Patti Handy, host of Money Rules 101, asked me what couples should do about estate planning when they remarry. Blended families add a lot of nuances, and this is where a plan matters most. Thanks to Patti (www.PattiHandy.com) for the interview.
Why does remarriage call for an estate plan?
This is especially true when you remarry later in life, in your 40s, 50s or even 60s, and each spouse has children. The number of things that can go wrong is innumerable. You and your new spouse need to sit down and decide what the plan is. It is like an earthquake drill at home: everybody knows where to go before it happens.
What happens when the stepchildren do not like the new spouse?
I had a client named Lynn who married a man whose adult children never really liked her. She worried about what would happen if he died first. Would she be out of the house? Would she have to turn the whole estate over to her stepchildren?
Her goal was to take care of his children, pay them off and not worry about them anymore. We wrote an estate plan that did exactly that. If her husband died first, she would write a check for $100,000 to each of the children, funded from an insurance policy and some bank accounts. After that they would leave her alone.
Who takes care of minor children, and how are they provided for?
If I remarry and have minor kids and I pass away, who raises them? My new wife, my ex-spouse, or my brother or sister? Each spouse has to talk about that, and also about where the money for the children will come from.
What if one spouse is much wealthier than the other?
If the wife has much more money and dies first and her family inherits, is her husband out on the street? Or does he stay in the house until he dies? I recently did a plan for a Friendly Valley couple here in Santa Clarita in which, after the husband dies, the wife stays in the house until she passes away.
That is called a life estate. We do it in the living trust and spell it out. The more we spell things out, the less likely we are to have problems later. It is like a football team taking the field: a team that has practiced its plays has a much better shot than one running around with no plan.
What happens after the first spouse dies?
Does the survivor keep the home and the money, or does some of it go to children somewhere? That is the same question as in Lynn's case.
Should each spouse have a separate trust?
Sometimes. If a client comes in with no plan, we might do separate trusts: his, hers and maybe ours. She has a trust with her property and he has a trust with his, and they operate together and speak to each other while staying independent.
Each trust only governs assets titled in the name of that trust. You do not put an asset in all three trusts. If an asset is titled "Sally Smith's Trust," that trust governs it. A house the couple owns together might go in the joint "Harry and Sally" trust, which is a separate document that says what happens to that asset.
Or the couple can do one joint trust that says what happens when the first spouse dies and what happens when the second dies, with a different plan depending on who goes first. Again, the less left to the imagination, the better. Another approach is separate schedules: Schedule A for her property, Schedule B for his and Schedule C for the property they own together.
What about community property and separate property?
Property you accumulate during the marriage is presumed to be community property. What you bring into a marriage is generally your separate property. But it gets murky. A woman in Lancaster told me the house was her husband's before the marriage, yet she had been putting money into it: a new roof, a patio cover, the gardener, part of the property taxes. He still insisted it was his separate property. You control what happens to your separate property completely, but not to community property, so we need to spell this out.
How much authority should the surviving spouse have?
Should the surviving spouse make the decisions, or will you leave them with a sister, brother or parent? Can the survivor change the common trust? If you do a common trust, which I would not necessarily recommend for newlyweds, giving the survivor carte blanche to change anything may not be a great idea. What changes can be made, if any, after the first death?
One strategy is to create a plan for the first 10 years and then see how things are going. If you have a lot of faith in your new spouse and things are going very well, you may want to revisit the plan. You are not necessarily stuck with it for life.
What about beneficiary designations?
You will have life insurance, IRAs and 401(k)s with beneficiaries. Is the new spouse the sole beneficiary, or do you spread it around? Maybe your spouse gets 50% of your IRA and your children get 50%. The spouse has to sign off that it is okay not to get 100%. There are ways to take care of the new spouse and also your children or loved ones from a previous relationship.
Should both spouses attend the meeting?
Yes. It does not help when a client comes in alone and says, "I just got married and I want to create my own plan." It is much better if the spouse is in the meeting and all of us create a plan everyone has agreed to. You sign off that it is okay with you, he signs off that it is okay with him, and everybody is happy.
What about incapacity and health care decisions?
If one spouse is in a car accident or becomes seriously ill and cannot speak for himself, does the new spouse have full say? Many people think the spouse is automatically in charge, and that is not true. If your adult children disagree with your new spouse about health care and nobody is legally in charge, you have a standstill. Sign documents that say who is in charge and in what order.
What is the main takeaway?
More is better. The clearer you are, the better. Do not leave it to the imagination.
How can people reach you?
Call 661-414-7100 to make an appointment, or visit mansourlaw.com (Mansour is spelled M-A-N-S-O-U-R).