Five Financial Snags To Face In A Second Marriage
Published Thursday, March 31, 2011 at: 7:00 AM EDT
“Blended” families, once unusual, have become increasingly common. They’re typically the result of a divorce, after which one or both ex-spouses remarries, frequently to a husband or wife who also has children from a previous marriage. There are about one million divorces in the United States each year, and it’s estimated that almost half of all families today are of the blended variety.
Unfortunately, not every “Brady Bunch” lives in bliss and harmony, and discord is particularly likely after your death. Consider these five areas in which your blended family might face avoidable financial snags.
1. Beneficiary designations. Writing a former spouse out of your will may be at the top of your post-divorce to-do list, but it’s also crucial to remember all of the other places you designated your once beloved as primary beneficiary. That may include life insurance policies, retirement accounts, trusts, and annuities. And you likely shouldn’t just write in the name of your new spouse. Deciding how and whether your new spouse and your own children share in your estate may involve complicated planning and could mean establishing one or more trusts—and you’ll need to coordinate all beneficiary designations with the provisions of your revised estate plan.
2. Tax-free gifts. A relatively simple way to look after the needs of children from a first marriage is through a series of tax-free gifts. You may currently give $14,000 annual gifts to as many recipients as you choose without incurring gift tax liability. So, if you’re relatively young, you might use this provision to begin transferring assets to your children (and possibly your grandchildren), presuming you can afford to gift that much. Over a decade or two, you could help your offspring build substantial savings. But your early death would undercut this strategy, and it’s important to consider who’s getting the money. For example, making yearly gifts to both a child and the child’s spouse would enable you to give more but might put money in the hands of a son- or daughter-in-law who later divorces your child.
3. Estate executors. In simple estate planning situations, it often makes sense to choose a spouse or other trusted family member as estate executor. Particularly if that person stands to inherit a substantial part of your assets, he or she is likely to be conscientious about following the provisions of wills and trusts and making sure your wishes are carried out. But that approach isn’t likely to work in a blended family. A new spouse or one of your children will have different interests and may not be able to agree with other family members. Unless you want a judge to sort out the mess, it’s generally better to appoint an independent third party. Moreover, a professional acting as executor may provide other valuable benefits to the estate.
4. Power of attorney. A power of attorney is a valuable estate planning tool, but your intentions may be thwarted if the wrong person gets this responsibility or it isn’t handled properly. This legal document establishes the right for another person to act on your behalf, and that person could use it to transfer assets to a trust, for example, or to make annual tax-free gifts—basically, to take over any tasks you may be unwilling or unable to handle yourself. This authority can be either broad or specific—for example, it could be limited to selling securities or other possessions. Here, too, it often makes sense to give this power to a family member, but in a blended family that could lead to conflicts. Appointing someone from outside the family may be preferable, and it generally makes sense to have a durable rather than a general power of attorney.
5. Trusts. Various trusts can help sort out assets and interests for blended families. But even some trusts frequently used in such situations could cause problems. For example, a “qualified terminable interest property” (Q-TIP) trust can divide your assets between a surviving second spouse and the children from your first marriage. Typically, the spouse gets to use the trust income, while the children, as trust beneficiaries, receive the trust assets after the spouse dies. But this arrangement may spark disputes between the spouse and the children regarding management of trust assets, with the spouse possibly emphasizing current income while the children preferring asset appreciation. One solution is to give an independent trustee the ability to make adjustments so that everyone is treated fairly.
The bottom line is that the special dynamics of blended families make careful estate planning imperative. We can work with you and your attorney to create planning strategies and vehicles that serve the needs of you and your family.
This article was written by a professional financial journalist for Advisor Products and is not intended as legal or investment advice.
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