When drafting up wills and trusts, I sometimes have a client tell me that they want to split their estate into shares for each of their children, but they don’t want the estate to benefit their daughter-in-law or to their son-in-law in the event of their spouse’s passing. Instead, they would prefer that whatever is left of the inheritance go to their grandchildren.
The intent is perfectly reasonable. If your son dies and his inheritance goes to your daughter-in-law who then remarries, it’s possible that your hard earned estate will one day end up with some other family that you don’t know.
When I get direction to bypass the in-laws, I often ask my client if they are talking about what would happen if their son or daughter predeceases or if they are talking about a situation where their child survives my client and then dies.
“What does this matter?” is a response I often hear.
“Well, let’s say that your son survives you,” I begin. “If you leave his share of the estate outright to him, then he owns it and can leave it to whomever he wants. If his will gives everything to his wife, then she’s likely to inherit what you left him.”
“We love our daughter-in-law,” my client responds, “but what if she remarries and leaves everything to some new husband? We don’t want that. We’d prefer that our grandchildren receive what’s left.”
“In that case you shouldn’t leave everything to your son outright, instead you should leave it in a continuing trust for his benefit,” I add. “You can make him the trustee of his own share, but instead of it being subject to his will, you could add a provision that, if he dies, if there is anything left of the share, then it goes to benefit your grandchildren. That way you give him control as trustee and as primary beneficiary, but you can direct it at his death rather than giving his will complete control over what you left him.”
Before the client concurs and instructs me to do just that, I throw something at them that they probably didn’t consider.
“If you leave the assets in a continuing trust, you might want to give your son a power of appointment over the assets so that he can direct who gets them in his will.”
“Why would we do that? Then we’re right back where we started! If he gives everything to his wife, then what’s the point of creating a trust share for our son that would go on to our grandchildren?”
“That’s a good question,” I say. “But consider this – what happens if your son hits hard times economically and dies unexpectedly? There might be considerable sums held in trust for the grandchildren, leaving their mother destitute. You wouldn’t want that either would you?”
“Probably not.” The client says. “So what do we do?”
“A power of appointment does not have to be an all or nothing proposition,” I’ll advise. “You could give your son the power to appoint some portion of his share, but it must be appointed into a trust for his wife that continues for her lifetime. In other words, you could limit how much of his share he can redirect away from the grandchildren (who would be the default beneficiaries) and to his wife, but you can also ensure that upon her death it goes back to your bloodline.”
The power of appointment might say something along these lines: “I grant to my son the limited power to appoint up to half of the remainder of his trust share to his wife, provided that he exercise the power in such a manner as to direct such sums into trust paying his wife income for her life and then the remainder of the share at her death will revert to my grandchildren.”
I explain that the actual wording of the will would be far more legal in nature, but that would be the gist of it.
While it’s easy to simply go with default language that would distribute all of a deceased son’s share to that son’s children, that might not be the right thing to do, especially when your child is in a long term marriage and your grandchildren are of that marriage. Every family’s situation will be different, so it is important to consider the ramifications of your default beneficiaries should something unexpected happen.
©2017 Craig R. Hersch.