Wedding Bells, Again – Some marriages are blissfully successful, but the estimated failure rate is over 50%. All too often, couples rush headlong into a new legal relationship without thinking through all the family ramifications. Estate planning is an important aspect, particularly if blended families that include children from prior marriages are involved.
Conversations with your new spouse
The first step, even before sitting down with an attorney or financial planning expert, is to have frank and comprehensive conversations with the potential partner. You need to consider the expectations for the new union and apply them to key questions.
- Which assets do you both want to leave to each child?
- Do you expect to have more children together?
- Which assets will you be combining in the marriage and which will you keep individually?
- Do you want to retitle some of the assets in both names?
- Is either of you carrying debt and how will it be handled?
- How old are any of the spouses’ children and will they need guardians?
- Do any of the children have special needs?
- Is there a significant age difference between you and your potential spouse? Is one of you more likely to survive the other?
- Will you be maintaining your former financial advisors, or is it more efficient to find someone new?
After you have hashed out these basics, you have some serious legwork ahead.
- Make an inventory of all the assets.
- Update wills and all beneficiary designations, such as 401(k) accounts, IRAs, bank and brokerage accounts, and real estate (including first homes and vacation homes).
- Consider life insurance and long-term health care insurance. Note that, regardless of a prenup, either spouse will be liable for the expenses of long-term health care, so consider insurance as a form of asset protection.
The best laid plans can go astray. Imagine that a couple has verbally agreed to treat all the “blended” children equally. Suppose one partner dies or the marriage breaks down. (Over half of second marriages actually do end in divorce.) The surviving or departing spouse may not be emotionally close to their stepchildren. Promises may be broken or overlooked.
What safeguards can you put in place?
Think about trusts
Trusts are an excellent mechanism for providing a spouse with lifetime income while capital or assets ultimately vest in children or other beneficiaries. At the same time, a trust may give protection from creditors, divorce proceedings or estate taxes. You can also control inheritance timing. If you die prematurely or are married to a much younger spouse, a trust allows some funds to be released to your children sooner, with the rest delayed until they are older.
A qualified terminable interest property trust (QTIP)is not a quick fix. QTIP trusts are always irrevocable, so they cannot easily be modified. QTIP trusts serve various purposes. For example, they may allow a widow or widower to live in a family home during his or her lifetime, without requiring them to request permission to sell it. Likewise, the surviving spouse may spend the trust income but not touch the principal. The spouse is also precluded from transferring the assets to a new wife or husband if he or she should remarry. A marital trust, by contrast, gives the spouse more control.
Estate tax under a QTIP trust is only assessed when the surviving spouse dies. It therefore postpones rather than eliminates the liability. The beneficiaries then become responsible for paying the tax. The trust must be settled with at least one trustee, but the grantor need not select the spouse. Why avoid naming a spouse? There are multiple reasons. It is conceivable a surviving spouse might not invest in the beneficiaries’ best interests. Conservative investments might provide more immediate income, but higher risk choices might yield more for future inheritances.
When you are ready to review your estate plans, an experienced attorney can help you address these complex dynamics.
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