Legal Articles by Experts

Americans not only are living longer, they’re marrying later. In many cases, those late marriages are remarriages, in which one or both spouses already have children, significant assets and vital personal financial goals. Example: The husband wants to make a large bequest to his alma mater, but the wife doesn’t agree.

Challenge: Estate planning in these circumstances can be tricky. Naturally, you’ll want to provide for the person you’re marrying. At the same time, you’ll want to leave a legacy for your children, other heirs and favorite causes. Finding the right balance is not at all simple.

Some proven techniques can help prevent family feuds. Here are the most effective ones…

PREPARE A PRENUP
Asking your spouse-to-be to sign a prenuptial agreement might not be a romantic gesture, but it’s certainly practical.

The popular image of a prenup is that it’s a tool for a wealthy spouse to keep a new, much poorer mate from grabbing his/her money. But that’s not necessarily so. These days, both spouses-to-be often have significant assets. A well-executed prenup is vital in such cases and when both spouses already have children.

A prenup can make it clear which are his expenses, her expenses and their expenses. Plus, a prenup can spell out where marital assets will go as part of a comprehensive estate plan.

A prenup can protect each spouse from the new mate’s “ex” by specifying who owns which assets, etc. It also can be used as part of an asset protection plan to help protect your premarital assets from suits by your new spouse’s creditors and possible future creditors.

Required: For an agreement to be valid, each party should have an attorney, and those attorneys should be independent of each other. The agreement should fully disclose each spouse-to-be’s financial condition in some detail.
Trap: Some prenups end up being overturned in a court fight.

Typical reasons: One spouse pressured the other to agree to the prenup…there is inadequate disclosure of assets and liabilities in the prenup documents.

That’s less likely to happen if both parties are represented by lawyers who know the pitfalls of prenups and how to avoid them.

Strategy: Don’t personally ask your prospective spouse to sign a prenup. Instead, have your attorney, accountant or financial planner raise the issue.

This professional adviser can say that an agreement will protect both spouses and their children. That approach probably will help produce a valid prenup and maintain good feelings all around.

Even better: To keep the good feelings going, don’t focus your discussions only on the possibility of your new marriage not working. Focus on protecting each other from outside claims.

SOMETHING FOR EVERYONE

Among remarried spouses, marital trusts—in legal jargon, qualified terminable interest property (QTIP) trusts—have become popular estate planning tools.

How they work: After the first (generally the older and wealthier) spouse dies, assets go into a QTIP trust, where they are invested in stocks, bonds, etc., and the income (or a fixed percentage payment) from the trust goes only to the surviving spouse until his death.

An independent trustee (not the surviving spouse or kids from a prior marriage) can tap the principal, too, in case the surviving spouse has a critical need for additional money. After the death of the second spouse, the trust assets pass to beneficiaries named by the first spouse to die, usually his children.

Loophole: Assets left to a QTIP trust are subject to estate tax at the survivor’s death, not at the death of the first spouse.

Trap: QTIP trusts may seem ideal for estate planning—the survivor is comfortable financially and the trust fund eventually goes to the children.

However, the children of the wealthier spouse may have to wait for decades to get a payoff. There might be vicious arguments over how the money is invested and whether principal should be distributed.
Strategy: A married couple in this situation can buy insurance on the wealthier spouse’s life. If his children are beneficiaries, they will get the insurance payout at his death.

REAL ESTATE CONCERNS
Real estate can be another complex issue, especially now that housing values—in spite of recent softening—have increased sharply in many areas.

Common quandary: If both spouses come into the marriage with homes, where will they live? One spouse might move into the other’s home. If the other home is sold, will the sales proceeds be divided, held jointly or go to the original owner?

In such a situation, should the new family home be held jointly or kept in the name of the original owner?

If title is changed to joint ownership with right of survivorship, the surviving spouse automatically will inherit what is surely a six- and even a seven-figure asset.

That will be the case no matter what it says in either spouse’s will. Therefore, the original owner’s children will be shut out of what they might consider a family home.

Strategy: Address these questions before the marriage. Bring in a lawyer or tax pro to go over all the consequences.

Savvy planning might save huge family fights, and substantial amounts in tax.

Example: John and Jane, both single home owners, marry each other. John has a $400,000 paper profit on his home while Jane has a $200,000 paper profit.

Jane can sell her home and pocket tax-free profits because her gain will be within the $250,000 capital gain exclusion that’s in the Tax Code. Then she can move into John’s home.

Loophole: After both spouses have used John’s house as a principal residence for at least two years, the capital gain exclusion rises to $500,000 on a joint return. John can sell the house then, tax free, as long as the gain does not exceed $500,000.

Ongoing issue: The maneuver described above will trim income tax but may not resolve the issue of who inherits the house—the spouse or the kids.

One tactic is to apply a QTIP-like technique to the home. A so-called life estate can be given to the survivor.

How it works: The surviving spouse can be given the right to stay in the house for his life.   Upon his death, the title to the house might pass to all the children or to selected heirs, such as the children of the original owner.

In a typical arrangement, the surviving spouse will be responsible for the home’s maintenance, insurance, property taxes, etc., as long as he lives—even if he does not continue to live in the home.

Caution: Life estates can be unfair to the surviving spouse and are tricky. Example: If the surviving spouse is alive but confined to a nursing home, the life estate does not end and that spouse remains responsible for all expenses.

There are lots of details to address in order to avoid a family feud later. Consult with an estate planning professional and work through lots of “what if” scenarios. Consider using a QTIP instead to provide more flexibility.

THE IMPORTANCE OF WILLS
The sophisticated tactics described above may be vital in your estate plan after you remarry. However, estate planning basics are essential, too.

Examples: You’ll need a new will after you marry or remarry. Your old will probably won’t cover your new circumstances and details of your prenup.

Beneficiary designations also may be out of date. Make sure your IRA, life insurance, transfer-on-death bank accounts, etc., are going where they’re supposed to go under your new estate plan.

Trap: Don’t forget to address powers of attorney. If you devise a great estate plan but your new spouse gets sick and his child from a prior marriage obtains control over his finances, the plan could be destroyed.

Better: Name independent agents or restrict the powers children may have if they serve as agents (e.g., they can’t sell the house).

(Article originally published August 1, 2007)