Here’s the story of a lovely lady,
Who was bringing up FOUR very lovely girls…
Here’s the story of a man named Kevin,
Who was busy with THREE kids of his own…
Till the one day when the lady met this fellow,
And they knew it was much more than a hunch,
That this group must somehow form a family,
That’s the way we all became…
Involved in a much more complicated estate plan!
That’s not really how the story is supposed to end, right? I was the lady in this scenario, and Kevin is now my husband. Like other couples, when our relationship started we took long walks, went out to dinner and the movies, and had deep conversations. The furthest thing from our minds was how, if this relationship continued, we would set up our estate plan.
As things progressed, our discussions turned to the logistics of combining households, who would get to park in the garage, and what brand of toothpaste we would share. Estate planning didn’t seriously come up. We were happily married in the summer of 2014 — two adults, seven children, and two dogs all living as a family that was actually larger than the Brady Bunch!
Then reality set in. As we were re-naming beneficiaries and combining our financial affairs, the complications of this second marriage started to emerge. We couldn’t delay the inevitable. We needed to have a difficult and uncomfortable conversation regarding our estate plan. We had to address questions such as what would go to the children of our first marriages; what, if anything, we would give to charity (would we agree?); and what would go to the surviving spouse upon the death of the other. While these issues were complicated and emotional, we knew we needed to plan before it was too late.
We had to consider some pretty scary scenarios. Say, for example, that Kevin passes away, leaving everything to me with the expectation that I will provide for his children and carry out his philanthropic wishes. Instead, suppose I get remarried, and I change my beneficiary designations so that all those assets, now my assets, will pass to my own four biological children at my death. Nothing would be left for Kevin’s kids. Other possibilities could be even grimmer, and they have to be considered in estate planning.
At Trust Point, we talk to many blended families to help provide advice and tools to plan good solutions and ease possible family conflicts. Here are some recommendations for estate planning if you are already in a second marriage, or even just thinking about it.
Where to start
Good communication is key. Have an honest conversation with your new spouse about your existing finances, your goals for the future, and how you expect your assets to be distributed. If your children are adults, you may also want to include them in these discussions so that everyone knows what to expect. Consult with the estate-planning experts at Trust Point to discuss the special challenges that present themselves in second marriages. Like most people in this situation, you probably want to provide for your spouse’s needs, while ensuring that your children will retain part of the property or assets. Providing for everyone can get tricky.
One place we like to start with families who seek Trust Point’s expertise is to review any fiduciary designations you have made. This includes beneficiary information on insurance policies or retirement accounts, power-of-attorney (POA) designations, and healthcare directives. In your estate planning, you should think holistically about insurance policies and retirement accounts. For example, you might want to provide a death benefit through a life insurance plan for your spouse, while allowing the rest of your estate to pass to your children.
It is important that you do not name minors on your beneficiary designations. Minors are not legally able to control assets, and a guardian may have to be appointed by the court to manage the assets until the minor turns 18.
A durable power of attorney lets you name a trusted individual to manage your financial affairs and legal decisions during your lifetime if you are not able. Similar to a POA, a healthcare directive allows you to name someone you trust to make decisions about your medical treatments when you are not capable yourself. An updated healthcare directive is always helpful for medical professionals in the event of an emergency. Reviewing your healthcare directive gives you a chance to talk with your new spouse about your feelings regarding end-of-life care, organ donation, and burial arrangements.
Surprisingly, we often meet with people who forget to change one or more of these designations — financial, legal, or medical — when they get divorced or remarried. Make sure that your accounts and plans are up-to-date and that everything matches your wishes. You don’t want to accidentally leave money to an ex-spouse or present your new blended family with any other disagreeable surprises.
Whose is Whose?
You may come into a second marriage with individual assets, as opposed to owning everything as joint tenants with right of survivorship. Under the latter arrangement, the surviving spouse would have sole ownership of the assets at the passing of the first spouse. This would allow them to dispose of the property as they deem necessary, which could include selling a house, say, and leaving the proceeds only to their own biological children.
Given that lack of control, alternative property arrangements should be considered. This could be accomplished through a marital property arrangement that lists all significant assets and specifies which spouse has ownership of each. For example, if one spouse solely owned a house prior to marriage, that owner could set-up a life estate to allow the surviving spouse to use and maintain the property during the survivor’s lifetime. At the surviving spouse’s death, the property would pass to beneficiaries named by the other spouse — the one who originally owned the house.
Special considerations need to be made if you live in a community-property state, where most property is considered jointly held after marriage. There are exceptions to the rule so it is important to have these discussions. Identifying exceptions such as this are where the credentialed staff at Trust Point can really add value to your estate plan.
If there are family heirlooms or other specific items that you know you’d like to leave to your biological children, start putting together a list. Make sure those items are addressed in writing in your final estate plan. One of the biggest mistakes people in blended families make is failure to clearly identify any property that will be left to specific children. At Trust Point, we have encountered a number of situations where an estate has an item that has little to no financial value, but the family still has conflicting viewpoints of what happens to it. Disappointment and family tension arise when children don’t receive something they’re convinced their parent wanted them to have.
It is common in first marriages to leave everything outright to the surviving spouse. In a second marriage, the benefits and risks need to be weighed more carefully. On the plus side, outright distribution to the surviving spouse occurs under the estate-tax marital deduction, which defers any estate tax liability until the second spouse’s death. Outright distribution also provides the surviving spouse with free access to the funds, with no special oversight or reporting required.
On the other side of the coin, there are risks. If you die, your surviving spouse could get remarried again and give everything to the new spouse, leaving nothing to your children. Or, the surviving spouse could spend the money in an extravagant, irresponsible way. Or. everything could be eaten up by creditors of the surviving spouse.
Special Tools for Special Cases
It is important to learn about tools and techniques that can help you get where you want to go. One tool that may be suggested, given the risks associated with leaving property outright, is the use of a trust. Setting up a marital trust for the benefit of the surviving spouse will not only provide for the survivor but also will allow the deceased spouse to control where the property goes upon the surviving spouse’s death.
A marital trust provides for the surviving spouse by requiring mandatory distribution of income. Under some arrangements, discretionary principal also may be provided for the surviving spouse’s lifetime. Discretionary distributions are determined by the language in the document, but typically would include health, education, maintenance, and support of the surviving spouse.
The person or organization you name as trustee of this trust should be selected with care. The trustee must act in an objective manner to avoid future conflict.
An independent fiduciary, such as Trust Point, may be a wise choice to help avoid family discord. Trusts do require some administrative time and costs, but the peace of mind they provide are well worth the expense.
You need an estate plan that fits you and your situation. At Trust Point, we understand the value of getting to know our clients and understand that each situation is different. Knowing a family’s values and goals allows us to create customized plans. Besides our credentialed staff, we also work in tandem with estate planning attorneys to ensure the plan works as it should.
After many long discussions, Kevin and I finally have a plan in place. It was a lot of work, but we knew that if one of us passed, expecting the survivor and the children to “just work it out” was not a good plan. We now know that what we want to happen will actually happen. That will help ensure we all remain one big happy, blended bunch!