John O. McManus, trusts and estates planning lawyer and founder of McManus & Associates, today held a conference call with clients, during which he discussed the Top 10 Estate Planning Issues for Divorcing and Remarrying Individuals — please see below.
You are invited to hear John’s expert guidance, based on more than two decades in the field. Click on the audio player below to listen.
We welcome the opportunity to help you and your loved ones with our 10-Step Wealth and Family Values Protection Process™. Please give us a call at 908-898-0100 or 212-753-9000.
Top 10 Estate Planning Issues for Couples Exiting a Relationship and Prior to Remarrying
1. Addressing guardianship for minor children after death
- In instances where a separation or divorce is not amicable, one of the most significant risks is that the parents will choose different guardians for their minor children.
- This results in a predicament where only the survivor’s wishes will be honored and may cause additional, unnecessary rancor between the families.
- It is best to address this concern in advance of the divorce during the mediation and settlement process so that both spouses agree on a unified plan for the care of their children if they both pass away and subsequently to have both parties reflect the arrangement in their Wills.
2. Separation and the spousal elective share
- During the period when a married couple is separated, one of the key problems is that each spouse continues to be named as the primary beneficiary under the Will and will receive the entire estate.
- In most cases, this is an unsatisfactory outcome and it is critical to revise the Will in order to limit the spouse to the statutory elective share (typically about 1/3 of the estate) so that as many assets as possible pass directly to the children or other loved ones at death.
- The amount that passes as part of the elective share can be held in trust for the benefit of the estranged spouse.
3. Incapacity planning during separation
- A related issue is that during the period of separation, the spouse is empowered to act with respect to the most sensitive and important health, financial, legal, and personal matters through the Health Care Proxy and Power of Attorney.
- In a time of estrangement, it is not appropriate for the spouse to possess these authorities to act for such matters because they may not act with the appropriate judgment or best intentions. In more extreme circumstances, the estranged spouse may use these in an intentionally detrimental fashion.
4. Life insurance and divorce settlements
- One of the most common errors during the divorce settlement period is the insufficient attention paid to estate tax planning, especially with respect to obligations for former spouses to maintain life insurance.
- During this process, it is essential for the spouses’ attorneys to consider whether the life insurance should be held in an Irrevocable Life Insurance Trust (ILIT).
- The purpose of the ILIT is to protect the proceeds from attack or diversion from a new spouse and to avoid estate taxes before the children from the first marriage receive it.
5. Asset titling and beneficiary designation
- Once a divorce is completed, it is critical that the assets retained by either spouse after the divorce remove the former spouse as a beneficiary and that the former spouse is no longer named on any deed or any account that was previously owned jointly.
- While a court may enforce the separation agreement or divorce settlement, it is essential to note that if the former spouse is still named long after the divorce is complete, it may be interpreted that this was an intentional decision to keep the former spouse as a beneficiary.
6. Prenuptial agreements for high net worth families
- For those possessing material wealth or who may expect to inherit material wealth during their lives, a prenuptial agreement that addresses post-death distributions is a mandatory consideration. It is also a particularly relevant issue for those who remarry and have children from the first marriage.
- Without a prenuptial agreement, the spouse is, by law, entitled to a substantial portion of the estate (the elective share) which would divert assets to the second spouse and away from the intended beneficiaries.
- Therefore, the prenuptial agreement must be established to clearly define the expectations for distributions when an individual passes away to protect the interests of the recipients. These provisions must then be captured in the Last Will and Testament.
- In many instances, individuals do not wish to sign a prenuptial agreement since they find it inelegant or unromantic or simply do not wish to disclose their total financial assets to their new spouse.
7. Trusts for a spouse after remarriage
- As is typical after remarriage, individuals desire to provide for their new spouse if they pass away.
- It is strongly recommended that these transfers be made in trust or there will be no way to ensure that the new spouse leave those assets to children from the first marriage.
8. Incorporating a new spouse into incapacity planning
- Once an individual remarries it is important to appoint the new spouse as an agent to participate in medical, financial, legal, and personal matters so that they do not have to go to court in order to assist in the event of incapacity.
- However, if there are children from a previous marriage, it may be important to include certain safeguards, especially in the Durable Power of Attorney, to assure that a new spouse does not transfer financial assets into his or her name to the disadvantage of the children from the first marriage.
9. Life insurance preservation and wealth transfer via gifts prior to and after marriage
- The purchase of new life insurance policies in an ILIT can be a cost-effective solution to provide sufficient assets for both a new spouse and other beneficiaries without additional exposure to estate taxes.
- Efficient gift planning can also be implemented so that other beneficiaries, such as children, may be provided for adequately through transfers that utilize the lifetime gift exemption or tax-free strategies, such as GRATs and annual exclusion gifts of $13,000 per year.
10. Benefits of a self-settled trust
- Mindful that prenuptial agreements are not always executed, for those who wish to shelter assets prior to or after a remarriage to avoid the right of election by the second spouse or potential future divorce, there are alternatives by creating a self-settled trust. The self-settled trust enables an individual to maintain the flexibility to access the assets.
- A self-settled trust is one in which the individual transfers assets to a trust where he or she is a beneficiary. Such trust must be located in a state with asset protection statutes, for example Delaware, Alaska, and South Dakota.
- This strategy permits many additional and meaningful estate planning benefits, such as:
- allowing the individual to receive distributions from the trust as a beneficiary;
- removing the assets from the estate for tax purposes;
- preserving generation-skipping tax credits; and a higher degree of asset protection against liabil