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Money November 2017

Dollar Sense

Divorced and Considering Remarriage? Consider Estate Planning Arrangements First

By Teresa Ambord

A pre-nup agreement is not a popular topic with many people because it seems to anticipate failure. But instead of looking at it that way, look at is as a sort of insurance policy to make sure your children from your previous marriage will inherit what you want them to inherit.

If you are considering marriage and you have children from a previous marriage, it’s important to contact your estate planner to make sure everything is in order.

 

Update All of Your Estate Planning Documents

Even if you don’t have major assets, you need a will, powers of attorney, health care directives, and other documents such as trusts and life insurance policies.

Imagine if you passed away and your surviving spouse learned that your former spouse (or his or her relatives) are still listed as executor of your estate. Depending on where you live, the laws in your state may specify that your divorce decree automatically revokes property dispositions as well as appointments to posts such as your executor.

But the same may not be true if your former spouse’s relatives are appointed to these posts. For example, you and your former spouse may have named your sister-in-law as a guardian. Check with your estate advisor to ensure that you know these appointments are cancelled, if that is your intention.

Also, be aware that the terms of your divorce may require you to retain your former spouse as the beneficiary of certain retirement or pension plans. Again, check with your estate advisor to find out what you’re up against.

 

To Prenup or Not to Prenup?

For the sake of your children, consider a prenuptial agreement. This is not a popular topic with many people because it seems to anticipate failure. But instead of looking at it that way, look at it as a sort of insurance policy to make sure your children from your previous marriage will inherit what you want them to inherit.

If your current spouse is financially independent, chances are he or she will be fine without your assets. Depending on where you live, it can be hard to disinherit your spouse. Many states provide the surviving spouse with an elective share of the estate of the deceased spouse, such as one third to one half, regardless of what your will or living trust specifies. If you live in a community property state, each spouse is entitled to one-half of all community property.

A prenuptial agreement allows spouses to waive the respective rights to each other’s property, as well as serving other purposes. For example, such an agreement can preserve control of a business you own. If you’re already remarried, it’s not too late. Consider a post-nuptial agreement.

 

Check Your Beneficiaries

Divorce is often characterized by chaos, which is why it’s common to forget that your former spouse is still the beneficiary on your life insurance, retirement, annuity, or trust. Don’t waste another moment checking to see who your beneficiary is, otherwise the last person in the world you’d want to give your money to may end up getting it all.

Take your research a bit farther. If you have minor children as your beneficiaries (your kids, your grandkids, or some other minors), is your former spouse set to be their legal guardian if you pass away? If so, keep in mind that he or she will control assets that minors inherit directly. Someone, perhaps your former spouse, will likely be made conservator of that money while the children are still minors. A conservator will be obligated to act in the best interest of the children and will be supervised by a court of law, but in reality, that person will still have considerable discretion over how your assets are used.

If you’re not okay with your former spouse (or whoever the legal guardian of the children would be) getting control of your assets, talk to your estate advisor. You might be able to avoid that scenario by establishing trusts for the kids, and choosing a trustee yourself.

 

What about Taxes?

If your estate is large enough that estate taxes might be a concern ($5.49 million in 2017), multiple marriages present some challenges if you want to preserve some assets for children from your previous marriage.

You may know that you can take advantage of the marital deduction which allows you to leave unlimited assets to your spouse, tax-free. But to do that, you have to leave assets to him or her outright. And that means you have no guarantee that your current spouse will provide for your children from a previous marriage.

Ask your estate advisor about establishing a QTIP trust (that is a qualified terminable interest property trust). This allows you the benefit of the marital deduction, shields your assets from estate tax, pays your current spouse the income from your assets, but protects the principal for your children to inherit when your current spouse dies.

Ask your estate tax advisor for details about QTIP trusts and other ideas for protecting your assets. Remarriage complicates estate planning, especially when there are children from multiple marriages involved.

All this is why it’s critical to work with a qualified estate advisor to protect your heirs from unintended consequences.

 

[Adapted from information provided by the estate experts at Thomson Reuters Checkpoint.]

Teresa Ambord is a former accountant and Enrolled Agent with the IRS. Now she writes full time from her home, mostly for business, and about family when the inspiration strikes.

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