It is likely that our clients—especially those in or nearing retirement with significant assets or those dealing with family trusts—are accustomed to hearing us remind them of the importance of estate planning: having properly designed wills or trusts; keeping their beneficiary designations up to date; periodically reviewing all estate planning documents to be sure they remain current; and everything else that goes along with having and maintaining a solid estate plan.
But we need to keep in mind—and help our clients keep in mind—that all these things become even more important in the case of blended families, whether the new family is formed as a result of divorce and remarriage, or the death of one or both of the new couple’s prior spouses.
And, as with most aspects of financial planning, everything depends on good communication, both between the new spouses and with us, as professional financial planners and the legal advisors we help our clients connect with. This becomes especially crucial in the case of a family trust when divorce or death results in the formation of a new marital relationship that may not have been contemplated when the trust was originally formed.
Expectations about children
For new blended families including children from more than one marriage, it’s important for us to do all we can to make sure the spouses clearly tell each other about their expectations for assets to be left to the children. For example, if trusts have been created for college expenses by one of the spouses before remarrying, the new spouse needs to know that these assets will likely be maintained as non-marital property by the spouse who created the trust.
On the other hand, the new spouses may want to formulate a clear agreement about any financial support or inheritance that will be provided by each to their respective stepchildren. In both cases, the financial advisor has a valuable role in facilitating these conversations and helping the clients take the necessary steps to carry out the agreed-upon estate planning.
In some cases, a partner may come to the new marriage with contractual obligations to an ex-spouse — such as child support — that must be taken into consideration. It is our responsibility to know our client well enough to understand these requirements and ensure that they are clearly communicated and understood by the new spouse.
Also, for couples residing in a community property state, it’s important to stipulate any assets that will remain separate (non-marital) property. Typically, this can include assets that either partner brought into the marriage as well as inheritances received after the marriage began. Form of ownership of such assets is important, too. If they are held in an account designated either “tenants in common” or “joint ownership with right of survivorship,” they will typically be considered commingled assets belonging to both spouses equally.
For this reason, assets that are intended to be maintained as separate property should be held either in a trust designated for that purpose or in an account owned only by the partner who owns the assets. As financial advisors and wealth managers, it’s our responsibility to help our clients navigate these situations in ways that uphold their best interests and intentions.
Carefully consider beneficiaries
Another important consideration is how beneficiaries of various accounts and assets are designated. Many of us have horror stories about when we’ve had to inform a recently bereaved client that the beneficiary designation in favor of an ex-spouse on an old IRA owned (and forgotten) by the deceased means that yes, the assets in that account will indeed pass to the ex-spouse, notwithstanding the terms of the will or trust.
As advisors, we realize that assets like life insurance policies, annuities, and retirement accounts have named beneficiaries who will receive the assets upon the death of the account owner, and such assets typically pass to the beneficiaries without going through the probate process. For this reason, it is especially important for us to help both spouses in a new blended family understand the need to review their life insurance policies, retirement accounts, and other assets with named beneficiaries to make sure that the designations reflect their current wishes.
Because many beneficiary designations also permit the owner to set the percentage of the total benefit that will go to each beneficiary upon the owner’s death, these percentages should also be reviewed to be certain that they accord with the owner’s current intentions.
Let’s face it: Family relationships are always tricky, and when you toss in the complications that come with remarriage, whether due to divorce or death of a spouse, the picture can become even murkier. But as trusted advisors, we owe it to our clients to patiently and carefully work through the implications and think through the potential consequences of not properly formulating or updating their estate planning documents. And, like almost everything else in our business, this requires clear communication and the professional commitment to “get it right.”
Our clients deserve nothing less.
Kimberly Foss is a CFP and CPWA professional at Mercer Advisors practicing in the Sacramento Valley area. The opinions expressed by the author are her own and are not intended to serve as specific financial, accounting or tax advice.