Estate Planning for Blended Families and Second Marriages
Many people don’t get serious about estate planning until they are well into middle age. By then, they may be part of a blended family: they are married for a second (or more) time, and one or both spouses have children from a previous marriage. Estate planning for a blended family can be tricky because each spouse may want to provide both for the other and also for their biological children after their death. If you’re in such a marriage, you should proceed cautiously and read the entirety of this page.
Redo Your Estate Plan Will(s) and Trust(s) Before You Remarry
If you are about to get remarried, you obviously want to celebrate, but it is also important to focus on less exciting matters like redoing your estate plan. You may have created an estate plan during your first marriage, but this time it will probably be more complicated–especially if you have children from your first marriage or you own more valuable assets. The following are some pointers for ensuring your interests are taken care of when you remarry:
- Take an inventory. The first thing you and your spouse should do is take an inventory of your assets and debts and share it with the other person. Don’t forget to include life insurance policies and retirement plans in your inventories. It is important to be open and honest about money if you want to prevent bad feelings in the future.
- Decide how you want to handle finances. Once you know what you are worth financially, then you need to decide if you want to combine (or not combine) assets when you are married. For example, if one spouse is selling a house and moving in with the other partner, will he or she contribute to the cost of the house? If one spouse has significant debt, you may not want to combine finances or make any joint purchases. These decisions need to be made upfront so everyone is clear on what to expect.
- Decide what you want to happen when you die. You and your future spouse need to figure out to whom each of you want(s) your estate to go when you die. If you have children from a previous marriage, this can be a complicated discussion. There is no guarantee that if you leave your assets to your new spouse, he or she will provide for your children after you are gone. There are a number of options to ensure your children are provided for, including creating a trust for your children, making your children beneficiaries of life insurance policies, or giving your children joint ownership of property. Even if you don’t have children, there may be family heirlooms or mementos that you want to keep in your family. Again, open discussions can prevent problems in the future.
- Consult an elder law or estate planning attorney. Even if you don’t have a lot of valuable assets, you should consult an attorney, especially if you have children. You will definitely need to update your last will. You may also need to update or create other estate planning documents such as a durable power of attorney and a health care proxy. If you have significant assets, a prenuptial agreement may be appropriate. In addition, the attorney can help you decide if a trust is necessary to protect your children’s interests.
- Change your beneficiaries. You may want to change the beneficiaries on your life insurance policy, annuity, and/or retirement plan. If you are divorced, however, you may not be able to change some of the beneficiaries. Bring your divorce decree with you to the attorney so he or she can make sure you do not violate the decree. If you can’t change your beneficiaries, you may want to buy additional life insurance or retirement plans that will include your new spouse.
The most important thing to remember is to be open and honest with your future spouse and your family members about your wishes.
What are the estate planning considerations in a second marriage later in life?
Many widows and widowers simply do not like living alone after their beloved spouse dies. As widows and widowers increasingly meet and decide to get remarried, they need to be aware of important estate planning considerations. As the life expectancy of people in the United States dramatically increases, the reality of second and third marriages becomes more likely. Widows and widowers are increasingly likely to meet and decide that a second marriage is an excellent way to avoid spending their golden years alone.
Remarriage can be one of the best decisions for an aging person. However, a remarriage later in life (often) creates a unique set of legal questions. For example, many older clients take for granted that their adult children will inherit from them when they pass away. The reasoning behind this assumption is because the majority of their property and life have been spent with their previous spouse, who was a co-parent to his or her children, and the one who helped to build or sustain the family assets.
However, a new marriage means that the marital property is governed by the laws of the new marriage. If there is no prenuptial agreement, then the surviving spouse would, under the laws of New Jersey, inherit at least one-third of the estate. This means that the adult children from the first marriage might be in for a rude awakening. A large part of the children’s inheritance might be “swallowed up” by the second spouse’s right to inherit one-third of her new husband’s estate.
The problems that are created by second marriages should not be taken lightly. It is important to talk these things through with your future spouse. Chances are, he or she also wants to make sure that adult children receive assets. If you don’t have a frank discussion with your would-be spouse, you may end up causing your loved ones a great deal of heartache and confusion as they struggle to figure out what would be best and what you would have wanted.
What is the Elective Share?
If a spouse dies, then the surviving spouse may elect to take a one-third share of the deceased’s estate. This is called an elective share. Basically, a spouse can’t be disinherited. The surviving spouse has a right to his or her elective share in the estate of their deceased spouse. The only way that a surviving spouse can be completely disinherited is through a prenuptial agreement, where both spouses can agree to waive any claims to an elective share of each other’s respective estates.
Your elective estate includes not only property in your name alone, but also most assets with beneficiary designations such as bank accounts, securities, IRA accounts, your interest in jointly-held property, annuities, certain interests in trusts, the cash value of life insurance, and even property that you might transfer to a child during the one-year period preceding your death. In other words, you cannot easily ignore your spouse’s rights to his or her elective share. Many clients ask me how the surviving spouse will be able to claim his or her share if the assets are left in trust for a child. The answer is that the surviving spouse can file a probate proceeding and force the child to return the assets to satisfy the elective share obligation.
Why is it important to have a prenuptial agreement for a second marriage?
Due to an increased life expectancy, a 50% or higher divorce rate in the United States, and an increasing amount of second marriages, prenuptial agreements are now widely accepted. It is very important for individuals to approach the idea of a prenuptial agreement with an open mind. It must be emphasized that a prenuptial agreement does not mean that you are planning to get a divorce, or that you do not trust your new spouse. Instead, couples are now recognizing the seriousness of their upcoming commitment to marriage. Moreover, couples are now communicating their concerns for the future financial security of their other relatives and are expressing their respect for the hard-earned assets and accomplishments of their future spouse.
Although many people look at a prenuptial contract as rather “unromantic,” the reality is that individuals in middle and later life are likely to have more significant assets than younger couples. Additionally, older clients often have important financial obligations in the form of alimony or child support payments, hard-earned estates they wish to leave to their children, and emotional baggage from their previous marriages. In order to provide a solid foundation for their future marriage, clients should consider sorting through their finances. They should also create a plan for how they will merge their economic as well as their emotional lives.
No one should jump into the serious business of marriage. There are some very harsh consequences that can occur if a person does not carefully plan for economic ramifications. Life is not always a fairytale romantic experience. At this stage of life, single people should carefully prepare a detailed and comprehensive prenuptial agreement that addresses every aspect of their financial life.
RETHINKING RETIREMENT PLANS IN A SECOND MARRIAGE
In a blended family, one or both spouses may have a sizable retirement account such as an IRA. One practice is to name the other spouse as primary beneficiary of the IRA, with the account owner’s children as secondary beneficiaries. This approach is common in first marriages, in which the children are the offspring of both spouses, but it can lead to trouble in a blended family.
EXAMPLE 1: David Jennings has $500,000 in his IRA. He names his wife Christine as the primary beneficiary and his two children from a prior marriage as the secondary beneficiaries. Thus, if Christine predeceases the children, they will inherit the IRA. Even if Christine does inherit the account, the balance will pass to David’s children at Christine’s death.
There are two flaws in this strategy. First, Christine can tap the IRA at will as long as she takes the required minimum distributions. She can take out all $500,000 at once, pay the income tax, and then either spend the money or give it to, among others, her own children from her previous marriage.
Second, in this example, Christine is a surviving spouse and sole beneficiary of David’s IRA. Under the tax code, Christine can roll over David’s IRA to her own new or existing IRA (no other beneficiary can do this). Then Christine can name any beneficiaries she wishes, such as her own children.
In either scenario, there is no guarantee that David’s children will see a penny of his $500,000 IRA.
How can David avoid this outcome if he wants to provide for Christine and his own children? One tactic is to divide his $500,000 IRA into two $250,000 IRA’S. He can designate Christine as the beneficiary of one IRA; his children can be co-beneficiaries of the second IRA. Alternatively, David can leave the entire $500,000 IRA to his children, who can stretch out required minimum distributions over their longer life expectancy and thus enjoy extended tax deferral. If David adopts this plan, he can leave other assets to Christine, depending on the size of his estate and her financial needs.
TRAPS FOR UNSUSPECTING SPOUSES FOUND IN SOME TRUSTS
In blended families, spouses also may use trusts in their estate planning. The first spouse to die might leave assets in trust for the surviving spouse, who will get the trust income and also might have some access to the trust principal. At the surviving spouse’s death, remaining trust assets may pass to the children of the spouse who funded the trust. Some trusts of this nature can be qualified terminable interest property (QTIP) trusts and defer estate tax.
Trusts can play a valuable role in estate planning. Again, though, trusts can cause problems in blended families. With the arrangement described previously, the trustee might face a conflict between investing for current income (which would benefit the surviving spouse) and investing for long-term growth (which would benefit the trust creator’s children). In addition, the children may have to wait for many years before receiving any inheritance if the first spouse to die leaves all of his assets to such a trust.
Dividing the estate might be a better solution. Some assets could be left to the surviving spouse and some to the children, outright or in separate trusts. If the spouses fear that such a plan would leave insufficient amounts to the beneficiaries, they might buy life insurance and increase the total estate value.
Second Marriages and Financial Liability for Nursing Home and Long Term Care Costs
Beware… if you remarry, you cannot escape personal financial responsibility for the nursing home and long-term care costs of your spouse regardless of a prenuptial agreement. Federal law and NJ law clearly mandate that if you are married (even for one day) both spouses are jointly liable for the costs of long-term care of the other until or unless divorced. You may have amassed two million dollars before you married your second wife, but if she requires a nursing home at a cost of $11,000 per month, you are responsible for her payment to the nursing home.
Read more related articles at:
Yours, Mine and Ours: A Checklist for Blended Family Finances
Remarried With Children? 5 Estate Planning Mistakes to Avoid
Also, read one of our previous Blogs here:
Estate Planning for Blended Families
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