The Three Goals of Living Trust Management after the Death of Your Spouse

After the death of one’s spouse, there are three goals that must be achieved in order to have a successful Living Trust.

Goal 1: The first goal is to protect your ownership and control of your Living Trust assets for the remainder of your life. In other words, if you become incapacitated to the point that you cannot manage the Living Trust assets, you want to be sure that some good person will step in as your lifetime agent to use the funds for your benefit, and not run off with them to Brazil during Carnival.

Goal 2: The second goal is to make sure that your deceased spouse’s share of the Living Trust assets will not be diverted by you, the surviving spouse, to your new boyfriend, your new girlfriend, your new spouse, or your new spouse’s children from his or her first marriage. In other words, while you may want to divert the Living Trust assets from your bloodline, I can tell you with all certainty that your deceased spouse does not want to see that happen.

Goal 3: The third goal is to capitalize on the opportunity your Living Trust gives you to save estate taxes for your children after your death. In other words, you have to implement provisions in your Living Trust now—during your life—to make sure your children pay less estate tax years later when you die.

In order to help your Living Trust achieve these goals, I need to meet and confer with the surviving spouse on at least an infrequent basis. But as you can well imagine, many surviving spouses are consumed by grief and unable to deal with any type of business matter. As such, the most important issue initially becomes Goal 2, which is the focus of this chapter. After all, we do not want a grieving widow or widower to suddenly be taken advantage of, especially when it comes to diverting assets away from your children and your first spouse’s intentions.

Does Your Deceased Spouse Approve of Using Half of the Living Trust Assets to Support Your Second Spouse?

When your spouse died, you came into full control of both halves. You get the income from both halves. You get to dip into the principal of both halves. You get to wheel and deal with both halves. You have the power to use your deceased spouse’s half any way you want. This is consistent with all normal expectations of husbandand-wife assets.

This sounds like a pretty good arrangement for you, the surviving spouse, but not so much for your deceased spouse. Why? Because having the power to do anything you want with your deceased spouse’s half includes the power to leave that half to your new spouse, girlfriend, boyfriend, caretaker, or significant other. That ghostly whisper you hear over your shoulder is your deceased spouse saying, “Honey, you can do whatever you want with your half. But I don’t want my half to end up with some opportunistic trollop. Make sure you leave it to our children.”

Remarriage among widows and widowers is commonplace. After spending a lifetime with your spouse, you don’t want to be alone, unless you crave your new solitary life where you can focus totally on your own needs and desires. Thus, even if you do not realize it now, you may remarry, and your new second spouse will probably become the primary focus of your existence.

It is hoped that your children (whom I refer to in this chapter as your “first children” because they are the product of your first marriage) will be happy for you when you marry this second spouse. They will revel in the knowledge that you will not be alone for the remainder of your days. But let me give you a taste of reality from the trenches. In the many situations I have encountered when my surviving spouse clients have remarried, I run into many first children who are happier for themselves than for their parents. Why? As one first child put it so succinctly: “Mr. Condon, I can’t tell you what a relief it is for me that Dad hooked up with a new wife. Now he has an automatic caretaker! If he becomes incompetent, she can schlep him to the doctors. She can change his diapers. Then I can be free to do my thing, which is skiing, surfing, and tennis.”

Such a lovely sentiment. When I hear such words from my clients’ first children, I always wonder what family baggage came to bear that caused them to effectively divorce their parents at the time when their parents needed them the most. But what goes around often comes around. There is no such thing as a free lunch. The first children whose euphoria stems from the fact that you remarry will soon wake up to the fact that they must now compete with your second spouse for the Living Trust assets.

Is this a valid concern? You betcha! Your Living Trust has a provision that states, in essence, that you have the power to change the inheritance instructions. If you love your second spouse, and if your relationship with your first children has flattened over time, it is only natural that you would want to change those instructions to name your second spouse as a beneficiary.

Every week, I get a call from first children who are scared to death that their surviving parent will leave all the Living Trust assets to their stepparent. Sadly, there is nothing the first children can do to prevent this occurrence. If the surviving parent wants to cut them out of the Living Trust, it can be done because of the surviving spouse’s complete power and control of the Living Trust assets.

However, your first children will be relieved to know it’s not a done deal. There are certain protective plans that can be built into your Living Trust that takes away the surviving spouse’s power to amend the deceased spouse’s half of the Living Trust in any way that affects the first children’s inheritances. But these protective plans have to be put into the Living Trust when you and your spouse first established it together.

Are there any protective plans in your Living Trust? Did you even discuss this issue with your attorney before you and your spouse signed it? Perhaps your attorney was not experienced enough—or too busy—to suggest the possibility of the Living Trust assets being diverted from the bloodline by the surviving spouse.

Or perhaps your attorney did raise this issue with you and your spouse, but you dismissed it. Like many of my clients, you may rely on faith that the surviving spouse will “do the right thing” and make sure all of the Living Trust assets ultimately go to the first children. Regardless of the reasons, you must remember this important message: The possibility that your children may suffer some inheritance loss because of the remarriage of a surviving parent is something that must be discussed and considered between you and your spouse at your first Living Trust meeting.

Fretting and Hoping—by Your First Children

Now that your spouse is dead, what can your first children do to prevent you from diverting your deceased spouse’s half to your second spouse if you have a Living Trust without any protective plan? Really, all they can do is hope that you and your spouse recognized this issue and put in the appropriate provision in your Living Trust to limit the surviving spouse’s ability to change the inheritance instructions of the deceased spouse’s half.

If your Living Trust does not have any protective plan, then you are the owner of both halves, and your first children must lie awake at night fretting about the possibility that you will divert their inheritance to your second spouse, and hoping you will do the right thing. As my father used to say, sometimes you run into problems that have no solution. In this case, I suppose fretting and hoping is the only remedial measure your first children can implement.

Preventing Your First Children from Fretting and Hoping So They Can Get Some Sleep

For purposes of carrying this admonition all the way through, let’s assume that your Living Trust does contain a protective plan that prevents you from messing with your deceased spouse’s half. What, then, are those plans and what are their effects?

One protective plan simply requires that on your deceased spouse’s death, the deceased spouse’s half will go out of the Living Trust and directly to your first children. The outright distribution of your deceased spouse’s half to your first children absolutely guarantees you will never get your grubby mitts on it. Of course, you, the surviving spouse, would be deprived of the use of that half, and you would never sign a Living Trust that does that. After all, the goal is ensuring that the deceased spouse’s half ends up with the first children, not impoverishing the surviving spouse.

Instead, the more acceptable protective plan (at least, to you) is the transfer of the deceased spouse’s half to a “marital trust.” The marital trust is not contained in a separate document. It’s part of the inheritance instructions of your Living Trust.

In the marital trust, it is stated that you, the surviving spouse, receive all the income from your deceased spouse’s half, and you have the right to dip into the principal for your health and support. Later, when you die, your deceased spouse’s half goes out of the marital trust and to your beneficiaries.

What about the half of the Living Trust assets belonging to you, the surviving spouse? Can that be controlled in the marital trust as well? No. Your half belongs to you, and you are free to do anything with it. Leave it to a new spouse. Leave it to a significant other. Leave it to your first children. Spend it. Throw it in the street. The fact is, no one and no trust can control what the surviving spouse does with the surviving spouse’s half, except the surviving spouse.

Therefore, if you, following your spouse’s death, need to marry someone so you won’t be alone or to provide you with a caretaker you can call upon at all hours, or because you cannot find your way to the kitchen, you can reward your second spouse with your half on your death, and there is nothing to prevent you from doing so. But with a marital trust, you will not have the power to leave your deceased spouse’s half to your second spouse, much to the relief of your deceased spouse and your first children. With the marital trust, your deceased spouse’s half of the Living Trust assets is protected from you, while still providing economic value to you.