Deciding how your assets will be distributed after your death is always challenging. But the process can be especially fraught for individuals who remarry once or multiple times.
Consider that about 40% of new marriages in the US include at least one spouse who is remarrying, and many of these spouses have children from previous marriages. With ex-spouses, step-siblings, half-siblings and other family members in the mix, estate planning is complicated not only by the sheer number of potential beneficiaries but also by the complex emotional relationships among the members of these blended families. It can be difficult for couples to find equitable ways to support children from multiple marriages.
Likewise, protecting family homes or businesses becomes complicated when multiple parties feel strong connections to the assets.
Navigating these challenges requires a special approach to estate planning. Consider these strategies for developing a fair division of assets for a blended family…
1. Realize that your situation is unique. There is no one-size-fits-all estate plan for couples in second and later marriages. Blended families come in endless configurations, and what works for another family might not suit your needs.
Start by acknowledging the specific facts of your situation, then establish goals that feel right to you and your spouse. Among the factors to consider are how much in assets each spouse enters the marriage with…how much income and expenses each generates during the marriage…how many children there are and what ages…and the particular needs of each child.
Example: If one or both of you have children from a prior marriage and you also have children together, you might have a goal of dividing your assets equally among all of them to minimize the potential for disputes. However, if children from a previous marriage are adults and financially well-established, you might plan to leave a larger portion (or all) of your assets to young children from your current marriage. Families with adult children who already are well-off also might want to prioritize charitable giving, whether through a trust, foundation or other means. Starting from these goals, you can work with a financial adviser and estate planner to create a plan that fits your family’s situation.
2. Get a “postnup.” If you’re already in a blended family but don’t have a prenup, you haven’t lost your chance. A postnup can serve most of the same functions as a prenup. Check what your state’s laws are regarding postnups. Prenuptial or postnuptial agreements may not be necessary for all first marriages, but they are critical for couples who are coming from previous marriages.
These agreements are the most effective way to specify which assets—including future earnings—are considered to be marital property and which belong to each spouse and his/her respective children.
Examples: You can choose to protect money that you already have saved for a specific child’s college education while agreeing to set aside shared money for children that you might have with your new partner. Similarly, one spouse can waive the rights to certain properties, such as a vacation home or a family business, that the other partner wishes to save for his/her children from a previous marriage. This ensures that assets with special value or meaning can be passed on to specific people, without having to keep all your accounts separate.
To avoid potential legal disputes over the prenup or postnup if the marriage ends in divorce, each partner should hire a separate attorney for the drafting process. Both partners and their lawyers should make a list of all assets each spouse is bringing to the marriage and agree on whether those assets will become marital property or remain separate property.
If either partner has children from a previous marriage, the agreement can outline specific directions for financial support or the inheritance of certain assets.
3. Consider establishing trusts. For remarried couples, trusts can serve several purposes. They can provide a formal structure to keep the assets of one spouse separate from the other’s…ensure a source of income for a surviving partner after the death of the other…and preserve assets for children from previous marriages.
Example: One popular option for remarried couples is a qualified terminable interest property (QTIP) trust. This type of trust provides lifetime income for the surviving partner, while also designating where the trust’s remaining assets will go once the surviving partner dies—whether it is to children from that marriage…to children from previous marriages…or elsewhere.
4. Use insurance to support different members of the family. Having a life insurance policy can be an effective way to direct money toward a particular beneficiary while preserving other assets for different uses. Policies also can be kept separate from other agreements such as prenups or wills, which rules out possible misinterpretation or lawsuits in the event of divorce. Life insurance policies can be especially helpful for couples with one significantly older spouse.
Example: Each spouse can purchase a new life insurance policy and name children from a previous marriage as the beneficiaries. That allows him/her to leave other assets to the new spouse and/or any children they might have together. Alternatively, each spouse could buy two life insurance policies, one for the children from a previous marriage and one for the new family.
5. Update beneficiaries on all your financial accounts. Most people understand that their wills should be updated when entering a new marriage. But many individuals neglect to update beneficiaries in other documents, including retirement accounts, bank and brokerage accounts, life insurance policies and real estate and vehicle documents. Even if these crucial updates are discussed before the marriage, it’s easy to neglect following through on them…and the consequences can be serious.
Example: If the husband does not remove his ex-wife as beneficiary of his pension, she may have a claim on that account even if the new will says that all assets go to children from the new marriage.
Beneficiary designations can be updated online for many accounts. Others might require you to sign and mail a paper form. Some require spousal approval. Check with each of your financial providers for their specific process. Once you update your beneficiary designation, be sure to let the named individual know.
6. Be specific but also build in flexibility. Specificity is key for estate plans for newly remarried couples. Say you and your new spouse decide to keep your previously held assets separate but share all new income generated during your marriage. In that case, you must spell out in writing what exactly counts as income, considering not only salaries but potential income sources such as investment returns and capital gains.
Likewise, you should decide on the specific mechanisms that are involved in sharing your income, ranging from setting up a joint account to having your adviser structure your investments so that all dividends or income goes directly into that shared account.
Caution: Too much specificity can cripple an estate plan, especially if you try to construct complicated rules to handle changes in your family structure or financial situation. Example: Rather than attempting to calculate adjustments in the percentage of assets that each child from previous marriages will inherit in the event that you and your new spouse have a new child, simply write into your estate plan that you will revisit this agreement with each major change in your family’s makeup. Even if nothing substantial has changed, it’s a good idea to revisit your estate plan every two to five years to ensure that it still meets your goals and intentions.
7. Have honest conversations with your family. Even the most carefully crafted estate plans can result in frustration and resentment if you don’t discuss them with your family members. This is especially true for blended families, which can include step-siblings who don’t fully trust one another and half-siblings who may have such a big age difference that they don’t really know one another.
Once you have completed your plan, arrange meetings with the named family members (either as a group or individually if the siblings don’t get along) to review your rationale for each decision in your plan. Such conversations can be difficult, but they will help answer questions your heirs might have and can go a long way toward avoiding ill will in your family many years down the line.
