For traditional nuclear families, the goal of estate planning is usually straightforward: Leave everything to the surviving spouse who, in turn, will leave everything to their joint children. Things get more complicated when a person divorces and remarries, particularly when he or she has children (or stepchildren) with more than one spouse. Here are five tips to consider if you’re divorced and getting married for the second (or third) time.
- Update your will and other estate planning documents. It’s critical to review your will, trusts, health care directives, powers of attorney and other estate planning documents to ensure you’re not unintentionally benefiting your former spouse or his or her family or giving them control over your affairs. Check whether your former spouse or members of his or her family are appointed as executor, trustee, guardian, agent or attorney-in-fact in any of your documents. In many states, a divorce decree automatically revokes property dispositions to, as well as appointments of, your former spouse, but it may not automatically revoke dispositions to or appointments of your former spouse’s relatives.
- Consider a prenuptial agreement. If you have children from your previous marriage, you may wish to leave the bulk of your estate to them, particularly if your new spouse is financially independent. The laws in most states, however, make it difficult to “disinherit” your spouse.
For example, many states provide a surviving spouse with an “elective share” — typically between one-third and one-half — of the other spouse’s estate, regardless of the terms of his or her will or living trust. And in community property states, absent a specific agreement to the contrary, each spouse generally is entitled to half of all community property.
You can use a prenuptial agreement (or a postnuptial agreement if you’re already married) to waive your respective rights to each other’s property. These agreements can also be used to serve a variety of other purposes, including retaining control of a business and defining premarital assets and debt.
- Review beneficiary designations. Determine whether your former spouse is still named as beneficiary of any life insurance policies, annuities or retirement plans and update the beneficiary designation if appropriate. Also, keep in mind that, if you’ve named any minor children from your previous marriage as beneficiaries, and you unexpectedly die, your former spouse will likely become their legal guardian and gain control over their property. If this scenario is unacceptable, consider designating a trust as beneficiary for your child’s benefit.
Have you established any irrevocable trusts that name your former spouse as a beneficiary? If so, do the trusts provide that his or her rights terminate automatically in the event of divorce?
Also, find out whether your divorce decree grants your former spouse any rights with respect to life insurance, retirement plans or other assets. If the answer is yes, your ability to update certain beneficiary designations may be limited.
As you name new beneficiaries, be aware that your new spouse may have mandatory rights to certain assets, such as qualified retirement plans. If you wish to name someone else as beneficiary — a child from your previous marriage, for example — you’ll have to ask your new spouse to waive these rights in writing.
- Make the most of trusts. If you leave wealth to your spouse outright, there’s no guarantee that he or she won’t spend it all or share it with a new spouse, leaving your children from your previous marriage with nothing. The creative use of trusts can avoid this result and ensure that all your loved ones are provided for.
For example, you might establish a trust for your new spouse (and any children you have together) and a separate trust for your children from your previous marriage. Another option is to set up a trust that provides your new spouse with income for life and preserves the principal for your children.
If you’re affluent enough that estate tax is a concern, consider a qualified terminable interest property (QTIP) trust. This type of trust allows you to take advantage of the unlimited marital estate tax deduction without having to leave all your wealth to your new spouse outright.
To qualify, the trust must meet several requirements, including paying out all its current income to your spouse. If these requirements are met, the trust assets are shielded from taxes in your estate and the principal is preserved for your children or other beneficiaries. Bear in mind that, when your surviving spouse dies, the remaining trust assets will be included in his or her estate and potentially be subjected to estate tax.
- Use life insurance. If you don’t want your children to wait until your new spouse dies to receive their inheritance, a QTIP trust may not be the best option. Instead, consider using life insurance — placed in an irrevocable life insurance trust if necessary to avoid estate tax — to provide immediate benefits for your children while leaving other assets to your spouse.
To ensure that your objectives are met, begin planning as early as possible, ideally before your divorce is final. The terms of your divorce decree can affect your ability to provide for your children and a future spouse, so it’s a good idea to consult your estate planning advisor during the divorce process. Also, keep an eye on Congress as they debate whether to repeal the estate tax. If tax laws are changed, many common estate tax planning strategies will no longer be applicable.
Sidebar: Second marriages: Choose trustees carefully
If you’re remarrying, it’s critical to choose your trusts’ trustees carefully. Naturally, your new spouse and your children from your previous marriage will have conflicting interests in your wealth, particularly with respect to trusts that provide an income interest to your spouse and a remainder interest to your children. To minimize tension and disputes, consider appointing an independent or corporate trustee.
