Estate planning for a second marriage is different than for the first marriage. It is complicated by the fact that each spouse has brought children or assets (or debts) into the second marriage. It can be complicated further if first marriages ended in death rather than divorce, because children of the first marriage may view the inherited money from their first parent’s death as their “legacy” or “birthright.”
In reality, your children have no claim over your money. It’s yours. I think you should do what I tell my own father: “Spend it all, every penny. But if there is a nickel left over, divide it three ways.” I have two siblings on my father’s side.
Also, if we are in brass tacks, your spouse also has no claim over your separate property money and you have no claim over theirs. And you have full dominion over one-half of the community property money, as do they.
If you don’t leave a will or a trust (an intestate estate), the California Probate Code says that your spouse will get 100% of the community property and one-half of your separate property, with your children getting the other half (if you have two or more children, your spouse gets one-third and your children split 2/3rds of your separate property). Probate Code 6401.
Then, characterizing community and separate property is done in this scenario at warp speed with quite a bit of pressure (to say the least). This can be done under an all-out war posture if there is a battle between your children of Marriage 1 (who will search all of the assets to try to figure out if you had separate property interests) and your spouse of Marriage 2 (who will believe everything is community property). Litigation may ensue. If you leave a house with $1 million in equity, which in today’s California real estate market is not difficult to imagine, that will give probate lawyers a lot to fight over to justify their fees. But, if you add in a retirement asset, a lake house, a business with receivables and a life insurance policy, there may be a $3 million estate that probate lawyers will feel perfectly justified in billing $500,000 in attorneys’ fees over the three years following your death.
So, making an estate plan makes the most sense. Anyone with a reasonable amount of assets already knows that. But how do you reasonably plan when a) you aren’t sure what is the community belonging to both of you and what is the separate property belonging to each of you? If you are in a second marriage and have children or property from your first marriage, then there are issues to be worked through in your second marriage estate plan.
Let me give a couple of very common scenarios:
Scenario 1:
At the beginning of 2025, a potential new client called my office. She said she was the daughter of the Decedent Father, who had been a dentist on the Central Coast of California. He had built a practice with her mother; when her mother died after 30 years of marriage, the dental practice was healthy and strong. Decedent Father remarried a woman who worked for him about 2 years after her mother had died. Decedent Father sold the house she grew up in and bought a much larger home in an exclusive neighborhood. Stepmother’s daughter had moved into a guest house on the property. When Decedent Father died, Stepmother inherited the house as community property because her name was on the title. There were many additional issues, but let’s focus here on the house. Stepmother told my client: “When I die, my daughter will inherit it and decide what to do with it.” Daughter asked me what could be done.
Scenario 2:
Decedent Wealthy Mother dies leaving a separate property trust. The trust provides that Stepfather (second marriage of almost 30 years) can live in Decedent Mother’s separate property home (paid off before second marriage) for the rest of his life, at the expense of the trust. If Stepfather decides to move out, the trust will pay for “comparable accomodations.” Daughter is named as trustee of the trust. Stepfather moves out and remarries within 90 days of Decedent Mother’s death. How much money should Daughter set aside for “comparable accommodations” for Stepfather?
In both scenarios, there is an inartfully drafted trust that does not consider the fact that although certainly the Decedent wanted to take care of their second spouse by ensuring that they did not have to move out of the home they were accustomed to living in.
The Dentist was newly in love (with all the excitement of a widower finding love again) and bought the second wife the biggest and best house he could afford. More house than they needed probably. New wife, for her part, did not want to live in the house of memories of his first wife, and no one can fault her for that. But, if the trust drafting attorney had been thoughtful and thorough, would they not have asked whether the outcome of his untimely death what he would have wanted? Did he really want a $3 million home to go to his second wife’s daughter rather than his own daughter?
The Wealthy Mother wanted to take care of her long-term second husband by permitting him to age in the home they lived in during their marriage. She wanted him to have the security of knowing he could live in the home forever, without cost to him. That she had taken care of him. She could not have predicted that he would remarry within 90 days of her death or that he would move out and move in with his new wife or that he would ask the trust to continue to pay his “comparable accommodations” for his new marriage (his third). Setting aside the fact that there is still an obligation to take care of Stepfather written into the trust, despite his remarriage, the question was “what is comparable accommodation”? Stepfather alleges that “comparable accommodation” means full-time skilled nursing care if that is what he wants.
Thoughtful estate planning could have resolved both of these issues. In most cases, estate planning lawyers are not thorough in their planning. This is usually because they are charging a flat fee for the trust documents and they do not have the time to make a reasonable amount of money on the transaction to take the time to do it right. You should never be buying a $1,500 trust from anyone and you should definitely not be filling out a form online to make a trust.
Thoughtful estate planning for a second marriage should cost about $5,000 in addition to the $6,000 to $12,000 that you spend on a community property audit before the estate planning. Your drafting attorney should develop a full and complete picture of your community and separate property assets and then ascertain your wishes.
Scenario 3:
Both spouses are on their second marriage, approaching their 25th anniversary. They have a substantial asset portfolio of $10 million in real property and investment accounts. They each have adult children from first marriages, but none together. Each has separate property assets. Wife has more than Husband because of inheritance, but both have sizable separate property estates that neither has tried to value. Neither totally trusts the other not to leave their share of the estate to their children at the expense of the stepchildren. Perhaps it is more unease, than distrust, but they would like to create a plan that ensures that each is protected in the event of the death of the other – by “protection,” they mean, income and housing security and not having to ask their stepchildren if they can spend their own money. Each also wants to ensure that their children do not get disinherited like the Dentist’s daughter in Scenario 1. They also have a very difficult time talking about separate and community property. And they have a difficult time acknowledging that they are afraid the other will disinherit their child.
How to handle Scenario 3 is one of the major concerns in second marriage estate planning. It is, no doubt, a sensitive topic for spouses who have been together a long time to discuss the character of assets that they may have considered “ours” for decades. It is also difficult to discuss trust issues regarding children and stepchildren. Compounding that is the problem of the Wealthy Decedent Mother in Scenario 2 above, which is that she very much wants to take care of her not so wealthy husband, but wants to ensure that the assets she inherited will go to Daughter when she dies.
It is completely normal to want to care for a long-term spouse and also to protect your children’s inheritance. Most people do not want to create an estate plan by which their children are disinherited for the benefit of their stepchildren. And neither side wants to engage the “macabre gamble” regarding the first of the spouses to die. By doing nothing, the most likely outcome is that assets will move from Decedent to Decedent’s Spouse and from Decedent’s Spouse to Decedent’s Spouse’s children at the expense of Decedent’s children. Even a healthy agreement between spouses does not resolve the problem.
Scenario 4:
Second marriage spouses have a healthy and productive conversation about their estate plan and agree that whichever dies first, the other can “use” the resulting estate as though it was 100% community property, but that when the second-to-die Spouse (Spouse 2) dies, all of the money will be distributed equally between children and stepchildren. This is a lovely sentiment. It cares for Spouse 2 and provides that the children of Spouse 1 will not be disinherited.
What can we do to ensure that these wishes are effectuated?
If Spouse 2 can use the entire estate corpus in whatever way they want to use it after Spouse 1 dies, then they can simply give it away to their children while they are alive. They can sell assets like real estate at reduced prices, set up tax-advantaged accounts for the benefit of their children, even create more exotic instruments like Charitable Remainder Trusts to provide income to Spouse 2 and then to Spouse 2’s children. Nothing will stop them from giving away assets during Spouse 2’s lifetime. When Spouse 2 dies, the balance of the estate will be divided equally between children and stepchildren, but if Spouse 2 truly wants to provide for their children at the expense of Spouse 1, then the estate assets can simply be given away during the spouse’s lifetime, or moved to pay-on-death accounts naming Spouse 2’s children as beneficiaries and pass outside of the estate. The spirit of an estate plan that provides that Spouse 2 can do whatever they may want with the estate is to make sure that Spouse 2 does not have to ask their stepchildren if they can spend their own money, which is a very reasonable goal to have in estate planning (it would be demoralizing to have to ask your stepchildren if you can make an investment). The other very reasonable goal is to provide for Spouse 2, so they do not have to worry about money.
But, in giving the freedom to utilize the trust corpus any way Spouse 2 sees fit, Spouse 2 is essentially unconstrained by an agreement that Spouse 1’s children will share equally in any inheritance after Spouse 2’s death because Spouse 2 has the ability to spend or distribute or invest the money any way they see fit, including in investments that effectively disinherit Spouse 1’s children through pay-on-death benefits (think here not only of a brokerage account naming Spouse 2’s children as POD beneficiaries, but also a life insurance trust or other life insurance vehicle that we used to use to defeat death taxes – Spouse 2 pays $1 million for a $1 million life insurance policy that pays out outside the estate at death, reducing the size of the estate for taxation purposes). We are not really worried about death taxes anymore because the federal estate tax exemption is currently $13.61 million, an amount much larger than most estates.
Options:
Option 1:
Spouse 1 and Spouse 2 could do a property audit and Spouse 1 could create an estate plan that gives away Spouse 1’s portion of the community or separate property money to Spouse 1’s children upon Spouse 1’s death. This is basically a hostile act on the date of drafting of the estate plan. Neither spouse will likely feel overjoyed at the prospect of the other spouse admitting that they do not trust them or their children to follow the wishes of the first-to-die. It also undermines the fundamental reason for estate planning (in a post-death tax world), which is to ensure that one’s spouse is taken care of after Spouse 1’s death. Giving away half the assets at the death of Spouse 1, when Spouse 2 may live decades longer, undermines Spouse 2 (whichever spouse ends up being Spouse 2, because remember that during the planning phase, neither spouse knows whether they will be Spouse 1 or Spouse 2 and they are playing the “macabre gamble” that they will be the second-to-die).
Option 2:
A/B Trusts or what are sometimes called “Survivor’s Trusts” and “Bypass or Credit Shelter Trusts” were traditionally a tax vehicle. The Survivor’s Trust would hold the surviving spouse’s share of the assets, which they could access during their lifetime. The Bypass Trust essentially split the estate into two shares and held the decedent spouse’s assets up to the estate tax exemption threshold. The Bypass Trust would then bypass the surviving spouse’s estate and reduce estate taxes upon their death. Normally, the Bypass Trust contains language that a) it is irrevocable upon Spouse 1’s death and b) Spouse 2 may use all of the interest and income from the assets in the Bypass Trust but could not invade principal or corpus.
The Bypass Trust was only ever funded to the estate tax exemption threshold because it was used as a tax planning vehicle. These have fallen out of favor for two reasons: 1) most obviously, because the estate tax exemption threshold is now over $13 million and most estates do not approach that figure and 2) because the IRS allows portability, which provides that Spouse 2 can use any portion of Spouse 1’s share of the exemption. This means in practice that each spouse can use a $13.61 million exemption, raising the estate tax exemption threshold for a married couple to $27 million, a number very few estates approach.
But, A/B Trusts may serve a purpose in second marriage estate plans to resolve the problems raised by the scenarios set forth above. If the parties do a community and separate property audit, they can create an A/B Trust that splits the assets into two trusts upon the death of the first-to-die. Each spouse can entrust their separate property and half of the community property to the family trust. When either spouse dies, their share of the trust corpus is placed into an irrevocable B trust that permits Spouse 1 to use income and interest to live on, with irrevocable beneficiary designations. Spouse 2 cannot invade trust principal (or because we are not worried about estate tax exemption thresholds, could invade principal with guardrails in place) and would have full access to the A or Survivor’s Trust.
The Community Property Audit gives the parties full knowledge of their asset picture and allows them to make determinations of how they want their estate divided upon their death dependent on the overall asset picture. For example, the parties may agree that the house is 100% community property with a portable interest, so that if Spouse 2 decides to downsize, they have access to the equity, including the Decedent’s share of the equity, but the Decedent’s share of the equity will carry into the new house. If Spouse 2 needs skilled care, they could use all of the equity for that care if needed without having to ask beneficiaries of the Bypass Trust for permission. But the spouses could agree that certain accounts or other assets are part of the irrevocable B trust. In other words, because we are not tax planning at the estate tax exemption threshold, but planning inheritances for children and stepchildren while taking care of the second spouse, we are free to make whatever arrangements will both care for Spouse 2 (in a world in which neither spouse knows at the time of estate planning which spouse will be the first-to-die) and provide for Spouse 1’s children.
This is essentially filling old wine bottles with new wine. We use a tried and true estate planning vehicle, the A/B Trust, to solve the increasingly modern problem of resolving estate planning for second marriages – providing for the children of first marriages while caring for the second spouse.
For especially tricky scenarios, such as the Decedent Dentist scenario, where the Decedent Dentist was a widow(er) upon the second marriage, the Dentist’s children may view portions of Dentist’s money as their “legacy” from the death of their parent. This allows the Dentist to earmark certain funds for either immediate dispersal upon dentist’s death (such as the $1 million life insurance policy proceeds or the home the parent inherited from their parents), while preserving other assets for use by Spouse 2.
This is not a perfect solution. Nothing is. But this permits us to plan with a scalpel rather than a bludgeon. The property audit is a key portion of this type of planning. It helps both spouses understand the assets that are “mine, yours and ours” and from that understanding, how best to serve two masters: taking care of one’s children from marriage one and taking care of one’s spouse from marriage two.
As an additional note on this topic that will get a longer post: you may want to believe that your children will not fight with their stepparent (or their stepsiblings). You may wish to point out that your children are entitled to nothing, so if they get anything at all they should be overjoyed. You may point to an unusual love between your children and their stepparent or a bond between stepsiblings that is as close to blood kin as could be imagined, closer even because at some level they chose to love each other, but please please please do not be fooled. People fight over even small scraps of money. Greed settles in quickly. You are likely the rainbow bridge of love and affection between your children and their stepparent – even a stepparent that has been in your children’s lives for decades. When your children start to watch their stepparent favor their own child with money they perceive as their rightful inheritance, bad feelings emerge quickly.
Proper trust planning is a type of love letter you write to your spouse and your children. Spending the time and money and having the difficult conversations now has the ability to save years of agony and fighting, not to mention as much as a quarter or more of your estate spent on litigation. Memories of you become tainted. Old wounds reopen. Trust litigation is awful business. Worse even than divorce litigation (and I have done both for many years). As an aside I took an informal poll of 6 judges sharing a dinner table with me at an event recently after the table had taken down several bottles of wine: which is more difficult, trust or divorce? All 6 without hesitation said trust litigation is the most awful they have to deal with. I believe this is because spouses loved each other at one time, but siblings and step-siblings or step-parents never had to love each other, and in the case of late second marriages after the natural parent dies, there may be outright hostility.
It’s an investment to do a real audit of your books. It can be emotional. It can feel hurtful. But working through the issues now can save so much later pain that it is worth the investment.