Creating a will can be mentally and emotionally taxing. Legal nuances can be difficult to understand, and imagining your family’s future once you’re gone can be worrisome. To make this process easier, many people choose to name their spouse as their sole beneficiary. In theory, this decision would allow the spouse to live comfortably after their partner has passed, give the spouse the ability to change asset allocation if their circumstances change and allow the assets to be passed down to the couple’s children or agreed-upon beneficiaries.
While this might seem like an easier solution to the more complex will-writing options, the inheritance rights of your spouse might spur long-term disadvantages for future beneficiaries.
Inheritance rights of your surviving spouse: Know the risks
Diminished assets to your children
While you and your spouse may have agreed to give all remaining assets to your children upon your spouse’s passing, life can often get in the way. For example, your spouse might remarry. As your surviving spouse, they have the right to name their new spouse as the beneficiary of the assets. Then, when your spouse dies, their new partner can leave the assets to their children – leaving no assets to yours.
Less rules, more risk
Another common pitfall of leaving all assets to your spouse is a lack of restriction around asset use. While you’ve left your assets to your spouse to help ensure your family can live comfortably for years to come, your spouse may not be as financially savvy as you – leading your assets to diminish far faster than intended due to poor financial decisions or investments.
Lack of protection for heirs ill-equipped to handle money
Furthermore, if all goes as intended and your surviving spouse passes down the assets to your children, your children may not have the financial knowledge to fully capitalize on the inheritance. Or worse, they may make financial choices that waste the assets you had hoped would contribute to a fulfilling life.
Trust the trust
A better solution to naming your spouse as your only beneficiary may be to leave all assets to a trust. Under the law, a trust is the same as a person. It can own assets, have debts and financial obligations, and so on.
A trust can give certain inheritance rights to your spouse based on your specific instructions. For instance, depending on the structure of the trust, your spouse can take all the money they need, whenever they need it. Or, you can set limitations to help ensure the money goes toward their best interests. You can set rules stating:
- How soon. You can delay availability of money for a certain period or spread distributions over time.
- How much. You can grant heirs access to interest only, to a certain percentage of the trust’s principal or both.
- How often. You can state whether money is to be distributed whenever the person requests it, or you can release assets on a schedule, like an allowance.
- How so. You can require that your money be made available only for certain purposes, such as paying for college, or only under certain conditions, such as a medical need.
Consider setting your spouse as a trustee
You can also appoint your spouse as a trustee, allowing them to operate and access the trust at any point during their lifetime. This gives your spouse the same access to your assets as if you left it to them directly. However, your spouse doesn’t own these assets, so when they die, your assets will continue to go to the beneficiaries of your choosing instead of being passed to the family of your spouse’s potential second marriage.
Smart decisions may provide long-term advantages
While leaving your spouse your assets may seem like the best idea to benefit your family, it can come with significant disadvantages that can be avoided by engaging different options in your will. Speak with your financial advisor to see what financial avenues may be best for you and your family, and speak with an estate planning attorney prior to making any major decisions.
The use of trusts involves a complex web of tax rules and regulations. Neither Edelman Financial Engines, a division of Financial Engines Advisors L.L.C., nor its affiliates offer tax or legal advice. Interested parties are strongly encouraged to seek advice from qualified tax and/or legal experts regarding the best options for your particular circumstances.