Estate Planning for Second Marriages
Second marriages are ubiquitous in the contemporary United States. This post takes a look at a few of the common challenges with second marriage estate plans.
When we consult with our estate planning clients, we give second marriages special consideration. Depending on the circumstances, an estate plan can be intimidating both during the initial discussions between spouses, and after one of the spouses dies.
One of the initial questions we ask our estate planning clients is: are you in your first marriage together, or is this a second or subsequent marriage for either of you? The answer to that question frequently drives the remainder of our consultation. Second marriages deserve carfeful consideration in any estate plan.
Couples in their first marriage present a more traditional estate planning scenario. The couple works together during their marriage to build-up a marital estate that is preserved through a conventional estate plan. These estate plans are designed to use marital resources for the spouses during their lifetimes, then pass on to their children or other heirs.
Couples that are in second or subsequent marriages, however, present unique challenges depending on the variety of circumstances involved in such marriages. Here are a few types of second marriage cases our law firm sees in our estate planning practice.
Scenario One - Each Spouse has Adult Children
In this case, each spouse has their own adult children. First, are any of the children to be disinherited? Or are each of the spouses separate children to be treated equally? Second, when do the spouses -referred to as "Grantors" in estate planning parlance- want their respective adult children to inherit funds from their trust?
The primary concern in a joint trust posture under this scenario is what to do when the first spouse dies. Sometimes, the couples' estate is divided into two equal shares: one for the deceased spouse; the other for the surviving spouse. Then, the deceased spouse's share is divided into separate trusts for his or her adult children; in accord with that spouse's testamentary wishes. The advantage to this type of distribution pattern is that the deceased spouse -during their life- has the certainty of knowing his/her adult children will be taken care of immediately following their death.
In other cases, the surviving spouse is in control of the entire marital estate for the rest of his/her life and the adult children of each spouse waits until the surviving spouse dies before the estate is distributed to the beneficiaries. The obvious advantage to this distribution pattern is that the surviving spouse has the benefit of the entire marital estate for the balance of their life.
Often, when couples come to their initial estate planning consultation at our law firm, they have not discussed these scenarios. This leads to a tense conversation. Sometimes one spouse is discovered to be holding a grudge against one or more of the other spouse's children. Other times, some type of undisclosed grievance comes to light impacting the ultimate structure of the estate plan.
Scenario Two - Disparate Ages and Wealth of the Spouses
In this scenario, one spouse comes to the second marriage much younger and significantly less wealthy than the other spouse. Here, the elder moneyed spouse usually desires to retain a significant portion their wealth for their adult children.
This can be accomplished with a proper estate plan. The younger less wealthy spouse can be granted advantages such as a life estate in the marital home or a specific financial bequest. In this manner, the bulk of the older wealthy spouse's estate is preserved for its desired purpose.
Many times, the adult children of an older wealthier individual see the new spouse as a threat. More often than not, these perceptions are not discussed between spouses, or between the parent and the adult children. What gets left unsaid over the years transforms into deep feelings of distrust which then explode into crisis upon the death or illness of the older spouse.
Proper estate planning and communication can alleviate such devasting scenarios. For this to happen, however, the monied spouse usually needs to take the lead on these discussions. Being proactive with an estate planning lawyer is a "best practice" to avoid distrust and to prevent ruptured relationships.
Scenario Three - Mental Illness of the Surviving Spouse
Mental health is in a free fall crises these days. Unfortunately, it eventually affects most families one way or the other. In the context of second marriages, proper estate planning can head off unforeseen mental health problems.
The basic scenario is where one spouse dies in the second marriage. Depending on the estate plan, the marital estate is then left to the surviving spouse. If the surviving spouse has a significant mental illness, there may be nothing left for the next generation.
Due to its unpredictability, mental illness is difficult to plan for in second marriages. One of the chief concerns is that the marital estate is exposed to perpetrators of the many forms of financial elder abuse. When both spouses have adult children, the estate planning goal of leaving one's estate to their children is significantly complicated.
On the one hand, most people would agree that the mentally challenged indivudal will need the entire marital estate to survive, especially once they lose their trusted partner. They need resources more than ever once they are on their own. On the other hand, the adult children of the decedent spouse are then exposed to receiving nothing when the surviving spouse finally passes.
In our experience, these difficult concepts are almost never discussed between spouses, or their adult children. And that is a shame because they need to be thoroughly discussed.
The families within second marriages are all different. Each have their strengths and weaknesses. A good estate planning attorney can navigate a path that makes sense for each spouse.
Prenuptial Agreements
Prenuptial agreements can be utilzed to address some of the challenges highlighted in this blog post. But a recent poll conducted by the American Bar Association found that only 15% of couples utilized a prenuptial agreement.
Prenuptial agreements contemplating divorce have been legal in Michigan in 1981; prior to that year, prenuptial agreements could only contemplate the death of a spouse, not divorce. There are some basic requirements for a valid prenuptial agreement: paramount among these is that the agreement must be fair, equitable and reasonable relative to the surrounding facts and circumstances of the executing couple.
To be considered fair, the executing parties must disclose all their assets and liabilities to the other. Each party must have ample opportunity to consult legal counsel. The further in advance of the nuptials the agreement is signed the better; midnight on the evening before the wedding is not the time to execute the agreement.
A 2017 Michigan Supreme Court decision in Allard v Allard forever changed the landscape of modern prenuptial agreements. In that case, the issue was whether a family court had the power to invade the separate property of a spouse, even when the genesis of that separate property was protected by a prenuptial agreement.
The Supreme Court answered the question in the affirmative: family court judges can, under certain circumstances, award the separate property of one spouse to the other spouse, even when the property was designated as separate within a properly executed prenuptial agreement.
Currently, there is a movement among the family law bar in Michigan to adopt the Uniform Premarital and Marital Agreement Act [UPMAA]. This uniform act does not apply to separation agreements; does not affect the rights of third parties; affirms that prenuptial agreements are enforceable without consideration [normally a requirement for a contract to be valid]; and establishes standards of enforcement to guide family court judges.
In second marriages, a prenuptial agreement, when combined with a well-designed estate plan, is a powerful planning tool. Many disaster scenarios can be avoided. Also, expectations can be discussed and satisfied with the proper planning.
Beneficiary Designations
The use of proper beneficiary designations is also important in second marriage estate plans. Again, communication and trust are the keys to success.
When the spouses of a second marriage discuss their estate plans, retirement assets should be thoroughly discussed. Social security planning and required minimum distributions are important planning tools.
Properly designating beneficiaries can accentuate a well thought out estate plan by providing for individuals that the participant desires to care for. Inattention to such details can lead to problems for the loved ones left behind by a spouse in a second marriage. For example, in our practive, we have seen cases where the decedent spouse in a second marriage simply forgets to change his beneficiary designation after a divorce. Upon that spouse's death, there are then complications to sort out prior to the distribution of any of that individual's hard-earned retirement savings.
These and other scenarios play out across Michigan all the time within the context of a second marriage. Attention to detail, auditing one's retirment documents and designated beneficiary forms, and communication with one's spouse are the keys to success.
We Can Help
If you or a family member need estate planning assistance, our law firm offers a free consultation to get things started. Taking the first step in a second marriage is important to getting a customized estate plan completed. Give us a call; we can help.
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