It is actually easier to do than you might think. Recently a client of mine came in with an older trust that they wanted to update with their new distribution plan. In reviewing their trust I discovered that their trust was set up to distribute half of the estate at the death of the first spouse – meaning the surviving spouse would immediately lose half of everything when he or she lost their spouse. The clients were shocked when I pointed this out, and we immediately corrected their plan to protect the surviving spouse.
The trouble comes when couples misunderstand two things: community property and distribution options.
I know, it sounds like a boring attorney thing but it makes a huge difference in who gets what, and is probably one of the largest sources of litigation in probate and family law. Community property is essentially any property and debt acquired during the marriage and therefore both spouses have equal interest in the property. There are exceptions of course, a large one being inheritance, but that is the general rule. Separate property, by contrast, is property acquired either before or after the marriage, and is therefore owned by only one spouse.
Where this impacts estate planning is when your will or trust spells out what happens to “your” property. In the situation above, the trust said that husband’s portion will go here, and wife’s portion will go there. What they didn’t realize was that husband’s portion included his community interest in the house, for example. So if he passed away first, his beneficiaries could own half the house along with the surviving spouse.
Often people have an idea for the distribution of their estate that they think is “simple” because they’ve worked it out in their mind, and it does make a great deal of sense for their particular situation. In this case the couple assumed there would be no distribution until both of them had passed on, when in fact the document they had created spelled out that distribution would happen at the death of the first spouse. They didn’t realize that they had options that would protect the surviving spouse, and protect the intended beneficiaries.
It’s very important to understand what will happen when the first spouse passes away, otherwise your spouse could be in for a very unpleasant, and potentially financially devastating surprise.