Estate Planning For Defacto & Second Marriages
Estate planning can be difficult for people in their second marriage.
Typically, the estate planning objectives of people in a second marriage are:
- Providing for the surviving spouse in the second marriage;
- Providing for the children of the second marriage (particularly if young); and ensuring assets flow to the children of their first marriage.
Discretionary testamentary trusts are recommended to help achieve these objectives. It may also be beneficial to utilise binding financial agreements and mutual wills.
Discretionary Testamentary Trusts
A discretionary testamentary trust (DTT) is a discretionary trust that is created by will and takes effect upon the death of the will maker. A DTT is administered by the trustees for the benefit of the named beneficiaries, who may include the children of a former relationship. In blended families, it is becoming increasingly common that the will maker’s children be the only primary beneficiaries, with the surviving spouse named a general beneficiary. Other general beneficiaries can be restricted to the will maker’s descendants, in order to exclude the surviving spouse’s descendants from receiving trust income.
The terms of the trust must be set out in the will, and the main issues to address are the identity of the appointors, trustees and beneficiaries. Appointors have the power to remove and appoint trustees and must consent to any capital distributions. For these reasons, in most situations no one person should be a sole appointer as this has the potential to put trust assets at risk. In a blended family situation, it may be best to consider appointing an independent person as an appointor, for example, a trusted accountant or advisor.
The trustees have the responsibility of carrying out the terms of the trust and making distributions to beneficiaries. This is an important role in a DTT, as the trustees have the discretion to decide which beneficiaries should receive income. Again, in a blended family situation where disagreement between family members is expected, appointing independent persons is a good idea.
Adam is currently married to Brenda and the two have no children together. This is the second marriage for both spouses and each has two adult children from their previous relationship. Adam has significant assets and capital. He wants to ensure Brenda is adequately provided for should he predecease her, but wants his two children, Luke and Amy, to receive the majority of his estate. He does not want Brenda’s children to benefit.
Adam achieved his objectives by providing for the creation of a DTT in his will. He has appointed Brenda and his trusted accountant, Owen, as appointors of the trust, and his close friends, Tim and Jenny, as trustees. Adam made his two children, Luke and Amy, the primary beneficiaries of the trust, and Brenda a general beneficiary. The provisions of the DTT provide that distributions cannot be made nor the trust wound up without the consent of both appointors (this prevents Brenda from being able to immediately wind up the trust and take the assets for the benefit of herself and her own children). Adam has provided in the terms of the trust that the trustees are to make periodical distributions to Brenda until her death, without significantly dissipating trust capital. Upon Brenda’s death, the trust is to be wound up and assets and capital divided evenly between Luke and Amy.
How many trusts should I create?
It may be the case that a will maker decides to create more than one DTT. This may be to deal with different assets separately, or to allow each of his or her children to control their own trust. For couples who have had only one spouse, one DTT will often be sufficient as each spouse’s beneficiaries are likely to be the same. A common situation in a blended family is for the will maker to provide for the creation of two DTTs – one in respect of the main residence and other capital which may be used by the surviving spouse, and another over capital which is to be retained for the benefit of the children of the will maker’s first relationship.
In the example above, now assume Adam has created three DTTs. He has left the residence in which he and Brenda live, and a specified sum of money, as assets of the first trust. As this trust is entirely for Brenda’s benefit, Adam has made her appointor and trustee, which effectively gives her the power to do as she wishes with these assets. Adam will divide the remainder of his capital and assets between the other two trusts, “Luke’s Trust” and “Amy’s Trust”. He appointed Owen and Amy as appointors of Luke’s Trust, and Owen and Luke as appointors of Amy’s Trust. He also made each of Luke and Amy the trustee of the other sibling’s trust (so as to possibly provide some protection for trust assets in the event of either sibling separating from their own spouse).
Binding Financial Agreements
Blended families might also consider a binding financial agreement (BFA). A BFA is binding on the parties to it and deals with how all or any property of the relationship is to be dealt with in the event of the breakdown of that relationship. BFAs are particularly useful in a second marriage to provide certainty as to the spouses’ current and future financial requirements and of the provisions they want made in respect of their children of former relationships, especially where these children are financially independent adults. BFAs may also provide for equal or unequal divisions of assets acquired during the marriage.
Ideally, so long as the relationship exists, a Binding Financial Agreements will mirror the provisions of the spouses’ wills.
There is a common misunderstanding of the term “mutual wills”. Many people believe that when spouses make wills containing similar provisions (“mirror wills”) they will not be able to change these wills without the other’s consent. However, this is not the case. To make wills that cannot be varied without the consent of both parties, a Mutual Wills Agreement (MWA) is required. A MWA is an enforceable contract between the spouses, and if either party breaches the agreement, is subject to challenge to remedy the breach. MWAs should also include provisions to prevent the other spouse giving away assets without consent, to prevent the dissipation of assets.
Adam and Brenda have now agreed to leave a percentage of their respective estates to each other’s children. If Adam and Brenda made mirror wills, there is nothing to stop Adam going back to the solicitor without Brenda’s knowledge and making a new will that excludes Brenda’s children. If, however, they enter into a MWA, Adam will be in breach of contract if he varies his will without Brenda’s consent.
Estate planning objectives are different for every family, and a myriad of complexities can arise for people in second marriages. Each individual has different desires as to who should, or should not, inherit their estate and independent legal advice should be sought to best achieve these wishes.