Should I Leave My Estate to My Spouse or to My Children?

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Most people want to benefit their spouse in a blended family or second marriage situation and yet still provide for their children. Experience teaches that the potential for conflict is so great that to follow traditional estate planning patterns could be a mistake that could create problems, legal fees, and conflicts between your surviving spouse and your children.

There is a technique that can be employed if that is not a concern. That is the establishment of a trust for the benefit of your surviving spouse that requires that all of the income of the trust be distributed to your surviving spouse. Principal distributions can be prohibited, permitted for your surviving spouse’s health, education and maintenance during her lifetime, or permitted in the total discretion of the trustee. Upon your spouse’s death, the proceeds pass to your children.

The conflicts using this technique, while somewhat diminished remain substantial. However, this technique may be necessary to eliminate the estate tax by utilizing the marital deduction for amounts in excess of your estate tax exemption amount. If your surviving spouse is adequately taken care of, or has wealth of her own and the marital deduction is required to reduce the estate tax, a form of the marital deduction trust can be employed that would minimize the income distributions from the marital trust and prohibit principal distributions. The trust may be subject to estate tax at the second death, which your surviving spouse’s federal estate tax exemption may be available to shelter.

This type of trust called a Qualified Terminal Interest Property Trust or often referred to as a QTIP trust. This trust differs from the standard marital trust in that your surviving spouse lacks the ability to alter the distribution scheme established by your estate plan. This can be effective in sheltering from tax, delaying the tax, and perhaps avoiding the tax.

The irrevocable life insurance trust (discussed in more detail in the next chapter) is another technique that should be considered. The life insurance trust could be established for the benefit of your children with life insurance in an amount equal to the value of your entire estate or equal to the amount passing from you to your surviving spouse. This is a classic example of taking taxable assets, passing them to a non-taxable beneficiary (your surviving spouse) while distributing non-taxable assets (the death proceeds in the life insurance trust) to taxable beneficiaries (your children).

Monetarily this can be equalized and the parties can be segregated in use and benefit from your estate. However, if your children have emotional attachment to your actual assets, then this particular planning technique would not be effective. As an alternative, the life insura