If your client is unable to keep up the insurance premiums-because of age or disability, say-the prenup should promise to pay an equivalent sum out of the estate.
All in all, says Raftery, the prenup-with-life-insurance technique "gives the children their full inheritance-namely, the assets of their parent's estate [minus the house, wedding gifts and so forth]-and the spouse a guaranteed amount to live on that comes quickly and hassle-free." The insurance payout, he adds, is exempt from probate, transfer papers, federal income taxes and, since it's between spouses, federal estate taxes.
But the prenup solution has its detractors. Emotional distress is the No. 1 complaint. "No one wants to talk about death while planning a wedding," says Rex Ritchie, a director at Woodbury Financial Services, a subsidiary of The Hartford Financial Services Group, in Oakdale, Minn. (For more about prenups, see the sidebar.)
Q-TIP Trusts
Another tool to support both your spouse and children after you die is a qualified terminable interest property, or Q-TIP, trust. Here's how it works: The estate goes directly into a trust for the surviving spouse, who receives all the income it earns but has no control over it. When the surviving spouse dies, the trust is dissolved and the money that's left goes to the children of the first spouse or to whomever was originally designated.
Q-TIP trusts are exempt from federal estate taxes, too, because they're passed between spouses. But they can be tricky, if not costly, to maintain. "If the executor makes even a slight error in filing the federal estate tax return, it could invalidate the trust and cost the estate thousands of dollars," cautions Shelley Elder, an estate-planning attorney in Kennesaw, Ga.
Q-TIP trusts may also pit the surviving spouse's financial interests against those of the offspring. "If the stepparent needs income, the trust is probably managed to generate income rather than for growth, while a portfolio for the children would likely have more growth exposure," says Catherine White, founder and president of FinArc, an investment management firm in Needham, Mass.
That problem is made worse still, she says, "if the surviving spouse takes extra money out of the principal." Which is possible, she explains, because Q-TIP trustees are often allowed to distribute from principal if there's a medical emergency or another valid reason. So choose your trustees carefully.
A final caveat: Q-TIP trusts can be disastrous if "the stepparent is as young as the children, or younger," says Chuck Noparstak, a financial planner with Equitrust Financial Group, in Deerfield, Ill. A young stepparent means the children will likely have to wait a long time for their inheritance-or they may even never see it if the surviving spouse outlives them.
"Offspring aren't happy about waiting until the 'evil stepmother' or 'evil stepfather' dies," observes Charles Avalli, an attorney at Gentile, Horoho & Avalli, in Pittsburgh. Needless to say, this is not exactly conducive to family harmony.
Communication
To ease or even avert this kind of family friction, many financial advisors suggest a strong dose of transparency and communication. "Communication, particularly before a death occurs, helps families prevent these types of issues," says Steve Ciepiela, president and CEO of Charles Stephen & Co., a financial planner in Albuquerque, N.M.