I had a client who was the administrator of his wife’s estate when she passed away. She had been married before. She had never once thought about her estate planning. She had assumed that everything she had would pass on without complication to my client by operation of law. She left no will and no other instructions.
Her first husband had died about 25 years before her, leaving her a business and a home that she went on to share with the client upon remarriage. Over the years, he had built up this business with her, but it turned out that her first husband’s estate had debts, and other real estate holdings as well. The client ended up with two estates to sort out, whereby the complications of the first husband’s estate impacted his wife’s own estate. Real estate that had devolved to her through her first marriage had to be sold, and estate taxes paid. Some of this was owned by the business (not her) prior to the second marriage, adding another layer of complication. The paper trail of debt and other holdings was thin and not always helpful. And needless to say, this was a tremendously stressful situation for my client, a responsible man who always did the right thing, but who now found himself in his later years having to manage a messy ball of inheritance issues.
Second marriages — more than first marriages - need estate planning.
Most second marriages are the integration of two people’s assets and oftentimes, families. You and your spouse bring to your second marriage your investment and retirement accounts, real estate and other possessions, and your kids, who may be minor children or adult children or both. You bring your pets with you, and your loved ones who you support and wish to continue to support. You bring your own favorite charities, and your own sensibilities about inheritance and even your own independence as you age.
But you may also bring the following to your second marriage:
Legal obligations from your divorce to your former spouse. For example, if your former spouse - by the terms of the divorce settlement - is to remain a beneficiary of your retirement account, you can’t override this and make your current spouse the new beneficiary, or assume that s/he and the children your share will take over as full beneficiaries should something happen to you. Review your previous divorce settlement and ensure that your estate planning, now updated for your second marriage and family, properly caters for your legal obligations to your first spouse.
Property. Some clients ask whether they now share their property as “community property” and so it needs to be covered in only one person’s estate plan. The legal concept and rules that relate to community ownership usually arise in matters of divorce, not inheritance. Essentially, in community property states (of which New York is NOT one), whatever you bring individually to a marriage becomes community property and if you divorce, you each get half, and in dividing up matrimonial property, no consideration is given to who brought in how much. As regards inheritance law, community property has a bearing in that anything you inherited from someone else becomes part of that shared matrimonial property.
The more urgent legal concept to consider as regards property is Joint Tenancy. This is the automatic operation of law that mandates that if you and your spouse hold your current home or any real estate as Joint Tenants with Right of Survivorship, when one passes on, the surviving spouse automatically receives full ownership, without having it spelled out in a will. If your property’s legal title has you and your current spouse as Joint Tenants, then you’re pretty much in the clear.
Matters regarding children. If you’ve set up a trust for your kids from your first marriage, then anything in that trust is not part of what you have in your second marriage. In other words, whatever trusts you’ve set up cannot be the subject matter of your new estate plan that pertains only to your current (second) marriage.
Trusts are also effective estate planning tools. For example, if you and your second spouse have very young children, and either one of you (or both) also have much older (adult) children from a previous marriage, you could set up trusts for the younger children to ensure that they will be well provided for should you not be around before they attain the age of majority. Trusts are also good because like a will, they can specify who inherits what from both of each of you, with the added advantage that trusts do not have to go through probate. Additionally, in the case of young children, the trustee (preferably someone with financial expertise or experience) can manage the trust such that they will have enough to maintain a good quality of life and education until they are grown.
There are some trusts which are particularly useful to remarried couples - for example, a “bypass” trust allows one spouse to provide for the surviving spouse while making it possible for the deceased spouse to name children from a former marriage as co-beneficiaries under that trust. Trusts are complicated but powerful legal instruments and you should consult an estate planning attorney and your financial planner who is experienced in such matters.
Last but not least, consider what happens to minor children from your previous marriage who now live with you and your second spouse should something happen to both of you. Who would be the guardian? Your former spouse as regards a child from that marriage? That too is not necessarily automatic, and in fact, you and your current spouse may decide that someone else would be a better legal guardian, especially if your child from your first marriage is happily integrated with your new family. Guardianship and custody are two separate issues and just because custody has been resolved, it doesn’t automatically mean that legal guardianship follows custody arrangements. They are two very different legal concepts. Should something happen to you, does your second spouse automatically have legal guardianship of your child from a former marriage? Not necessarily.
Financial assets. You may have taken out life insurance with your former spouse, whereby you were each the other’s beneficiaries on your respective life insurance policies. If you still own your policy and are paying towards it, you should ensure that you’ve updated it to reflect your current wishes. It’s entirely possible to keep a former spouse on as a co-beneficiary and add your current spouse and children from both or one marriage as beneficiaries as well. Note: for estate tax-saving reasons, some married couples also set up an ILIT (irrevocable life insurance trust) that removes the death benefits from a policy from the taxable estate, thereby decreasing taxes. The point is to update all your beneficiary designations when you remarry. You should do the same for your other financial assets e.g. your retirement accounts (e.g. 401K, IRA) and investment accounts (brokerage or managed account).
Updating your beneficiary designations are all important because these assets often form the bulk of your assets AND because your wills (if you make them) cannot override such designations under the law. Which means that if you have a new will for your second marriage, and lay out what happens to these assets, but haven’t updated your designations with the institutions that hold them, the people you intend as beneficiaries may not be the one who gets the benefits when you pass on.
Owning a business. If you own your own business alone, then that is an asset that forms part of your estate. If you decide to leave it to your second spouse in the event that something happens to you, that must be provided for as well.
But what happens if your spouse still owns a business with a former spouse? The situation gets a little trickier if your spouse is one of several partners of members in a business, and the partnership agreement is silent on the inheritance of your spouse’s share. Don’t assume that you’ll automatically inherit her share of the business in terms of stepping into her shoes as a full partner. Your estate plan will not over-ride any agreements made among the various owners of the business, whether one of them is a former spouse or not. For example, the partnership agreement may state that upon your spouse’s death, the remaining partners have the right to purchase that share at a previously agreed price with no need to consult you. Also, in the case of a sole proprietorship (e.g. your spouse owns her business as such), the law makes no distinction between her and her business. This means that upon death, the business becomes part of her personal estate, which means that estate taxes have to be paid on that business too. Death also terminates the sole proprietorship. Consequently, if you wish that business to continue (e.g. you are now working with your spouse), you should consider changing it to an LLC to avoid dissolution upon the death of the sole proprietor. And if you run the business with your spouse, set up succession and estate planning if you intend to continue that business.
If you or your spouse have a business, attend to its legal structure as regards assets and liabilities before you lay out your estate plan. Estate planning for businesses is complex. If your business is your largest and most worthwhile income-generating asset, then this is the asset you must attend to first before other material assets.