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Tying the Knot the Second Time Around

Columnist: Susan M. Teel
May, 2011 Issue
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Susan M. Teel
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At any age, remarriage can be heaven—rejuvenation and a source of joy—but estate planning the second time around isn’t for the faint of heart.

Relationships typically are more contentious when spouses’ ages are widely spread or when one is significantly wealthier or healthier than the other. Children can be wary of the motives of the new spouse, fearing family wealth will be transferred or dissipated and their authority, favor and influence will be lost. If ignored or dismissed, these underlying emotional responses can derail even the most brilliant estate plan—and upset an otherwise tranquil transition.

Traditional planning revolves around spouses first caring for each other and then providing for children. Priorities may shift when a new spouse, with or without children, enters the picture. Each spouse’s kids may have little or no sense of obligation or loyalty to the other, or to the new spouse. From an estate planning perspective, this may upset the traditional marital and exemption trust planning scheme that provides a support trust, at least, for the surviving spouse before assets flow to children. Even if this plan suits the new “blended” family, it certainly needs tweaking.

Before new spouses can decide whether to merge or maintain separate finances and how to restructure their estate plan, they need to gain an understanding  of each other’s finances, income, expense and asset allocations, as well as the emotional aspects of how the numbers apply to existing family relationships. New estate planning should cover not only how each partner’s financial assets will be divided, but also who’ll assume responsibility for debt, which may include obligations owed to dependent children and/or former spouses—both during life as well as after death. The partners should also consider the financial expectations and hidden agendas of each extended family member.

Assume that Dad, the wealthier spouse, will die first. Both Dad and Stepmom want his or her assets to pass to his or her children and not to the other’s or to a third party. Dad’s children fear Stepmom will seduce him to spend his fortune on her or her kids and are particularly sensitive about the family home. Further, when he meets Stepmom, Dad lives in the “family” home, filled with treasures, and is adamant that after marriage, since his home is the more comfortable, they’ll reside there. Stepmom, who has her former spouse’s retirement plan and social security, gladly agrees.

Do each hold their respective property in separate trusts that pass all to their own kids at death, thereby bypassing the “other family”? The kids may prefer this plan, but it is problematic. This may leave Stepmom out in the cold.

Do they retitle all of their assets, each owning 50 percent? If so, Dad has made a gift of a portion of his property to Stepmom—not a tax issue, but possibly an irritant to the kids. If they each leave their 50 percent to their kids at death, and don’t carve out anything for each other, 50 percent will pass to Dad’s kids when he dies, and the remainder will pass to Stepmom’s kids at her death. This plan may force the surviving spouse as well as all the kids to recalibrate. If Stepmom survives Dad, her 50 percent may or may not include 100 percent of the residence.

What if they adopt a traditional option of keeping each spouse’s assets separate, but Dad creates a trust for the benefit of Stepmom if he dies first? Dad provides that Stepmom, through the trust, likely funded with the house and some cash, can use the trust assets for her lifetime. When she dies, what’s left, including the house, passes to Dad’s kids. Fair? How long will Dad’s kids have to wait to obtain their inheritance? What if Stepmom has extreme medical expenses that eat up both her assets and Dad’s trust prior to her death, leaving Dad’s kids with minimal or no inheritance and possibly a mortgaged house? What if Stepmom remarries? Can she share the residence with her new partner? Can she “squander” the cash on a lavish lifestyle after Dad’s death? What if the kids attempt or cajole her into relinquishing the house early? Where and when will she move? Who is trustee of Stepmom’s trust? These issues are very real and common sources of conflict—but can be planned around.

In addition to revamping the estate plan, and beyond the scope of this column, a pre- or post-marital agreement is an essential part of most financial planning for a second marriage. Such agreements become part of a new estate plan. New spouses will want to diligently cover any oral agreements between them respecting financial issues in a legally enforceable writing. Sharing such agreements with both sets of kids may also be advisable. If forewarned, the kids may better understand and, ultimately, accept the terms—even if they don’t approve.

Beneficiary designations for existing IRAs, 401Ks, annuities and life insurance policies are all too frequently overlooked during marital planning. It’s almost impossible to unwind a forgotten or unintended beneficiary (for instance, a former spouse) after a death. Further, gifting these assets may be a strategy to compensate one or the other side in the second family arena or may provide a means of support for a family member. Before making beneficiary changes, both spouses should agree, because if a non-spouse is selected, the current spouse’s permission may be necessary to make the change.

Spouses also need to plan for disposing of tangible personal property—the furniture, silver, jewelry, collectibles and so forth—by preparing an agreement or list together, showing who brought each asset into the marriage and which items were acquired during the marriage. Careful planning may alleviate suspicion that Stepmom “took” an item, or determine whether Dad made a gift of an item to Stepmom. The worst situation occurs when spouses die together, and heirlooms must be divided between two disparate family lines without any direction.

Estate planning the second time doesn’t have to be so contentious. Peaceful options are available—with planning. Love’s labor is never lost!


Susan M. Teel is senior counsel at Dickenson, Peatman & Fogarty in the trusts and estates department and a member of its wealth management group. She’s specialized in estate planning, trust administration and probate for more than 25 years. You can reach her at steel@ northbaybiz.com.


 

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