Last week, BJ asked about distribution of assets in a second
marriage. His second wife had died with a Will leaving “everything” to
her children from the first marriage. He wanted to know what assets
were included in his wife’s probate estate, and what limits there were
on the Executor’s reach into assets like joint bank accounts.
Last week’s column was limited to identifying the variety of assets
that are considered non-testamentary. The Executor of his wife’s
estate was entitled to ask for proof why certain assets, like a bank
account with a “pay on death” designation, should not be turned over
to the decedent’s estate. I wanted to expand my answer to encompass
other options that BJ should consider.
For instance, BJ and
his wife could have simplified the entire process with some additional
pre-planning. Specifically, they could have entered into a prenuptial
agreement. If they didn’t think of that before marriage, they could
have entered into a marital property partition agreement at any time
during their marriage. Both are legally binding methods to identify
which assets are community property and which are separate property.
Additionally, either agreement could avoid the silent
creation of community property. Let’s say that BJ had a $100,000 CD as
his separate property before the marriage. He kept the CD in his name
only. Each year, the bank paid him interest – so after 10 years, the
CD was valued at about $130,000. Even though the underlying $100,000
is separate property, under Texas law the $30,000 interest earned
(because it was earned during a marriage) is community property. So
when his wife dies and her Executor asks about assets, BJ must give
the Executor ½ of that growth, or $15,000.
With a valid
prenuptial or partition agreement, the spouses could have eliminated
that silent creation of community property. The growth on BJ’s CD
would remain his separate property, and the growth on his wife’s
separate property would all remain her separate property. This would
help avoid an encroachment on their privacy by the other’s Executor.
What is his remains his, and what is hers remains hers.
even more protection, once the prenuptial or partition agreement is in
place, each spouse could create their own living trust agreement. Each
spouse would transfer his or her separate assets into his or her
separate trust, with separate names, separate management and separate
beneficiaries. When one spouse dies, there would be no need for a
probate and no appointment of an Executor. There would be no awkward
questions to the surviving spouse from the deceased spouse’s children
The decedent’s assets would all be
non-testamentary, and would be entirely separate and not intermingled
with the surviving spouse’s assets. The Trustee of the deceased
spouse’s trust would access only the assets held in the deceased
spouse’s trust, and would have no reason to inquire into the contents
of the surviving spouse’s separate trust.
There is one asset
that would need special attention in order for this separation method
to work properly: the marital homestead. Under Texas law, the
surviving spouse has a legally guaranteed right to occupy the marital
homestead. It does not matter if the house belonged solely to the
deceased spouse as separate property. It does not matter if the
deceased spouse left the house, in a Will or a Trust, to her children
from the first marriage. The surviving spouse can reside in the house
for life. But with special attention in a marital property agreement,
the spouses can agree that the legal homestead occupancy right is
waived. A knowledgeable attorney can be of great assistance in
preserving and protecting an estate, but you must consult and take
action while both spouses are alive and are competent.