Remarried with children: estate tax considerations of a significantly younger spouse.

• Author: Doiron, Daniel P.

Occasionally, an estate planner will encounter a family situation that requires special consideration in the development of an estate plan, for example, when one spouse is significantly younger than the other. A taxpayer who intends (whether via prenuptial agreement or otherwise) to dispose of his estate equally between a significantly younger second spouse and children from a previous marriage may inadvertently leave the children with considerably less than half of the estate if the impact of Federal estate taxes is not properly considered.

Traditional estate plans, which provide a spouse with support for life and a remainder interest passing to children on the spouse's death, are not appropriate when the children and spouse are approximately the same age; the spouse may outlive the children, thereby depriving them of their share of the estate. Therefore, the estate planner must consider methods that simultaneously provide for current, equitable distributions of estate property to the spouse and children while minimizing Federal estate taxes.

A simple stipulation in the taxpayer's will for the estate to be divided equally between the spouse and children would, on the surface, appear to be equitable to all estate beneficiaries. However, distributions to a spouse are afforded more favorable Federal estate tax treatment than distributions to a nonspouse. In computing Federal estate taxes (assuming the provisions of Sec. 2056 are met), an unlimited marital deduction is allowed for distributions made to the surviving spouse. A similar deduction is not available for distributions to a taxpayer's children. Since the children's share of the estate will be reduced by Federal estate taxes, the taxpayer's wish for an equal distribution of estate property is not achieved.

Example 1: T, age 68, has an estate valued at $5,000,000. He recently married a 25-year-old. T has a child from a previous marriage who is also 25. T's will provides for the equal distribution of his estate between his new spouse and his child. The Federal estate tax implications, along with the impact on amounts distributed to the estate beneficiaries, are:

Scenario 1: Gross estate value $5,000,000 Marital deduction, specific bequest 2,500,000) Taxable estate 2,500,000 Federal estate tax 1,025,860 Available unified credit (192,800) Net Federal estate tax $ 833,000

Gross estate value $5,000,000 Net Federal estate tax (833,000) Marital distribution (2,500,000) Distribution to child...