Financial Planning for Your Second Marriage
Lisa Smith* says her father was “obsessed with preserving capital”—and planned his estate accordingly. The late corporate executive set up a marital trust in which Lisa’s stepmother receives the income from the estate, while the principal will revert to Lisa and her siblings—a sister and a stepbrother—upon her stepmother’s passing.
In the meantime, Lisa’s father wanted the interests of both his biological children and his stepchild represented equally alongside those of his surviving spouse, so he named Lisa and her stepbrother—but not her sister—as trustees. “It all sounds great, but by not including all his kids he unwittingly put me in the position of constantly figuring out how to be fair to my sister,” Lisa says.
Complications like these are becoming commonplace as more and more people remarry later in life. In 2013, roughly two-thirds of adults ages 55 to 64 had remarried, up from 55% in 1960. And half of adults ages 65 and older had remarried, up from just 34% in 1960, according to the Pew Research Center.1
Such later-in-life unions often involve higher financial stakes. One or both partners may come to the new marriage with children, financial commitments that can include alimony and/or child support, and sometimes substantial assets that can complicate matters further.
These and similar challenges can test even the strongest relationships, making a comprehensive financial and estate plan all the more important. “I’ve seen what can happen when clients don’t tackle these issues head-on—from sky-high legal fees and family strife to the wrong beneficiaries being named,” says Kim Frank, a tax, trust and estate specialist in Schwab’s Wealth Strategies Group.
Kim notes that it’s not just children who are put at financial risk by poor estate planning. She’s seen situations where surviving spouses become financially reliant on relatives who may or may not have their best interests at heart.
Kim says taking the following steps can help ensure all your loved ones are taken care of according to your wishes.
Consider a prenuptial agreement
There are two key issues every prenup should address:
- The first is how assets will be divided in the event of divorce. That’s a difficult prospect to confront before you’ve even exchanged rings, but the unfortunate truth is that divorce rates for second marriages and beyond are even higher than those for first marriages.2 So while you can hope for the best, hope isn’t a strategy.
- The second is deciding how you’ll own your accounts and other assets, such as real estate, after marriage. “If you’re treating assets as separate, it’s crucial that you keep them separate,” Kim says. “If you later combine assets or use individual monies for a marital asset, such as a home, the prenup may no longer apply to those assets.” (See “A primer on prenups,” below.)
If your partner was previously married, Kim also recommends reviewing her or his divorce decree for obligations to the former spouse and any children. “It’s critical to know in advance,” she says, and suggests that remarried clients immediately update wills, powers of attorney, and the beneficiaries on all accounts and insurance policies so assets or important decisions aren’t unwittingly left to an ex-spouse.
Some married couples might also consider a “postnuptial” agreement to address many of these same issues. However, “the harsh reality is that the courts tend to assume that a prenuptial agreement is always valid,” writes attorney Robert J. Nachshin in the American Bar Association’s GPSolo magazine, “but they have the opposite reaction to the postnuptial agreement—the assumption is, in the majority of cases, that that type of agreement is not valid.”3
“Many clients still rely on an honor system, naming the surviving spouse as the sole beneficiary with the hope he or she will in turn name any children from a previous marriage,” Kim says. “The problem is that the surviving spouse has no legal obligation to follow through, and so spelling it out is important lest your children be inadvertently disinherited.”
An estate-planning professional can help to develop a plan that meets your goals and reflects your wishes. Experts like Kim work with clients and their attorneys to address the challenges specific to blended families, including asset titling, estate planning, prenups, and primary and secondary beneficiary designations, with an eye toward your changing financial picture.
Make it legal
Once you’ve spoken honestly with your soon-to-be spouse and an estate planner, the next step is to make your wishes legally binding. One option is to move individual assets into a living, or revocable, trust that gives you the flexibility to make changes to the terms of the trust during your lifetime and then becomes fixed, or irrevocable, upon your death. “Trusts can be a more secure way to plan,” Kim says, “rather than simply naming your spouse as the primary beneficiary or as the joint tenant with right of survivorship and expecting the rest to work itself out.”
If you do decide to establish a trust, make sure you name a reliable trustee to manage the assets. For example, if you name your surviving spouse as not only the primary beneficiary of the trust but also its trustee, he or she has full discretion over the distribution of assets. By the same token, Kim has seen stepchildren named as co-trustees alongside a surviving spouse, who then required authorization from the stepchildren to meet daily expenses. Kim cautions against such situations that can put a spouse and stepchildren on a repeated collision course.
Of course, such family dramas can largely be avoided by appointing an impartial third party, such as a corporate executor or trustee with experience in complex financial matters. “Professionals can add to the cost of administering an estate, but they can also act as honest brokers between family members who might otherwise come into conflict,” Kim says. And you can’t put a price on that.
Remarriage in America
Forty percent of new marriages include at least one spouse who was previously married.
Source: Pew Research Center, with data from the U.S. Census Bureau’s 2013 American Community Survey.
Primer on prenups
Prenuptial agreements aren’t just in case of divorce.
Prenups were once the purview of the super-rich. But with Americans marrying (and remarrying) later in life—and therefore bringing to the altar far richer family and financial lives—prenups have become more commonplace. “A prenup is often a good idea, especially when you consider that half of all marriages end in divorce,” says Kim Frank, a tax, trust and estate specialist in Schwab’s Wealth Strategies Group.
Typically, a prenup will spell out what each partner is bringing to the marriage—including income, real estate, retirement savings and any expected inheritance—and whether each asset will be treated as separate or joint.
What’s more, prenups can shield one partner from any liabilities accumulated prior to the marriage by the other, including student loans, credit card debt, and alimony and/or child support. “In the event of divorce, courts will sometimes try to divide the debt load equally between each of the two parties, but often that’s not an equitable solution if it’s primarily one partner’s,” Kim says. “How to treat debt, in particular, should be decided prior to marriage.”
That said, prenups are more than just insurance in the event of divorce. They can also be an important estate-planning tool. Kim recalls one client with children from a prior marriage who married someone with no children. Their prenup stipulated that the premarital value of her brokerage assets would go to her heirs, and that her half-interest in the home she shared with her husband would be held in a trust so that her half of its value would pass to her children upon his death.
Schwab specialists like Kim will often help clients identify and work through their specific issues before referring them to an estate-planning or marital attorney who will draft the actual agreement.
Needless to say, even broaching the topic of a prenup should be handled with care. Ultimatums, for example, set the wrong tone and turn an already sensitive issue into a potentially volatile one. Instead, Kim suggests finding common ground. “Each side might have something to protect,” she says, “so a better approach could be, ‘I’d like to keep these assets separate. Is there anything you’d like to keep separate?’ Broaching it like that can help bridge the divide.”
Finally, Kim recommends that you allot at least three to six months before the wedding to work out the details and have the prenup finalized. “There’s enough drama and scrambling before most weddings that you definitely don’t want to leave it to the last minute,” she says.
*Name has been changed to maintain confidentiality.
1The Demographics of Remarriage, 11/14/2014.
2Susan L. Brown and I-Fen Lin, The Gray Divorce Revolution: Rising Divorce Among Middle-Aged and Older Adults, 1990–2010, National Center for Family & Marriage Research at Bowling Green State University, 10/2012.
3“Prenuptial and Postnuptial Agreements,” 2001, Vol. 18.