Plan To Be 100

The challenge when planning for second marriages where each of them has children from prior relationships is that the client has to decide how it will go for the surviving spouse when they are dead.

There are really only two options:

Option A.  Unfettered Control.  With this approach you give the surviving spouse the right to amend the trust and to make withdrawals of principal for any purpose.   The surviving spouse can serve as Trustee.  The upside of this approach is that it’s easy and it assures that the surviving spouse will be able to enjoy life to the fullest after you’re gone.  The downside is that the surviving spouse can (and probably will) either change the trust or take the property out of trust and leave what is left when they die to whomever they choose – and that almost certainly won’t be your children.

Option B.  Put the Surviving Spouse in a Box.  With this approach, the trust becomes irrevocable when you die, and someone other than your spouse serves as trustee (either a bank or maybe one of your kids).   Typically, income is distributed to the surviving spouse, but invasion of principal is limited to some “ascertainable standard.”  The upside of this approach is that it protects your children in the event your surviving spouse does not outlive the money.  The downside is that your spouse will likely have a miserable time of it, battling for money s/he wants to use, especially if one of your children is trustee.

The Kurtz Case

Apparently, no one explained these options to the lawyer who drafted the estate plan for James and Barbara Kurtz.  That lawyer drafted a joint trust that became irrevocable when the first of them died, and distributed the remaining trust property among their five children (two of his and three of hers) when the survivor passed.  But … the trust also granted the surviving spouse the unfettered right to invade principal.  So, predictably, after Barbara died, James used his right to invade the trust principal to restructure the assets and revise the estate plan to provide only for his descendants.

In Re James Kurtz Protection Trust (click on the name to read the case) is unpublished.  In this case, the trial court held that the right to invade principal is inherently inconsistent with the purpose of having the trust become irrevocable at the first death, and therefore everything James did to undermine the original ‘divide-by-five’ outcome was void.  With a minor tweak or two, the Michigan Court of Appeals affirmed.

Conclusion and Comments

To get to their desired result, the COA asserts that the trust was inherently ambiguous and that the surviving spouse breached his fiduciary duty by taking the steps he took to undermine the intent of that original document while he was acting as Trustee.  I guess I can go along with ambiguity, although in this case the line between ambiguity and sloppy legal work seems blurred.  As for breach of fiduciary duty, it’s hard for me to see how a trustee who follows the express terms of the trust, even to the extent that doing so benefits himself, is guilty of breach.

Planning for couples with children from prior relationships isn’t easy.  I’ve learned to have “the conversation” and to explain the options, making the client decide whether they want their spouse to be put in a box or not.  How much money, how long they have been a couple, where the money came from – all considerations.  And sometimes, when planning for these couples, a third option is to give the survivor unfettered control over the joint trust but carve out a life insurance policy or dedicate a specific asset that goes to the children of the first of them to die.

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