Do You Trust Your Spouse? A Critical Question in Estate Planning
Before you start talking about complicated tax rules and legal documents, there is one simple question that should come first when planning your estate. Do you trust your spouse? Professor Jeffrey Pennell discovered that this basic question reveals a surprising problem in how lawyers plan estates today.
The Lawyer Experiment
Professor Pennell asks groups of estate planning lawyers to raise their hands if they trust their own spouse to handle their money wisely after they die. Almost every single hand shoots up in the room. Then he asks if these same lawyers create plans for their clients that give the client's spouse the same freedom and control. This time, almost no hands go up.
Think about what this means. The lawyers trust their own marriages enough to let their spouses have full control. But when they write plans for other people, they automatically assume those marriages need more rules and restrictions. Nobody even asks the client directly whether they trust their spouse.
The 1981 Problem
To understand why estate plans work this way today, we need to go back to 1981. That year, Congress made big changes to tax laws. They said married couples could leave unlimited amounts of money to each other without paying death taxes. This was great news for families.
But Congress also created something called a QTIP trust. You get the tax break for leaving money to your spouse, but you also control what your spouse can do with that money even after you die. The trust gives your spouse the income the money earns, but your spouse cannot decide to give the actual money away to someone else.
Professor Pennell believes these trusts became popular because the men who wrote these laws in 1981 did not want their wives to have full control over family money. It was almost entirely men on the House Ways and Means Committee. They wanted to put what Professor Pennell calls handcuffs on their wives. For more than forty years now, most estate plans have looked basically the same.
What Your Plan Says About You
When you create a trust that puts strict limits on what your spouse can do with money after you die, you send a message about trust. You also send a message about whether you think they are smart enough to handle the family money on their own.
Here is how most estate plans work today. When you die, your lawyer divides your money into two buckets. The first bucket is for your spouse, who can receive the income but cannot touch the main pile of money. They cannot give any away to save on taxes or adapt the plan if tax laws change.
The second bucket goes into another trust for your children. A trustee decides when your children get money and how much they get. Your spouse does not make these decisions, even though your spouse knows your children better than any trustee ever will. Imagine being married to someone for thirty years and then finding out they set up a plan like this.
A Better Approach
Professor Pennell thinks there is a better way for people who actually trust their spouses. His approach gives the surviving spouse much more freedom and control.
First, during the time your spouse is still alive after you die, they should be the only person who can get money from one of the trusts. Under this approach, your spouse comes first, period. The children wait until your spouse dies to get their inheritance. This prevents fights between your spouse and your kids over who gets what from the trust.
Second, give your spouse real power to make decisions. In one trust, give your spouse a withdrawal right, which simply means they can take money out whenever they want. They can use that money to make gifts to your children or grandchildren if doing so would save the family money on taxes.
In the other trust, give your spouse a power of appointment. This means your spouse gets to decide how the money gets divided among your children and grandchildren during their lifetime. Maybe one kid has a medical emergency and needs more help. Your spouse can adjust the plan to match what is actually happening in your family's life.
How Trust Saves Money
When you give your spouse more control, you create opportunities to save your family a lot of money on taxes. Imagine you own enough shares in a family business that you control the whole company. When you die and leave those shares to your spouse, the government might charge estate taxes on them.
If your spouse has the power to give away some shares while they are still alive, they can do something smart. They can give some shares to your children as gifts during their lifetime. When you give away just some shares instead of all of them, those shares are worth less per share because they do not include control anymore. This is called a minority discount.
Your spouse gives away shares at this lower, discounted value, so less gift tax gets paid. Then when your spouse eventually dies, the shares they still own are also valued at a minority discount. The family keeps more money and the government gets less. But this strategy only works if your spouse has the power to make those gifts. Traditional restricted trusts cost your family real money in extra taxes.
When Families Fight
Professor Pennell knows his ideas will not work for every family. Some families have real problems that need different handling. If your spouse and your children from a previous marriage hate each other, you might need more rules to keep the peace.
But here is the big question. Should we automatically assume every family will fight? Should we design every estate plan as if war is about to break out? Professor Pennell believes we should not base our standard plans on the assumption that family members are going to be at war with each other.
How Families Have Changed
Families today look completely different than they did in 1981. Divorce is much more common now. Many people get married more than once. Blended families are totally normal now instead of unusual problems.
The way married couples handle money has also changed dramatically. In many modern marriages, both people work and earn money. Both people understand finances and make decisions together. Women today have much more financial knowledge and independence than women had forty years ago. Does it really make sense to keep using the same estate planning template designed in 1981?
Three Questions to Ask
If you are thinking about creating an estate plan, Professor Pennell's work suggests important questions you should answer honestly. First, do you truly trust your spouse to make good financial decisions after you die? Not just small decisions, but big ones too.
Second, do you trust your spouse to care about your children's wellbeing? This matters especially if you have children from a previous marriage. Do you believe your spouse would make sure your kids are taken care of even after you are gone?
Third, do you trust that your spouse understands your values and would honor what matters to you? Maybe you care deeply about giving money to charity or want your children to learn the value of hard work. Whatever your values are, would your spouse respect them?
If you can honestly answer yes to all of these questions, then ask yourself why your estate plan should suggest the opposite. Your estate plan should match what you actually believe about your marriage, not follow some standard template that assumes the worst.
What Lawyers Need to Change
Professor Pennell's research challenges lawyers to stop following old habits. Instead of automatically pulling out the same standard trust documents, lawyers need to ask clients directly whether they trust their spouse. Not in a vague way, but specifically about handling money, making gifts, and caring for children.
After asking these questions, lawyers need to explain the different options available. They should explain what a traditional restricted trust does and what message it sends. They should also explain what Professor Pennell's approach does differently. Too many lawyers just automatically do the traditional restricted trust without telling clients there are other options.
Not Your Father's Buick
The title of Professor Pennell's article comes from an old Buick advertising slogan. When Buick wanted to attract younger buyers, they ran ads saying "This is not your father's Buick." The message was that Buick had changed and modernized.
Professor Pennell uses this same idea to argue that estate planning desperately needs to change and modernize too. We should not keep using estate planning techniques that our fathers or grandfathers used. Those techniques were designed for different times, different families, and different attitudes about marriage and money. Section 1303, the part about trusting your spouse, is absolutely fundamental to everything else.
You Can Have Multiple Goals
This approach does not mean you ignore taxes or forget about protecting your family's money. Smart planning can accomplish many goals at the same time. You can design a plan that saves money on taxes, protects assets, provides for your children, and still treats your spouse with trust and respect.
What You Should Do
If you already have an estate plan, take it out and read through it carefully. Look at what powers your surviving spouse would actually have. Can they make gifts to save taxes? Does the document show that you trust their judgment? If not, talk to your lawyer about updating it.
If you do not have an estate plan yet, spend time thinking about the trust question first. Be completely honest with yourself. Do you trust your spouse to handle things after you are gone? Say so clearly to your lawyer and make certain that your legal documents reflect that trust.
What Really Matters
Estate planning is not really about taxes and legal compliance, even though lawyers spend a lot of time talking about those things. Estate planning is fundamentally about relationships, values, and love. It is about how you want to take care of the people you love after you are no longer here.
Professor Pennell's work challenges us to make sure that message is one of trust, partnership, and respect. We have been using the same estate planning template for more than forty years. That template was created by men who had very specific ideas about marriage and control. Those ideas do not match how most people think about marriage today. It is time to ask ourselves whether we are planning estates for the marriages we actually have or for some outdated idea from 1981.
Citations
Pennell, Jeffrey N. "It's Not Your Father's Buick, Anymore: Estate Planning for the Next Generation(s) of Clients." Chapter 13, 2009 Institute on Estate Planning, pages 13-1 to 13-48. Available at https://ssrn.com/abstract=1953315.
Pennell, Jeffrey N. "The Joseph Trachtman Lecture." 34 ACTEC Journal 2 (2008).