SECOND SPOUSE TRUST PLANNING
By: David L. Crockett, Attorney, CPA
UCLA Law School ’69, UC Berkeley ’66
Newport Beach, Ca 92660 949-851-1771
CAN THE TRUSTOR PROVIDE FOR HIS 2ND SPOUSE AND KEEP THE FAMILY HAPPY?
THE TYPICAL SITUATION.
John and Jane have a long and happy marriage and have children who are now adults. Jane unexpectedly passes away from illness leaving John alone. Jane’s will leaves everything to John so he is financially stable. After awhile, John finds Sally (the second spouse) and falls in love with her and they marry. John’s children who miss their mother do not particularly get along with Sally. Sally is considerably younger than John. John wants to make sure Sally is taken care of for the rest of her life so John and Sally are considering a living trust. John and Sally want to know what their choices are in creating a trust.
A typical oversimplified solution.
Many trusts are written in this situation to state that on John’s demise, Sally gets all the trust income for the rest of her life and in addition allows her to use the trust principal for her “Support, health, maintenance, comfort, and welfare”. It further provides that upon Sally’s demise, what is left in the trust goes to John’s children. Writing it up this way is very good for Sally and not good for John’s children because of the real likelihood that Sally will spend all the money during her life leaving nothing for the children.
Reluctance of Dad to plan for the worst.
A Dad in John’s situation typically creates a trust for his second spouse because of his caring and affection for her. Also, second spouse often is the instigator of the trust and often the second spouse is involved in the discussions and preparation of the trust. The second spouse will of course want as much control as she can get and may be resistant to rules and restrictions that don’t suit her. Dad will have a difficult time believing that his second spouse would ever take advantage. Because of these factors, it is strongly recommended that Dad retain his own separate lawyer to prepare his trust without the involvement of his second spouse.
Court action to save some of the trust??
Unfortunately, this is a situation we have seen various times and have filed trust petitions/lawsuits on behalf of the children to try to stop people like Sally from draining the trust. Court battles in this type of case are difficult, time consuming and costly. We had one case where we successfully were able to get the mother in law to stop spending and to put some of the money back. In that case, she was excessively spending to completely remodel the house and to live way beyond what the trust could afford. In another case, the dad left the family home to his wife to live in for the rest of her life provided that she paid the property taxes and maintained the house. However, she was a recluse and a hoarder and didn’t maintain the house at all. As part of the litigation I personally inspected the house and it was basically a smelly slum! However, the Judge felt sorry for her and refused to force her out of the house or to make repairs. Needless to say, my clients were extremely disappointed. The basic rule here that most estate lawyers will tell you is that Courts are very reluctant to remove elderly folks out of their home, no matter how bad they are behaving.
Advance planning with intelligent trust provisions.
We have learned that one cannot just deal with a fortune and/or any real estate in a few simple paragraphs in a will or trust. Money and property is simply more complicated than that. Consider what typically occurs when you lease or rent a house. Rental/lease agreements often run for may pages and paragraphs. This is because after over 100 years of landlord/tenant litigation and disputes in California, forms have been developed by lawyers and by the CA Association of Realtors to cover every conceivable circumstance. (The CAR standard form lease is 8 pages of fine print). Unlike rental/lease agreements, most trust forms and even custom drafted trusts written by lawyers, vastly oversimplify the situation and leave the door wide open for disputes, lawsuits, and the wholesale wasting of family money. There are actually common sense ways to plan for the situation and satisfy most concerns. The planning for someone in Sally’s position can be unique and requires careful thought. We typically prepare one or more proposed drafts and circulate it to all concerned many days before the actual signing. This is so people can consider it and not rush into anything. The worst thing to do is to wait until the last days of someone’s life and try to rush a trust through and patch something together and then get it signed under less than ideal situation-such as in the hospital or when the person is on hospice.
Basic considerations and directions.
He is a basic list of some highlights. A custom prepared trust may have much more, depending upon the circumstances.
1. Don’t let the mother in law/second spouse be the sole trustee of the trust after dad’s passing. That is a formula for disaster. One might as well open the door to the bank vault.
2. If Dad wants to give the second spouse some control, make her a co-trustee along with one of more of Dad’s adult children. Allow her some discretion in spending. For example spend up to $5,000 per month without question and then require a co-trustee signature on amounts above that. The amount of course depends upon the standard of living they are accustomed to and the amount of money actually available.
3. Consider a partial distribution from the trust to the children upon Dad’s passing. There is almost nothing more likely to cause resentment and dissention then leaving a large amount of money and property in the sole control of the second spouse and making the children wait until her death before they get anything! Obviously the overall resources must be considered but if there is more than enough for the second spouse then give the children something at Dad’s passing.
4. Consider appointing an independent trustee to manage the trust after the Dad passes. The larger the trust, the more important this becomes. If the trust assets are in the $600k range or larger, a licensed institutional trust company should be considered. A trust company will charge trustees fees but at least the money will be there and the trust instructions will be followed.
5. Beware of making the children the trustee of the trust which would give them control over the second spouse’s expenditures. That can lead to disputes and litigation because the children will want to preserve as much of the trust as they can so they will have more left when the second spouse passes.
6. The larger the trust the more risk there is of mismanagement and money disappearing or being improperly spent. Trustees should be chosen on their skills, education and licenses and proven track record in handling money.
7. Carefully consider the age and health circumstances when making a second spouse a successor trustee. In many typical family situations, the Dad handled all the money and spending so what sense does it make to assume that the second spouse with no experience in these matters will all of a sudden be able to handle the finances? We have seen various cases where there is a well drawn trust but when the Dad passes away the second spouse simple refuses to follow the trust instructions! That can lead to expensive and complicated estate and income tax problems which sometimes don’t manifest themselves until after the second spouse’s death. Then the children are left to pick up the pieces.
8. Another way to look at this is, “Would the person being left in charge of the trust after Dad’s passing (i.e. the successor trustee) have enough life skills to seek advice of CPA’s or lawyers or financial advisors upon Dad’s passing?” If the answer is “no” then there is a potential for disaster.
9. When Dad passes away and leaves a second spouse in charge the children should not in any circumstances wait to get copies of the will and trust. In California, the law requires the successor trustee to notify all heirs including children and trust beneficiaries within 60 days of Dad’s death. That notice must state that those persons are entitled to a copy of the trust upon request. We have seen many unfortunate situations in which the second spouse refuses to provide a copy of the trust for years on end and then proceeds to spend all of Dad’s money! Consider placing a mandatory paragraph in the trust to the effect that if the successor trustee fails for any reason to provide a copy of the trust within a specified time period that there will be an automatic removal of the successor trustee.
10. Trusts are not registered with any government agency because they are a private contract and because they are changeable and revocable as long as the trust makers (Trustors) are alive and mentally competent. Thus, there is a danger of the trust being lost or destroyed. So, as a minimum, multiple Xerox copies and/or PDF file copies should be made and provided to the children when the trust is written. Because a trust is still revocable and changeable in this type of situation, California law specifically says that the beneficiaries (the children here) are not legally entitled to a copy of the trust so they could not sue to obtain it when Dad is still alive. However, as part of the trust preparation process, Dad could decide to give a copy to the children so they would have something to minimize future problems. A major future problem is the danger of nobody having a copy of the trust so when the Dad and the second spouse are deceased the children/heirs are left with huge and expensive legal problems. We recently were consulted about a situation where a valuable piece of real estate was placed into the Dad’s trust but when Dad and the Second spouse were deceased nobody could find a copy of the trust and the lawyer who prepared the trust was deceased and nobody could locate the lawyer’s files! The only solution to this was to file a trust petition/lawsuit with the Superior Court to let the court decide. That procedure will take a year or more and likely cost tens of thousands of dollars in court costs, receivership costs and attorneys fees. We had another situation several years back where there was a trust but no signed version. There was an unsigned version which was over 25 years old so the successor trustees couldn’t determine who to distribute the trust to. Lack of a signature makes a trust unenforceable.
11. Providing a copy to the children when the trust is signed is still not fail-safe. This is because the trust is amendable and revocable during Dad’s lifetime as long as he is mentally competent. However, the right to amend the trust can be controlled and restricted to prevent suspicious amendments. We have consulted and litigated many cases where the trust in this type of situation is considered fair by the stepmother and the children. Everyone has a copy of the trust and they are happy together at the holidays and Dad is comfortable that the children and his spouse won’t be fighting over the money when he his gone. However, near the end of Dad’s life, the mother in law turns the Dad against the kids in various ways (such as destroying birthday and Christmas cards sent through the mail and restricting phone calls and visits and worse). The mother in law then gets Dad to amend his trust to cut out or greatly reduce the share of the trust going to the children. The children don’t find out about the amendment until Dad had passed and are then of course devastated and stuck with considering long and expensive litigation. There is a simple fix to this but almost nobody drafting a trust even thinks about it. The trust could have sentences put in that restrict the right to amend by requiring various measures such as (i) notification to the children by certified mail; (ii) requiring a waiting period such as 60 to 90 days before it is effective (to give Dad chance to come to his senses); (iii) a mandatory waiting period and notification to Dad’s lawyer or other personal trusted representative (to keep the spouse from bringing in another lawyer of her own choosing to do the amendment); and (iv) a requirement of a mental competency evaluation by a health care profession
Houses are a particular area of concern. Often, the Dad in this situation will have the trust prepared to allow the second spouse to live in the house for the rest of her life. We have represented trust beneficiaries in various cases where the second spouse stays in the house but doesn’t take care of it or doesn’t insure it or doesn’t a pay the taxes or turns it into a rental property or has boarders or allows boyfriends to live with her. This type of situation should be taken as seriously as a long term lease and all areas of property ownership, occupancy, repairs, improvements, uses and so forth must be considered. Dad may not have any prior experience with management and ownership of rental properties or apartments so the lawyer preparing the trust needs to explain what is actually involved in a long term lease. For example: who pays for repairs; who pays for capital improvements; who decides on the repairs; can the children inspect the property and when? This is by no means a complete list. I advise on the overall situation from 4 points of view: as lawyer handling real estate, trust and estate matter including litigation; as a certified public accountant handling rental property expenditures and tax returns; as a real estate broker; and as a property owner of various rental houses an apartment buildings.
13. Another consideration is if the stepmother has any of her own money and separate property. Separate property is money and assets she either had from before the marriage or money and assets she inherited from her parents or relatives after she was married. Dad of course would have his money and property from his first wife, the children’s mother. Does the step mother keep her separate money in her own trust or her own accounts or does Dad have access and use of those things? If she and Dad have just put everything together then it can become more confusing and/or the children’s rights can be compromised. Part of the job of the estate lawyer is to separate out Dad’s separate property and the stepmother’s property as well as to define what community property might exist. The trust then needs to provide instructions as to who gets what on the death of either.
14. When the mother of the children passed away, there should have been some estate administration to deal with the mother’s separate property and her half of the community property she owned with the Dad. If there was administration of the mother’s estate/trust, there might be a separate trust in existence for the mother. That of course needs to be reviewed and considered to see what assets the Dad has available to leave in trust for the stepmother. It is not unusual for Dad to not have done any administration on the death of the mother of the children. If that is the situation, then that may need to be done to provide some clarity as to what the Dad can do.
Do not underestimate the likelihood of unfortunate things happening when the trust is not specific enough. Do not assume that a generic “trust” will cover the situation and prevent the stepmother and/or the children from trying to take advantage. Because of our experience with trust and estate litigation and with trust administration, when drafting trusts we try to think of “what can possibly wrong” and suggest adding things to our custom prepared trusts to try to prevent losses and abuses. We think of a trust as an insurance policy to insure your trust and estate against potential future risks and problems.