by Paul Hyl, Esq.
According to National Stepfamily Resource Center, a division of Auburn University's Center for Children, Youth and Families, about seventy-five percent of divorced persons eventually remarry.(1) In addition, there certainly are additional divorced individuals who engage in long term cohabitation with a new partner, choosing not to marry. Using the most recent statistics available, in 2007 there were nearly 2,200,000 marriages and only 856,000 divorces(2), making it about forty percent of marriages ending in divorce.
Estate planning in these second marriage/cohabitation scenarios is more difficult than in the traditional marriage situation. The couple may have conflicting desires and external influences. If spouse A were to predecease spouse B, spouse A typically would want to provide that surviving spouse B continue to live comfortably after spouse A’s death. However, at the same time, spouse A wants to ensure that their inheritance goes to their children from their first marriage and not the children from spouse B’s first marriage.
In New York, a surviving spouse is entitled to receive outright the greater of $50,000 or one-third of their deceased spouse’s estate – the so called “elective share”.(3) This elective share is calculated not just on the testamentary assets of a spouse but on various “testamentary substitutes”.(4) The need for a spouse to resort to exercising his or her right of election can arise both when the deceased spouse dies testate or intestate. Under the laws of intestacy, a surviving spouse is entitled to the first $50,000 and one-half of the remaining assets of a deceased spouse’s testamentary estate.(5) While at first blush, this might seem to be greater than the one-third elective share, if the decedent had significant non-testamentary assets such as joint accounts with, or assets which had designated beneficiaries other than, the surviving spouse, one-third of the net estate including non-testamentary substitutes could be greater than one-half of the testamentary estate.
This article will focus solely on what oft times is the biggest issue facing couples in second marriages: how to deal with the house. There are 3 possible scenarios when it comes to ownership of the couple’s real estate. It could be jointly owned, or, if owned by only one of the spouses, depending on their order of death, it may wind up having been owned solely by the first spouse to die or solely by the surviving spouse. In all such scenarios, transferring ownership of the house to a Trust that only is revocable upon the consent of both spouses, may be the only way to ensure the mutual understanding of both spouses will be carried out.
Jointly Owned Real Estate
When the parties’ real property is owned jointly by both spouses, regardless of whether it is owned as tenants by the entirety, joint tenants or tenants in common, without proper planning, problems can arise upon the parties’ deaths. In the tenants by the entirety or joint tenancy situation, the surviving spouse acquires full ownership of the realty, free to devise or gift in any way they determine, including to the exclusion of the children of the deceased spouse.
Ownership as tenants in common may eliminate the possibility of one of the couple’s children being disinherited, but it raises a myriad of other practical issues. First, depending on the deceased spouse’s other assets, the surviving spouse may not have received enough to satisfy the right of election. Secondly, the children of the deceased spouse, as co-owners of the realty, would be responsible for their proportionate share(6) of the expenses of maintaining the realty; including real estate taxes, homeowner’s insurance, repairs and maintenance, mortgage payments, landscaping expenses, etc., expenses which they may not be in a financial position to pay. Also, the children of the deceased spouse could force the sale of the realty through a partition action, effectively evicting the surviving spouse.(7)
Real Estate Owned Solely by One Spouse:
When real estate is owned by only one of the parties, regardless of whether that party dies first or second, there are concerns that must be addressed through careful planning. If the spouse who owns the realty dies first, they may want to provide the surviving spouse with the right to live in the house until the surviving spouse’s subsequent death. Simple language such as the following can be used in such a situation:
A. 1. If the Donor’s wife, JANE DOE, shall survive the Donor, the real property located at 123 Main Street, Any Town, New York, including, without limitation, the residence and all improvements thereon, and including all insurance policies relating thereto, shall be held in continuing Trust for the benefit of the Donor’s wife, JANE DOE, in accordance with the provisions of this Subdivision.
2. The Donor’s wife, JANE DOE, shall have the right to reside in any residence owned by this trust.
Further probing should be done to address possible contingencies that may arise. For example, who is going to pay the carrying charges on the residence? If the surviving spouse wishes to relocate in the future, will s/he be given the right to force the sale of the realty? Can s/he direct the repurchase of a new residence? The following sample language can be used to give the surviving spouse such control over the sale of the realty:
The Trustees shall sell any residence held in the trust at any time upon written notice to the Trustees from the Donor’s wife, JANE DOE, requesting the sale of any such residence. Further, in the event of a sale of any such residence pursuant to the foregoing sentence of this Paragraph, the Trustees shall purchase a new residence in an amount not to exceed the Net Proceeds, as hereinafter defined, from the sale of a prior residence, upon written notice to the Trustees from the Donor’s wife, JANE DOE, requesting such purchase. Absent a request by the Donor’s wife, JANE DOE, as set forth in the first sentence of this Paragraph, the Trustees shall be prohibited from selling any residence owned by this trust during the life of the Donor’s wife, JANE DOE.
If the Trust is to include other assets, it is important for the drafting attorney to inquire whether the other assets can be used to pay any of the expenses of the realty, and what rights the surviving spouse will have in such other funds. Will the spouse have the right to income? The right to principal? If the surviving spouse will have the right to principal, will it be based on an ascertainable standard or in the sole discretion of the Trustee? The issue of the Trustees’ discretion can be made more difficult if the surviving spouse does not get along well with the children from the deceased spouse’s first marriage, whom the deceased spouse may have designated as Trustee. In those situations, it may be advisable to have the client determine how much money the surviving spouse may need, and, to the extent the income generated by the other assets is insufficient, that distributions of principal be mandated to make up any shortfall. Such a clause could be worded as follows:
Pursuant to the forgoing provisions of this Trust, certain property is to be held by the Trustees in a separate trust for the benefit of the Donor’s wife, JANE DOE, in accordance with the provisions of this Subdivision. The income and principal of such trust shall be disposed of as follows:
1. The Donor’s wife, JANE DOE, shall have the right to reside in any residence owned by this trust.
2. Subject to paragraph 1 of this Subdivision, the net income of this trust shall be paid to or applied for the benefit of the Donor’s wife, JANE DOE, in convenient installments, but not less than monthly.
3. It is the Donor’s intention that the Donor’s wife, JANE DOE, receive at least One Hundred Thousand Dollars ($100,000) per year from this trust, in monthly installments. Accordingly, to the extent such monthly distributions of income to the Donor’s wife, JANE DOE, pursuant to Paragraph 2 of this Subdivision, shall be less than Eight Thousand Three Hundred Thirty-Four Dollars ($8,334), the Trustees are directed to distribute sufficient principal from this trust in each such month so that the total distribution of principal and income to the Donor’s wife, JANE DOE, in such month shall be equal to Eight Thousand Three Hundred Thirty- Four Dollars ($8,334).
In many second marriages, although only one of the spouses may own the realty, both spouses equally contribute to maintaining the house, even to the extent of making mortgage payments and paying for capital improvements. In these situations, an inquiry should be made to determine if the spouses desire that some of the appreciation in the house during this period should pass to the non-titled spouse. A sample clause that can be used in such a case is as follows:
Upon the death of the Donor’s husband, JOHN DOE, the Premises shall be sold, and the net sale proceeds, as hereinafter defined, shall be distributed as follows:
1. The first three hundred and ten thousand dollars ($310,000) (9) of the net sale proceeds shall be distributed to the then living issue per stirpes of the Donor; and
2. The remainder of the net sale proceeds shall be distributed:
a. one-half to the then living issue per stirpes of the Donor; and
b. one-half to the then living issue per stirpes of the Donor’s husband, JOHN DOE.
The various machinations that can take place in estate planning for a second marriage are endless and depend on a number of factors including the value, make-up and composition of each spouse’s assets, the age difference between the spouses, the current and expected post-death living arrangements, and the income of each spouse. In order to properly sort through those factors, the estate planning attorney must engage the client(s) in a detailed and probing conversation about their goals, fears and desires. The questions the attorney asks will make the client(s) think, they may make the client(s) uncomfortable and may expose disagreement between the spouses, but they are necessary and will serve as the means to a very important end, a well thought out and properly drafted estate plan that carries out precisely what the client wants.
Paul S. Hyl, Esq. is a senior associate at the Melville-based law firm, Cona Elder Law PLLC. He practices exclusively in the field of Trusts and Estates and Elder Law, advising clients on sophisticated Estate Planning matters, Medicaid planning, charitable giving and estate and gift taxation issues.
2. National Center for Health Statistics National Marriage and Divorce Rate Trends, http://www.cdc.gov/nchs/nvss/mardiv_tables.htm.
3. New York Estates, Powers and Trust Law (“EPTL”) §5-1.1A.
4. EPTL §5-1.1A(b). Testamentary substitutes include gifts causa mortis or within one year of death, totten trusts or pay on death registration accounts, joint accounts, revocable transfers or transfers with a retained income interest, many retirement accounts, and property owned by a decedent and payable on his death to someone other than the surviving spouse or his estate.
5. EPTL §4-1.1.
6. Vlacancich v. Kenny, 271 N.Y. 164, 2 N.E. 527 (1936).
7. New York Real Property Actions and Proceedings Law §901.
8. This phrase can be modified if there are other assets in the Trust which the deceased spouse wishes the surviving spouse to have access to in purchasing any replacement residence.
9. Where $310,000 represents the fair market value of the house at the time the spouses began cohabitating.