’s children.  If the deceased spouse’s assets go to the surviving spouse, there is no guarantee that those assets will transfer to the deceased spouse’s children upon the death of the surviving spouse.  Trusts often provide a good solution to this problem.

Trusts can be used to provide income to the surviving spouse while ensuring that the assets are ultimately inherited by the deceased spouse’s children.  Because the surviving spouse will never own the assets, the surviving spouse cannot redirect to whom those assets will go.  The trust can hold the deceased spouse’s assets in trust for the surviving spouse’s life, thus providing income.  Then, at the surviving spouse’s death, the assets are distributed to the deceased spouse’s children.  Consider the following example:

Mark establishes a trust with the following provision: “Upon my death, my assets shall be held in trust for the life of my wife, Mindy.  While held in trust for Mindy, my Trustee shall distribute all income to Mindy.  Upon the death of Mindy, my Trustee shall distribute the assets to my children.” 

This trust will provide income to Mindy but ultimately distribute the assets to Mark’s children.  Mark can be sure that Mindy receives income from the trust but can also be sure that his assets ultimately are inherited by his children and not Mindy or her children.  Mindy has no control over the distribution of assets at her death.

In some situations we may want some assets to go directly to the deceased spouse’s children at death and some held in trust.  This is very common for farm plans.  When children will be taking over the farming operation, we may not want to tie up the operating assets in trust but instead have those go directly to the farming children.  To implement this plan, a trust may have a provision similar to the following:

“Upon my death, my Trustee shall distribute all my farm machinery, grain, crops and other farm operating assets to my children.  The remainder of my assets, including my farmland, shall be held in trust for Mindy.  While held in trust for Mindy, my Trustee shall distribute all income to Mindy.  My Trustee shall offer to lease the farmland to my children for 80% of the county cash rent average.  Upon the death of Mindy, my Trustee shall distribute all remaining trust assets to my children.”

In this example, the farm operating assets go directly to Mark’s children so that they can continue the farming operation.  The only farm asset held is trust is the land, but Mark’s children have the option to lease the land at a favorable lease rent.  This strategy avoids interfering with the farming operation while holding non-operating assets for Mindy’s benefit.  Mark has met his goal of immediately transferring farm operating assets to his children while providing for Mindy and ensuring his assets will eventually be inherited by his children.

A third scenario involving trusts and second marriages may have some assets go directly to the surviving spouse, some assets go directly to the children, and some held in trust for the surviving spouse.  It may be appropriate for some assets to go directly to the surviving spouse so that they have full control over those assets.  A trust could include the following provision:

“Upon my death, my Trustee shall distribute all my farm machinery, grain, crops and other farm operating assets to my children.  All cash, investments and life insurance shall be distributed to Mindy.  The remainder of my assets, including my farmland, shall be held in trust for Mindy.  While held in trust for Mindy, my Trustee shall distribute all income to Mindy.  My Trustee shall offer to lease the farmland to my children for 80% of the county cash rent average.  Upon the death of Mindy, my Trustee shall distribute all remaining trust assets to my children.”

In this example, Mark wanted Mindy to receive some assets directly and not held in trust.    The farm operating assets are still distributed to the children immediately and the land is held in trust for Mindy’s benefit then distributed to Mark’s children at Mindy’s death.  Mark achieved his goal of having some non-farm assets go directly to Mindy, the farm operating assets go directly to his children with the remaining assets being held for Mindy’s benefit and ultimately distributed to Mark’s children.

As these examples illustrate, trusts can be very effective at establishing plans for second marriages.  The surviving spouse can be provided with adequate income while protecting the assets for the deceased spouse’s children.  A simple will-based plan or no estate plan at all can result in some or all the deceased spouse’s assets either be consumed by the surviving spouse or being inherited by the surviving spouse’s children.  A trust can be designed with a great deal of flexibility and creativity to provide a suitable farm transition plan for second-marriage situations.