Estate Planning Before a Second Marriage
Second marriages present unique challenges for estate planners to consider. In addition to complex legal issues, practitioners must be aware of the complicated family dynamics that often arise when two families are joined. A clear statement of the spouses’ intentions and thorough documentation of the characterization of assets can help prevent conflict within a blended family. To that end, here is a checklist of issues to discuss with your clients.
1. Ask the client to provide you with records from their divorce. Obtain copies of any financial disclosures, as well as a copy of the Judgment of Dissolution. The Judgment provides an inventory of the property awarded to the client, as well as any financial obligations they may have.
2. Advise the client to consider negotiating a premarital agreement with their future spouse. The characterization of property in a premarital agreement would affect a spouse’s ability to direct the property’s disposition at death.
a. Each party should be represented by separate counsel.
b. The client should be prepared to provide a copy of their Judgment of Dissolution to their future spouse’s counsel.
c. If the client’s future spouse also had a previous marriage, request and review a copy of their Judgment of Dissolution. Determine whether any debts or other obligations will continue into the duration of the second marriage, such as child support, spousal support, and equalization payments.
3. Review and update documents that are automatically revoked or terminated at the entry of judgment for dissolution.
a. Powers of Attorney (Probate Code §4154): A principal’s designation of the former spouse as attorney-in-fact is revoked if marriage is dissolved or annulled after execution. Rather than rely on revocation by operation of law, revoke outdated powers of attorney and notify third parties such as banks and other financial institutions of the revocation.
b. Non-Probate Transfers (Probate Code §5040): A nonprobate transfer to the transferer’s spouse, in an instrument executed by the transferor before or during the marriage, fails if, at the time of the transferor’s death, the parties have divorced or the marriage was annulled. Example: payable on death accounts.
c. Joint Tenancies (Probate Code §5042): A joint tenancy between the decedent and the decedent’s former spouse, created before or during the marriage, is severed as to the decedent’s interest if, at the time of the decedent’s death, the parties have divorced or the marriage was annulled. When a transfer fails by operation of Section 5042, the instrument is treated as it would if the former spouse failed to survive the decedent. It is best for clients to sever all joint tenancies during the divorce proceedings instead of waiting until the divorce is final.
d. Wills (Probate Code §6122):
i. Unless the will expressly provides otherwise, if after executing a will the testator’s marriage is dissolved or annulled, the dissolution or annulment revokes:
1. Any disposition or appointment of property made by the will to the former spouse.
2. Any provision of the will conferring a general or special power of appointment on the former spouse.
3. Any provision of the will nominating the former spouse as executor, trustee, conservator, or guardian.
ii. In case of revocation by dissolution or annulment the will shall be interpreted as if the former spouse failed to survive the testator.
4. Ideally, a client should have established a new estate plan soon after the dissolution of their previous marriage. If this did not happen, advise the client to establish a new estate plan prior to the second marriage.
a. Clients with substantial amounts of separate property should maintain separate property trusts to avoid commingling assets.
b. Clients should avoid giving the new spouse a fiduciary role over matters involving stepchildren. This relationship increases the likelihood of conflict.
c. It is particularly important for clients to nominate guardians for their minor children when they are divorced from the other parent. Even if one biological parent survives, the surviving parent might be unfit to have sole physical and legal custody.
5. Review and update beneficiary designations for life insurance policies and retirement accounts.
6. Plan for assets requiring extra care:
a. Owning a business with a spouse: Entering into a premarital agreement can help set the tone for what to expect upon divorce.
b. Equity: It is very commonplace for employees to receive Restricted Stock Units (RSUs) in the Bay Area. Even if the RSUs have not vested, there can be a community interest.
c. Pensions/retirement: There are retirement accounts (such as CALSTRS or CCCERA) that allow prospective retirees to select an option for how they will be paid. These selections may be irrevocable so they must be made with the second marriage in mind
7. Avoid commingling assets after the marriage.
a. Commingling is the act of mixing separate funds belonging to one party with those of another party. A common example is depositing separate property funds into an account holding community property funds, or an account held in joint name.
b. If a client claims that something is their separate property, it is their burden to keep records.
i. If a client executes a premarital agreement, the included financial disclosures would be valuable information to maintain; be sure that the client keeps those as part of their records.
ii. If a client does not execute a premarital agreement, it would be crucial to keep records that show asset values at the date of marriage and beyond. Clients should maintain electronic copies of each periodic statement after the date of marriage.
c. Clients should not rely on statutory definitions of separate property. For example, while inheritances are separate property, the client still has an obligation not to commingle. If a client commingles property beyond the point of recognition, it may be impossible for even a savvy divorce attorney or forensic accountant to trace and identify the separate property assets.
The most important thing is to encourage your clients to have open and honest discussions with their future spouses regarding their financial goals and estate planning expectations. These discussions might be uncomfortable, but they go a long way in maintaining harmony within blended families.