How can I protect my assets from my stepchildren if I die before my spouse?

Marital Bypass Trust

Imagine the following scenario:

You get married. You have children. You get divorced. You get remarried. Your new spouse has children from a prior relationship. You die. Your assets go to your new spouse. Your new spouse dies.

At that point, whatever is left of your assets goes to your stepchildren or some other heir of your new spouse.

Regardless of your relationship with your new spouse and your stepchildren, this is probably not what you want to happen to your assets after you die. Without some proper estate planning, however, that is exactly what will occur.

Instead, you probably want your new spouse to be able to benefit from your assets during his or her lifetime, then you want your own kids and their heirs to benefit from everything after your new spouse passes away.

Your Last Will and Testament

Your first line of defense in protecting your assets from passing into the hands of someone you don’t want to inherit is to have an experienced estate planning attorney draft a great Will on your behalf. If you have children from a prior marriage, and you want them to receive something when you die, then you can add them as beneficiaries of your Will. You can also add your new spouse, or anyone else for that matter, as a beneficiary of your Will.

You can also limit the portion of your estate that your spouse will receive, if that is something that you want. If you are married, however, you cannot completely disinherit your spouse. In other words, if you want your children to receive the entirety of your estate when you die, your surviving spouse can still receive a portion of your estate (as directed by state law). This is known as the elective share, and can always be enforced if you and your spouse are legally married at the time of your death.

Regardless of how you draft your Will, if that is all the estate planning you have done, and some or all of your estate passes to your new spouse when you die, then it will become the property of your new spouse. This is assuming that you die before your spouse. The result is that, when your spouse dies at some point in the future, after already receiving your property when you died, then your property will now pass according to his or her Will or state intestacy laws. The likelihood in that case is that your stepchildren and their heirs will receive some or all of your property.

Enter the Marital Bypass Trust

Luckily there is a workaround to this problem, known as a “Marital Bypass Trust.” Depending on how the Trust is set up, a Marital Bypass Trust will allow your surviving spouse to benefit from the Trust income and perhaps the Trust principle, while still allowing you control over the underlying assets and how they are distributed when your spouse dies and no longer needs to benefit from the Trust.

From a practical perspective, once the Marital Bypass Trust is set up, assets are transferred from your estate into the Trust. Your surviving spouse is only given certain rights and limited control over the assets in the Trust. They may receive income from the Trust or may be given the right to invade the Trust principal for health reasons, education or other approved support or maintenance. They may also get a limited power of appointment over the assets in the Bypass Trust. This permits the power holder to direct that the assets in the Trust pass to a limited class of beneficiaries (which do not include your spouse, his or her estate, or creditors of his or her estate).

With the Marital Bypass Trust, while your surviving spouse receives all income for life from the Trust, you can then decide in the Trust Document where the assets pass when your spouse dies.

Other Benefits of a Marital Bypass Trust

Using a Marital Bypass Trust prevents your assets from ending up in the hands of the your stepchildren, your new spouse’s, or perhaps even another person if your new spouse remarries.

Another benefit of this type of Trust is that it can minimize the federal estate tax incurred in each spouse’s estate by allowing both you and your spouse to fully use your applicable exclusion amount. The assets will be included in the estate of the surviving spouse, who can use their applicable exclusion amount to shelter some or all of the assets from estate tax. The assets transferred to the Marital Bypass Trust will not be taxed at your death, but will be postponed until your surviving spouse passes away.

Additional benefits include the professional management of assets for the surviving spouse and beneficiaries, the ability to avoid probate and the ability to maximize use of each spouse’s exemption from the generation-skipping transfer tax exemption.

What is the downside to a Marital Bypass Trust?

There are some costs involved with this level of estate planning as you’ll need an attorney to advise you on the estate and tax implications of setting up a Marital Bypass Trust, to actually draft the Trust Document, and to assist with re-titling of assets into the Trust as needed.  You’ll also need to appoint a trustee for the Trust and, if it is a professional trustee, they will need to be compensated for their services.

Contact a Wayside Legal Estate Planning Lawyer

Wayside Legal LLC is an award-winning law firm located in North Bethesda, Maryland, with experience handling estate planning matters in Maryland, D.C., and Virginia. If you are facing a situation where you need assistance with planning for the future, contact a Wayside Legal attorney today for a consultation to discuss your specific estate planning needs.