With a rise in “gray divorces,” it’s only natural that remarriage has become more prevalent among seniors. However, they also tend to be lax about updating their estate planning.
It’s easy to have an estate plan fall out of date following a remarriage. The consequences for even unintentional missteps can be devastating, particularly for children from a first marriage or your new spouse. While both genders can be affected, statistically, women’s risk of being disinherited is greater than men’s. Here are some common pitfalls and how to avoid them.
Failure to protect your current spouse
It’s a good idea to design a custom plan to intentionally and seamlessly distribute assets to your children and new spouse. You might want to consider specifying that your spouse receives a life interest to remain in the marital home for the rest of their life following your death.
Failure to protect your children from a prior marriage
You might think to leave assets to your new spouse, with the understanding that they will provide for your children when you are gone. But this could leave your children at risk financially.
One option might be to create a revocable trust that provides flexibility for your children and spouse’s financial needs.
Another strategy worth considering is establishing a separate marital trust to segregate your spouse’s funds instead of leaving a shared pool of assets to benefit your children and spouse. A separate marital trust allows you to allocate funds for your spouse’s benefit directly. With a marital trust, you can also stipulate that the remaining assets in the trust pass on to your children when your spouse dies.
If you have a taxable estate, make sure you optimize lifetime gifting strategies for your children to move assets outside of your taxable estate.
Failure to protect against depletion of assets
A person might decide to leave assets to their spouse in a marital trust, with the intention that the marital trust will pass to the decedent’s children after the second spouse’s death. But those assets could quickly be depleted if, say, the spouse suffers a debilitating medical crisis and enters long-term care.
To avoid the possibility that your children receive little or nothing, consider a life insurance policy instead of a marital trust to provide for your spouse at your death, leaving other assets to your children.
If you are worried that there won’t be enough left over for your children, a “second-to-die” life insurance policy will provide an additional inheritance upon your spouse’s death.
Failure to protect your estate from your first spouse
Even though a signed divorce decree might automatically disinherit your ex-spouse from your estate, you still need to switch the beneficiary designations on your retirement accounts and company life insurance plans. That way, your assets won’t inadvertently pass to your ex-spouse.
With a 401(k), a surviving spouse would typically be the automatic beneficiary. That is unless the spouse waives that right. But this is not the case for life insurance and individual retirement accounts, where the named beneficiary would generally receive the death benefit or asset upon death, depending on state law. Likewise, suppose you want your children to receive retirement or life insurance funds. In that case, you need to update beneficiary designations, as appropriate, keeping in mind the need for spousal consent on a 401(k).
It’s common for people to forget to update beneficiaries on retirement accounts or life insurance policies, wreaking havoc in divorce or remarriage. People must update these accounts and their estate plan to reflect any new circumstances, so their ex-spouse won’t have the ability to control their money or make health-related decisions on their behalf. By taking these steps, they will be free to live their life out peacefully, without worrying about what will happen to them and the ones they love when they’re gone.
