Second marriages inevitably create estate-planning complications, warns attorney Martin Shenkman, CPA. The need to update beneficiary designations, powers of attorney and other documents to name the new spouse (or not) is only a small part of the challenge—additional planning steps often are needed, and some of these are tricky enough that missteps are common even when working with an experienced estate planner. Bottom Line Personal asked Shenkman what people planning a redo on “I do” need to know about their estate plans…
Preplan your Prenup Approach
Remarriage ratchets up the importance of prenuptial agreements. First marriages typically unite partners who are still young and possess relatively few assets. Second marriages more often involve somewhat older spouses with significantly higher net worths and perhaps kids from prior marriages…and the more partners have when they wed, the more important prenups become. But “get a prenup” is insufficient advice, warns Shenkman—the difficult part is to get a prenup in a way that doesn’t damage the relationship and protects your goals. Asking a fiancé to sign a prenup pits partners against one another in a financial negotiation. If mishandled, this can even create the impression that one partner thinks the other is after his/her money. “It is possible to control this process and avoid unnecessary antagonism,” says Shenkman. “But many people don’t do it very well.”
Shenkman’s strategy: You might start the prenup process not with visits to lawyers but with a joint visit to a financial advisor. Attorneys sometimes try to hammer out the best possible terms for their clients. Worrying about the feelings and finances of those clients’ fiancés may not be their priority. A fee-only financial advisor can instead focus on finances in a way that draws a couple closer together and finding practical solutions to conflicting goals. Instruct this advisor that the goal for the meeting is to find ways in which the soon-to-be-married couple can function effectively as a collective financial unit. The advisor’s recommendations will vary depending on the couple’s situation but might include such strategies as buying life insurance and disability insurance policies naming each other as beneficiary to provide financial protection for the new spouses…creating a joint budget…and/or seeking out savings by eliminating duplicated expenses. These conversations might help fiancés see each other as financial allies, reducing the odds that the potentially adversarial prenup process that follows will do substantial damage to the relationship.
Trusts to Protect Premarital Assets
In most states, assets owned by one partner prior to marriage remain the legal property of that spouse in the event of divorce, as long as those premarital assets are never “co-mingled” with the couple’s joint assets. But, Shenkman warns, avoiding asset co-mingling can be tricky during marriage.
Example: A married person who is aware of the financial dangers of asset co-mingling might know not to add money earned during the marriage to a premarital investment account—but that alone doesn’t guarantee that a divorce court won’t later consider the account co-mingled. What if money from the premarital account is used to pay the couple’s joint expenses? What if the couple’s joint assets are used to pay taxes resulting from investment income generated by the premarital account? Such things might be sufficient for a divorce court to rule that the assets have been partially co-mingled—if nothing else, it could trigger expensive legal battles between forensic experts evaluating the accounts.
Shenkman’s strategy: Prior to the marriage, if appropriate, have an attorney set up a “grantor trust” and place your premarital assets into this. Creating this type of revocable trust should cost around $1,000 to $6,000, and it won’t create extensive tax-reporting requirements or other major complications. Obtain a separate tax ID for the trust by filing form SS-4, Application for Employer Identification Number, with the IRS—despite this form’s name, it is used for trusts and estates, not just by employers. Placing assets in a trust that has its own tax ID may increase the odds that a divorce court will respect that these premarital assets have truly remained separate from the couple’s joint assets. Label the trust “John Doe’s Revocable Separate Property Trust,” substituting your name in place of “John Doe.” Having this label on the trust may help remind you what the trust contains and what it’s for, reducing the odds that you’ll accidently mishandle the assets it contains.
Does that sound like too much? If you’d prefer a simpler premarital asset-protection option, skip the trust and instead open a bank account or money-market fund account in your name—not both partners’ names. Use this account exclusively to receive income generated by the premarital assets and/or pay taxes and other expenses related to the premarital assets. Never transfer money from the couple’s joint account into this account. This may be sufficient to prevent premarital assets from being deemed comingled, though there is room for a divorce court to rule otherwise. That won’t mean that a court won’t consider those assets in formulating a settlement.
Does that sound like not enough asset protection? If you’re looking for the strongest possible premarital asset protection, also have an estate-planning attorney set up a type of irrevocable trusts known as a Domestic Asset Protection Trust (DAPT), then transfer your premarital assets into this trust prior to the marriage. This type of trust can completely separate premarital assets from the marital assets. Note that not all states allow DAPTs—but if you live in a state that doesn’t, you can set one up in a state that does as long as you have a trustee in that state. Downside: Setting up a DAPT can cost $5,000 to $15,000+, and it will significantly reduce your flexibility in terms of how you can use the assets that you have placed into the trust.
Dividing Assets Between New Spouse and Prior-Marriage Kids
“Everyone says ‘I just want a simple estate plan’,” explains Shenkman. “But if you have a blended family, a division of assets that seems simple might not work very well.” The interests of your new spouse and the children from your prior marriage may be too divergent to expect them to work smoothly together when it comes to your estate. If you’re in this situation, you need to consider not only what is fair in a second marriage and estate planning but also what could go wrong.
Example: A man who has remarried and has children from an earlier relationship tells his estate-planning attorney that he wants his new wife to retain access to the lion’s share of his assets after he dies…but when that wife dies, he wants the remaining assets to pass to his kids from his earlier marriage. That sounds fair and reasonable—but if that new wife is significantly younger than this man, she might outlive him by decades, meaning that the children from the earlier marriage might not inherit until they’re very old, if at all. Or that new spouse might find ways to divert money from the husband’s trust to her own, so her children from a prior marriage inherit instead. If this man becomes disabled before dying, for example, his wife might have power of attorney from him, giving her an opportunity to siphon off money before it makes it into his estate. Protecting children’s inheritances in second marriage should be a concern even when the new spouse’s morals and intentions are above reproach—that new spouse’s own adult children or someone he/she later marries might manage to manipulate the situation.
Example: Alternatively, a man who has remarried might tell his attorney that he wants everything divided evenly between his kids and his new spouse. But what does “evenly” mean if the spouse wants to continue living in the couple’s home? The seemingly simple request to divide everything evenly could lead to costly appraisals or even court battles.
Shenkman’s strategy: If you remarry, one of the primary goals of your estate plan should be to minimize entanglements between your new family and your children from your prior relationship(s). Even if you’re certain that everyone involved is mature, honest and well-meaning, the different branches of your family will always be somewhat at odds with each other when it comes to your estate. An effective way to minimize these entanglements is to provide one or two specific assets to the new spouse and everything else to children from the prior relationship…or vice versa. Insurance policies may be a good choice here—you might purchase a permanent life insurance policy and put it in a trust for the new spouse, with the rest of your estate going to the kids…or name the kids as beneficiaries of the insurance policy and leave everything else to the new spouse. If the new marriage results in children as well, those children can inherit their share of your estate from your new spouse when he/she dies.
