Q: My second wife and I have been married for 15 years. We are both in our early 70s. While not wealthy, we live comfortably. She has two children by her former marriage, and I have three by mine. The majority of the assets are in my name, and she owns the house where we live. We don't have enough to have taxable estates. While I want to take care of my wife, my concern is that if I put assets in her name and she dies after me, her children, not mine, will benefit.
We have no premarital agreement, and neither of us has a will, power of attorney or health proxy, but, at our ages, we have begun wondering how to approach this delicate situation.
A: First of all, we believe it is a mistake to assume you don't have a taxable estate because that determination will be made depending on the year of your and your wife's deaths.
For example, the exemption for 2009 is $2 million per person. This amount increases to $3.5 million in 2009. If you die in 2011, the exemption will be reduced to $1 million. Therefore, without knowing when you will die, you can't say that you won't have a taxable estate.
While gifts between spouses are generally recommended to equalize estates and reduce as much as possible any estate taxes, second marriages carry with them special planning issues.
It is wise to seek out an attorney who is competent in this field. If you and your wife go to the same attorney, you and she should be advised that each of you may require a separate attorney. However, if you and she have an agreement and want one attorney, then each of you will be asked to sign a waiver.
Because of the law in most states (community property states like Arizona will have different rules), you can't "cut your wife out," which it does not appear is your intention. What you want is to be able to make sure she is taken care of and that, if she survives you, at her death, your children benefit, not hers.
For this reason, many planners utilize what are called QTIP trusts, which not only qualify for the marital deduction if needed for estate-tax purposes, but also protect the principal for persons other than the spouse. At your death, the QTIP would be funded, and, from the monies deposited, your wife would receive a qualifying income interest for her life that would be paid to her at least annually. She would be the only income beneficiary, and she could require that nonincome-producing assets be made income-producing.
If you like, you can even authorize the trustee to pay out principal distributions under certain circumstances. In any case, in all events, the income from the trust must be distributed to your wife until she dies. At the time of her death, the amount for which the QTIP election has been made is totally includable in your wife's estate. And at the time of her death, the balance remaining in this trust will be distributed to your stated beneficiaries - that is, your children.
Under this scenario, your wife will own her house, will receive the greater of your or her Social Security, and will receive a lifetime of income from the QTIP Trust. If you have IRAs or 401(k)s or other qualified funds, the distribution of those, like life insurance, will be based upon beneficiary designations so that, in this way, you can provide additional sums for your wife..