Estate Planning Considerations for Second Marriages
Estate planning is relatively straight-forward for single individuals and even for married couples with most of the issues and dynamics clearly visible and intuitively addressed. However, when existing family with their own history, principles, traditions, and expectations merges with another, all of that changes. I guess the most important principal to understand here is that an estate plan for a blended family can take any number of forms depending on how the spouses are treating their finances, relationships with their children, and ultimate estate and financial objectives. Below are only a few considerations for blended families, and some of the different ways they can be addressed.
EXISTING ESTATE PLANS
If there are existing estate plans, they will likely form the foundation of the estate planning structure for the new family, but almost always need to be updated. This is assuming the existing plans were of each spouse as a single individual. If there are still estate plans in existence with a former spouse, they will likely need to be revoked and destroyed. The estate plans of single individuals now married are going to include a trust which handles the administration and distribution of separate property assets upon incapacity or death. The successor trustee is usually the first part of the trust that gets updated, simply to include the new spouse in some capacity or another.
However, distribution of assets may be the same or may need updating depending on how the new spouses want to treat each other's separate property. If the decision is to have a "what's-mine-is-mine-and-what's-yours-is-yours" structure, then it is possible that no changes need to be made. But in such a situation, there are three issues which cannot be ignored: 1) What happens with community property acquired after marriage begins? 2) What sort of protections does each spouse want with regard to continuing to live in the primary residence after the other's death? and 3) To what extent does each want their own separate property to support or be accessed by the surviving spouse?
The other components of an estate plan (Power of Attorney, Advance Health Care Directive, etc.) will likely need to be updated to include the new spouse in some sort of fiduciary capacity. This is not required, but usually a preference new married couples have.
AFTER-ACQUIRED COMMUNITY PROPERTY
A very common misunderstanding among newly married couples in their second marriage is that they are able to manage their finances like they did when they were single and keep everything separate without any additional planning (and essentially run their finances similar to how roommates would). The legal presumption in California is that all assets acquired during the course of marriage are community property, and upon divorce or death each spouse is entitled to half. This is an over-simplification and there are certainly exceptions, but it is important that both parties know that every dollar earned through employment is community property regardless of whose account it ends up in.
If a married couple truly wishes to run their finances as described above, there should be a pre- or post-martial agreement meeting the legal requirements to allow for such. From an estate planning perspective, there are three different options here: 1) They can sign a pre- or post-marital agreement preserving the property character of all after-acquired assets as separate property, 2) They can acquire assets as community property and update their respective trusts to address the ultimate disposition of their portion of the community property. Note that this becomes extremely difficult unless assets have some sort of physical record of their origin (e.g., wages earned during marriage are community property but rental income from a separate property rental property is separate). Even then, co-mingled property can become community property even if it began as separate. As so, this is not really a preferred option. 3) The couple can create a third, family trust which address just the community property. The other two trusts would own and address each's separate property, and the community property assets will be clearly identified, owned, and addressed by the joint trust.
COMMUNITY PROPERTY (AND SEPARATE PROPERTY) USED TO SUPPORT ONE SPOUSE AFTER DEATH OF THE OTHER
Conceptually it is easy to keep all assets in their clean separate and community categories, but when one spouse dies there are some considerations. Regardless of the ownership proportions of the primary residence, it is possible for one spouse to die with rights to distribute all or part of the primary residence to someone else. For the surviving spouse to first become a widow and then be forced to move is not a pleasant thought and is almost brought up as a planning point.
Traditionally there has been a "life estate" form of ownership which grants a lifetime ownership right to a piece of property. For some reason this was extremely common for many years, but in my personal opinion it is a horrible idea. I recommend to clients in this situation that they grant to the surviving spouse a "right to reside" at the property that is an exclusive and inalienable right so long as the surviving spouse "exhibits behavior consistent with maintaining the house as his/her primary residence." This precludes the surviving spouse from moving away and using the primary residence as a rental property and enjoy the income while putting the deceased spouse's estate distribution on hold. There is also the issue of what expenses will be borne by the deceased spouse's trust and which by the surviving spouse: property taxes, maintenance, etc. all need to be paid. In some situations couples will want the surviving spouse to pay the appropriate percentage of rent to the deceased's estate. Most of these issues are personal preference but should not be ignored.
CHILDREN AND OTHER BENEFICIARIES
Like most of the issues discussed in this post, this is primarily a personal decision. It is common for the separate property of each spouse to ultimately be distributed to the children of that spouse. There will occasionally be a preference for each spouse to set aside some of all of their assets to act as an emergency reserve for the surviving spouse and distributed to their children only after the death of the surviving spouse. The issue gets somewhat complicated when it comes to joint / community property. This is where the differences in the family are accentuated. There are multiple schools of thought each with legitimate arguments for and against:
First, one can consider the letter of the law and allow one half of community property to be set aside for the estate of one spouse and the other half for the other. If Wife has one child and Husband has five children, then each "family" gets half of the estate (which, again, is consistent with the black letter law). However, in such a situation, one of the children receives 50% of the community property and every other child receives 10%. This is a more pronounced problem the closer the children are and the amount of time they spent being raised together.
Another thought is to have each child receive an equal share regardless of which parent they came from. In our above example this would result in each of the six children receiving a 1/6th (16.66%) share of the community property. This is certainly a way to address inequality among a close group of step-siblings, but there can be ongoing resentment if one parent is looked at as the source of a disproportionate share of the community property.
Some other factors to consider when designing an estate distribution plan for the children:
What other resources are available to the children of each family? Is Husband's family of humble means without any anticipation of inheritance or support in the future, whereas Wife's children are already provided for via large trust funds from their grandparents?
Did one of the families have a different upbringing which merits special consideration? I have had clients reference a desire to "compensate" their step-children for situations such as losing a parent at an early age or having an abusive parent.
LEGAL OBLIGATIONS TO A FORMER SPOUSE
All of these considerations take a back seat to any legal obligations the spouses have to their prior spouses. Are there life insurance policies that are required to remain in force providing for a prior spouse? Are there certain estate planning provisions or entire trusts which are required to be maintained pursuant to the judgment? It goes without saying that all of the above estate planning issues are structured around these.
Like most of my blog posts, this was an attempt to raise some of the general issues that need to be discussed. The blending of two unique families brings with it a host of considerations. Although many of these considerations are personal, there are significant implications to think about. This was certainly not a survey of all of the relevant issues, and a deeper dive into these (beyond the scope of this writing) will generate additional questions which in turn, need to be addressed (e.g., taxes, form of ownership, etc.).