Getting married for another time can represent an exciting new chapter in life. It also merits careful consideration of both parties' estate plans. Without that critical step, the new couple risks having their intentions for their estate thwarted. In a worst-case scenario, it could even mean a trip to court for any beneficiaries challenging outcomes, costing them and the estate money.
Consider the following situation: A divorced client with adult children remarries and her new spouse also has adult children from a prior marriage. Without understanding the implications, the client established joint tenancy accounts with her new husband and named him the primary beneficiary on all her own accounts. The client then dies, and her assets transfer to the new husband. Ultimately, the new husband also dies, and all the assets that had originally been hers go to his children—including her family heirlooms, some of which had been in her family for generations.
To get you and your new partner started on a better path, consider the answers to these 4 questions.
1. Who do we each want to inherit, and when?
Before marriage, couples should clarify to themselves and each other what each would like to happen when the first dies. While this conversation can be difficult, it's necessary to avoid potential future conflicts.
An estate planning attorney can help facilitate a conversation that organizes your thoughts and objectives. Prior to the meeting, you and your partner may want to consider the following:
- Do I want my surviving spouse to be the sole heir to my assets?
- Should my new spouse only have access to assets for limited uses such as for their health, education, maintenance, support, or should it be unlimited?
- After my new spouse passes, where do the funds go: To my biological children, to stepchildren, or to both?
- Are children entitled to any funds immediately or during my surviving spouse's lifetime or should they wait?
- If a trust is created, who will be the trustee? Will the trustee be independent, or should it be a corporate trustee?
2. Should we create a prenup?
Some say that nothing says "I love you" like a prenuptial agreement. A prenup is a written contract created before marriage, that typically lists all the property each spouse is bringing to the marriage and specifies what each person's property rights will be after they marry. Couples with children from prior marriages may use a prenup to specify what will happen to their separate property when they die, so that they can pass on separate property to their own children while still providing for each other, if necessary. Without a prenup, a surviving spouse might have the right to claim a large portion of the other spouse's property, leaving much less for the children.
3. Does a will offer sufficient protection?
If a prenup isn't in the cards, then post-marriage, one option for the new couple to help ensure that assets reach desired beneficiaries is to create separate wills. However, it's common for married couples to have wills specifying that each spouse gives their entire estate to the other. These are known as mirror image wills. When the second spouse passes, the property is ultimately distributed to the children (or other heirs) of that surviving spouse and the biological children (and other heirs) of the first spouse are disinherited. Couples should consider with their attorney whether or not a mirror image will suits their needs.
In addition, there are limitations to wills which are important to consider when planning for blended families. Although the family may seem strong and cohesive for many years, relationships and family circumstances may shift over time, especially once one spouse passes away. Spouses who aren't biological or adoptive parents may not cherish children from their deceased spouse's previous marriages. As a result, the surviving spouse could change the terms of their will to disinherit the children from their deceased spouse's first marriage.
Moreover, a surviving spouse may decide to remarry again, and that new relationship can affect future decisions and distributions.
4. How might a trust help?
Another possible solution that allows each spouse to dictate the terms of their estate is a living trust. A living trust lets each transfer assets where, when, to whom, and in the way they want. There are many ways to structure a living trust. One option is to create one joint trust, that can split into 2 separate trusts at the death of the first spouse. These separate trusts are funded at the first death based on an allocation agreed to by each.
It may be a good idea to make the division mandatory at the time of the first death, otherwise the surviving spouse can change the ultimate distribution of the deceased spouse's assets. The trust of the deceased spouse (which becomes irrevocable at death) often provides for the surviving spouse, but typically in a way where the balance of the trust can be redirected back to the deceased spouse's children, once the surviving spouse passes. The primary benefit is that the surviving spouse can be provided for during their lifetime, but in a way where the terms of the trust cannot be changed, so that the assets reach the ultimate intended beneficiaries.
For example: A client, Susan, has a trust that upon her passing would provide income to her surviving spouse, Rodger, for his lifetime, with limited principal distributions. Upon Rodger's passing, the trust specifies that the balance of the trust is distributed to Susan's children. In this case, because the Rodger and Susan's children are both beneficiaries of Susan's trust, it would be important to specify how assets should be invested—since investing for current income would generally favor the surviving spouse, while investing for long-term growth would generally favor the children.
Of course, this is a simplified example, and only one possible distribution pattern. The important point is that each spouse chooses the distribution pattern for their own trust. In addition, each spouse can freely choose their own fiduciaries and the funds in trust are protected from the other spouse's and children's creditors. Finally, in any of these approaches, the couple's attorney will be sure to consider any state "elective share" statutes that may entitle a spouse to a certain percentage of estate assets.
One more consideration
For blended families, it's important to carefully identify the parties to the trust, especially the beneficiaries, and avoid general terms such as "to my descendants" or "to my children." This language is often used in living trusts, but for blended families the use of such language may result in unintended consequences. It's unclear whose descendants and children are being discussed—the decedent spouse's children, the surviving spouse's children, or both? With that in mind, best practices include explicitly identifying spouses, biological children, stepchildren, and all other beneficiaries.
Blended families are very common in the US and those that prepare proper estate plans, with explicit instructions as to what happens to family assets upon death or disability, are likely to ultimately achieve their desired outcomes. Although the above represents just some of the considerations, they represent a good starting point to getting you closer to clarifying your objectives—ultimately resulting in the creation of an effective plan. Consult with your estate planning attorney for strategies specific to your family's situation.
David is responsible for Fidelity's estate and wealth planning activities, including creation of new thought leadership in these areas. He heads a team of professionals that develops and delivers the depth and breadth of Fidelity's wealth planning offering.
Prior to joining Fidelity, David was managing director and head of Insured Solutions for UBS Wealth Management Americas. He served as chief operating officer of UBS Wealth Planning. David first joined UBS as a senior member of UBS Private Wealth Management, and was involved in the creation of that business for the firm. During his tenure with UBS, he also served as the chairman and president of UBS Life Insurance Company USA, Inc.; the chairman and president of UBS Financial Services Insurance Agency, Inc.; and a board member of UBS Trust Company, N.A.
Prior to joining UBS, David was a director in Merrill Lynch's Private Banking & Investment Group. He joined the firm's International Private Banking business in London and was a key member of the firm's Corporate Strategy unit.