Second Marriages Create Special Financial & Estate Planning Needs

An oft-told tale describes a young man’s efforts to entice a beautiful woman to marry him because he would soon inherit $20 million from his ailing father. Impressed, the woman asks the man for his business card. At their next encounter, the beautiful woman introduces herself as the man’s stepmother – i.e. showing that women are better financial planners than men.

This imaginary woman’s expertise in financial planning is based on laws that provide for surviving spouses before providing for a dead person’s children. The young man was now going to have to wait for his new stepmother to pass on, which – if this was a May-December romance – could be some years from now. 

Laughs aside, second marriages – particularly when there are adult children on each side from first marriages – create their own set of financial planning issues. Below are seven issues to consider:

Issue #1: If Dad dies first, the second wife has statutory rights in Minnesota to Dad’s estate upon Dad’s death regardless of what Dad’s Will says. This right is called an “elective share” and entitles the surviving spouse to varying amounts of the “augmented estate” depending on the length of the marriage. For example, the surviving spouse is entitled to 3% after one year of marriage and 50% at 15 years or more of marriage. The augmented estate includes practically every asset of both spouses whether it is life insurance, real estate, or property transferred prior to death. Under this scenario, the family cabin that was in Dad’s family for generations could end up with Dad’s second wife and her children. Solution: A pre-nuptial or post-nuptial agreement signed by both spouses in which each waives his or her right to the elective share.

Issue #2: If Dad and his second wife buy a new home or other real estate as joint tenants, Dad’s children from his first marriage may lose all claim to the property if Dad dies first. How? Under joint tenancy laws, Dad’s second wife becomes the sole owner of the home upon Dad’s death, and the second wife is entitled to use or dispose of the property as she sees fit. Her Will controls at her death, and she could have decided to pass the property solely to her children for her first marriage. Solution: A prenuptial agreement could require that real estate acquired during the marriage be held as tenants in common rather than as joint tenants. The difference is that the surviving spouse can claim the entire property under joint tenancy, but has no right to Dad’s half under tenants in common unless Dad specifically wills it to his second wife.    

Issue #3: The children of Dad’s second wife covet Dad’s wealth, which causes Dad’s children to worry about their inheritance. Dad likely wants to provide for his second wife after Dad’s death, but leaving assets directly to her enables her to pass those assets onto her children, or anyone else that she chooses, and to shut out Dad’s children. Solution: Dad could set up a Qualified Terminable Interest Property Trust, or QTIP Trust, for short, which is a Trust with strings attached. All income earned by the QTIP assets is paid to the second wife each year, but the second wife is only allowed to tap into the principal if an independent trustee – not the second wife or children from Dad’s first marriage – determine that she needs the money. Upon the death of the second wife, the remaining principal goes to Dad’s children from his first marriage. In this manner, the second wife is provided for, but a significant portion of Dad’s assets are protected for Dad’s children.    

Issue #4: If Dad dies leaving a much younger second wife as his widow, the adult children from Dad’s first marriage may need to wait a long time for the second wife to die so that the children can inherit Dad’s estate.  Solution: If Dad purchases life insurance, which provides a death benefit to Dad’s children at Dad’s death, then a cash payout is immediately available.

Issue #5: Dad and his second wife acquire new property during their marriage, and now they wish to divorce. Solution: A prenuptial agreement could be used to provide that property acquired during marriage shall be divided between them in proportion to the contribution each made in purchasing the property.    

Issue #6: Dad and his second wife have given each other a durable power of attorney on their respective assets. A durable power-of-attorney document allows Dad to name someone to handle his affairs when he’s mentally incapacitated. It is a very powerful document that can cover everything from drawing money from Dad’s checking account to selling Dad’s real estate.Solution: Dad should name someone other than his second wife as the power holder under a durable power of attorney, and could limit the breadth of the power granted over his financial assets.

Issue #7: Dad and his second wife’s medical needs come to the forefront as each ages. In Minnesota, if either Dad or his second wife has significant medical needs, the state will expect the other to help pay for the other’s care regardless of what the prenuptial agreement states.Solution: The prenuptial could provide that each must purchase long-term care insurance. The prenuptial agreement could further provide that each agrees to pay for his or her own medical expenses even, if necessary, to the complete exhaustion of that person’s assets before the other spouse would be expected to give any financial assistance to their spouse. This language may not be sufficient to protect the assets of the spouse who doesn’t need the medical care, but it should at least provide some protection.  

©2012, 2013 Wittenburg Law Office, PLLC. All rights reserved.

Disclaimer: This Blog is for informational purposes only and is not to be construed as legal advice. If you have questions, please seek the advice of an attorney. An attorney-client relationship is not formed by reading this Blog. If you are interested in Wittenburg Law’s representation of you, you must contact Wittenburg Law for a determination of whether your matter is one for which Wittenburg Law is willing and able to accept representation of you.

Bonnie Wittenburg, Wittenburg Law Office, PLLC, 601 Carlson Parkway, Suite 1050, Minnetonka, MN 55305  952-649-9771  www.bwittenburglaw.com  bonnie@bwittenburglaw.com