Estate Planning the Second Time Around

Estate Planning the Second Time Around

Estate Planning Needs Vary

Vaughn W. Henry

 Q – As a retired widower, I keep hearing new proposals for estate tax relief and am wondering how will my estate planning be affected by a remarriage?

. – Although there has been a lot of publicity about estate tax reform, the likelihood of meaningful change is remote. After all, the projected estates subject to tax over the next 25 years exceed $10 trillion, and with federal budget tightening, the odds of Congress walking away from that windfall are pretty slim. That said, do not wait for estate taxes to be eliminated, it’s not going to happen.

With divorce statistics on the rise, and the increasingly longer life span of many of our senior citizens, it’s very common for estate plans to be a consideration when contemplating a second or third marriage. Different states have specific laws concerning individual, joint and community property acquired during a marriage, so you should check with your legal advisor about how to best hold title to your property in each and every state. If you want property to go to your children and not to your new spouse’s family, then you need to be very specific about your intentions.

Generally there are five basic problems which should be addressed in replanning and organizing your estate.

• Children of previous marriages will occasionally throw up roadblocks if they feel that an outsider threatens “their inheritance”. Whether or not this feeling is deserved, it is something that should be addressed as quickly as possible. Otherwise, the underlying tensions in a family may create messy legal battles down the road. If there is an eventual dispute about an inheritance, it’s a rare family that has as much harmony and good will after parents die as before.

Good communication is very important. You can be specific about explaining and setting up a plan that is equitable, but not always equal, while you’re still alive. It’s much harder to properly unravel the reasons behind complicated distributions through a will or trust after death. To provide the most control of assets and their eventual ownership, it’s often better to distribute proceeds during your lifetime. Then, there’s no question about your intentions. If the estate is sizeable, you may want to take advantage of the $10,000 annual gifting exclusion to avoid tax on the estate and the problems of uncontrolled growth of your assets’ value and subsequent taxation.

•Prenuptial agreements are necessary if you want to preserve your assets for the original family. No longer a tool for the rich and famous, a well thought out agreement will avoid misunderstandings all around. Some clients avoid mentioning the subject of a premarital agreement because they don’t want to appear distrustful. However, it’s generally a better approach to go into a new marriage with a clear understanding of what’s mine, yours and ours.

•Insurance policies, pension and retirement plan beneficiary designations will need to be re-evaluated. Is the beneficiary or ownership correct on your contract? Many policies, locked away in a safety deposit box, still list deceased or ex-spouses as beneficiaries, much to the dismay of the family when it comes time to settle an estate. An annual review of your all insurance and annuity contracts should be a part of your plan. Remember, owning an insurance policy on your life puts the proceeds back into your taxable estate, no matter who the beneficiary is.

• Consider how powers of attorney should used. Generally, you will need someone to handle both medical and financial issues if you are disabled. Will it be better to have a child from a previous marriage or your new spouse making those critical decisions?

•If you have retirement income, check with your pension representative about the rights to survivor income if you should pass away before your new spouse. The same thing can be said about social security benefits.

The basic role of the estate plan is to conserve and distribute assets, provide adequate liquidity for survivor income, avoid excessive tax and transfer costs, and maintain family control for any ongoing business. Unique circumstances like disabled dependents needing special care, or opportunities for charitable gifting or managing estate assets for minors are all issues that a well constructed estate plan will address. Increasingly common are plans that decide in advance what percentage of the estate will pass to children, charity and the IRS. When presented with a choice about disinheriting the IRS, almost everyone prefers charity and heirs to wasteful and unnecessary taxation. Since tax changes in 1969, anyone with appreciated assets might be well advised to look at a §664-CRT scenario for income, security, reduced taxes and improved control of family wealth. CRT planning is a highly specialized field and unfortunately, few professionals work with them. This isn’t a “do it yourself” project, since estate planning should encompass wealth preservation planning. A team approach with qualified advisors will present you with a number of flexible strategies that will help you meet your family goals