1) Age difference: two 60-yr.-olds (or any other close ages) is a different tax ballgame as compared to when Joe is 15 (or more) years older than Mary.
2) Health issues (when serious, tax planning must be hurried).
3) Kids: The possibilities are endless…only Joe has kids (from prior marriage); only Mary has kids; both have own kids; it’s a triple-header…his/hers and our kids; the kids get along with each other or don’t; kids love or hate the step-parent; kids marry and some or all of the family hates the son-in-law or daughter-in-law; Joe adopts Mary’s kids or does not; and we could go on and on.
4) There is no premarital agreement or there is one that leaves Mary little or nothing. It’s nice when the marriage lasts for the long-term, has been great and both Joe and Mary want to ignore all or part of the premarital documents.
5) One or more of the kids (could be his/hers or ours) is in the business and one or more of the kids are not. There are two major issues: a) When there is more than one kid who will ultimately own the business, how do you treat the business kids equally (or some other ratio that you want), yet give control to the clear leader (assuming there is a clear leader) when dad retires or dies? b) How do you treat the business kids and nonbusiness kids fairly?
6) And the major problem facing the typical Joe and Mary: Joe wants to provide for Mary (really maintain her lifestyle) if he dies first, but he wants to leave as much as possible to his own kids.
Note: The above does not cover every problem in a second marriage, but it covers the problems seen most often in an estate-planning practice.
Let’s solve the toughest problem (no. 6) first. A qualified terminable interest property (QTIP) is the perfect solution. Here’s the two-step strategy:
Step 1—Joe transfers his business—tax-free—to the business kids using an intentional defective trust (IDT). The IDT gets Joe’s business out of his estate while Joe is alive, yet Joe keeps control of the business until he draws his last breath.
Step 2—All of Joe’s other assets—typically the residence(s), the IRA(s) (all other qualified plans—such as a 401(k) or profit-sharing plan—have been rolled into an IRA during Joe’s life) and investment type assets, such as real estate, stocks, bonds and other investments go into the QTIP at Joe’s death. Mary has a life estate: living in the residence to the day she dies and enjoying the income from the other assets for as long as she lives. No estate tax is due at Joe’s death. What happens when Mary dies? The QTIP show is over. All of the assets go to Joe’s children (and/or grandchildren). Estate tax now is due based on the value of the assets that pass to the children or grandchildren. Second-to-die life insurance usually is purchased on Joe and Mary to cover the estate tax due when Mary dies. The premiums on second-to-die life insurance are significantly less than buying insurance on only Joe’s life. Also, the death benefit comes immediately after the second of Joe and Mary dies…when that ornery estate tax is due.
The documents—the will and trusts— that contain the rest of the estate plan for Joe and Mary have the appropriate clauses and language to deal with each of the problems and issues listed above. Over the years, with the exception of curing health issues and settling family quarrels, the provisions in the various estate-planning documents (usually a trust) solve the items listed above.
Note: If you have a health issue, start your estate planning now. Time becomes critical. As a result, we service health-issue clients first and fast.
Also: How do we keep the kids equal, yet give control to the clear leader when transferring Joe’s business? We create voting (say 100 shares) and nonvoting stock (say 10,000 shares). The clear leader gets enough extra voting shares to have voting control and is shorted an equal number of nonvoting shares.
2) Ready to Tie the Knot…Again
Before you say “I do,” the about-to-be bride and groom must sign a prenuptial agreement. Failure to do so makes a lot of unhappy campers, particularly the spouse with the most wealth.
If the marriage becomes a winner, it’s easy to blow off the prenuptial and play the estate-planning game as described in category 1.
3) You Have a Significant Other
When I ask, “Will you marry down-the-road?” the answers vary from No, to Maybe, to Someday or some variation.
Whatever the answer, when the relationship is solid and for the long-term, then Joe is committed to taking care of Mary (maintaining her lifestyle if she outlives Joe).
What’s the estate-tax problem? Because Joe and Mary are not married, there is no marital deduction—no QTIP. If Joe dies before Mary, the estate tax is due now. With a QTIP (we learned in category 1), the monster estate tax is not due until both Joe and Mary have gone to heaven.
So what is the plan? We create a QTIP-type trust. We fund the trust with the assets needed to maintain Mary’s lifestyle: typically the residence and income-producing assets. Mary has a life estate only, living in the residence and receiving the income from the assets. At her death the assets go to Joe’s kids and grandkids.
The only fly in the ointment is that the estate tax is due at Joe’s death. When Joe is insurable, insurance on his life is the simple answer. Of course, the policy death benefit (D/B) must be set up usually an irrevocable life insurance trust) so none of the D/B is subject to estate tax.One final comment: The many problems and the even more solid tax-winning solutions to those problems of this article’s subject matter cannot be covered in just one article. So be warned: Start your planning, and call and make an appointment today with an experienced professional. Done right, everyone—except the IRS—wins. Done wrong, only you and your loved ones lose. Have a question? Call Irv Blackman at 847/674-5295. MF