By FPA Member Lili A. Vasileff, CFP®, CDFA™
Last Updated: May 2, 2011
Looking beyond divorce is both hopeful and encouraging. Planning for a fresh start may include building and forging new family bonds with second marriages and blended families. Optimistically, one hopes that the children of the prior marriage are an integral and loving part of the new family relationship, maintaining harmonious interaction with both spouses as if they were their own children. Blended families now actually outnumber traditional nuclear families, according the U.S. Census Bureau,1 and the trend is expected to continue with longer life spans, together with steady divorce rates. The U.S. Census Bureau estimates that 1,300 stepfamilies are forming every day in America; and that more than 50 percent of American families represent a remarriage or re-coupling.
According to the most recent U.S. Census Bureau data, a little more than half of divorced men and fewer than half of divorced women remarried, proportions that have been dropping over the last decade.2 There are many reasons for declining remarriage statistics, but clearly, it is no surprise that most involve financial issues. Estate planning for blended families is complex. A financial planner can recommend specific financial strategies to help you navigate the swirling emotions and anxious deal-making of divorce, and help your attorney put together an appropriate estate plan that looks forward.
Given the reality of today’s families, it is simply not possible to ignore the specter of inheritance for blended families during divorce negotiations. The truth is that often there are both emotional and financial strains between the previous family and the new spouse. As a consequence, the prior children may not be provided for as intended when their parents negotiated their divorce. For instance in the event of a death, if all of the assets are left to the new spouse, then the deceased’s prior children may not receive anything, and the surviving spouse may in turn leave all the assets to her/his own prior children. This could result in nothing being left to the deceased’s prior children.
There are darker scenarios as well: for example, if one spouse becomes incapacitated in the course of the second marriage, many good intentions can go astray while caregiving is provided by the new spouse. Wills might be rewritten, trusts may be established, and the new spouse may be appointed as trustee or guardian to ensure control over the assets. Suspicions may exist, but until the spouse dies it is difficult to know with certainty whether the estate plan was updated or changed. It is nearly impossible for you as an ex-spouse of the deceased to pierce the privacy veil of employee benefit plans and other beneficiary designations.
On the other hand, consider the reverse scenario: if all assets are left to children of the first marriage, there may not be sufficient assets remaining to support the current spouse. “Unforeseen difficulties can arise when death occurs without a new will or trust since state intestacy rules may remove from the current marriage up to two thirds of the deceased spouse’s estate and give it to the children of the prior marriage. This can occur even if the children are all grown and in less need of the assets than the current spouse and minor children of the current marriage. If the prior children are minors, an ex-spouse may gain control over the assets.”3 Such heartbreaking messes can and do happen.
When it comes down to it, children can be disinherited, marginalized, and entrapped — and left to legally battle for their inheritance, sometimes feeling litigation is their only option. They may have the most leverage when the parent is still alive, but then need to be careful about crossing the line between encouraging sensible estate planning, and outright harassment. The upshot is that when proper estate planning does not happen, two sides may end up squaring off in court.
What else is at risk without proper estate planning for remarriage and blended families? If you get alimony, you’ll likely lose it once you remarry. So ask yourself, how will I provide for myself and my children without it?
The formula used to calculate federal student financial aid includes income and assets of the custodial parent, defined as whomever the child has lived longest with during the year. The calculations often include the income of the parent’s current spouse, too; even though your new spouse has no legal obligation to contribute, their income and assets — or even those of a cohabiting partner — could decrease the aid your college bound child receives. If you will require student financial aid, your divorce discussions should include how you both plan to coordinate paying for college tuition.
If you are collecting Social Security on your prior spouse’s earnings record, remarriage can put an end to it. The exceptions:
If your former spouse is deceased and you remarry after you turn 60, or if your remarriage ends by death or divorce, you can still collect benefits. So if you are collecting your deceased spouse’s Social Security benefit, nearing 60 and hoping to remarry, you may want to consider waiting. (After age 62, you could then collect on your current spouse’s record if it provides for a higher benefit.)
Remarriage has no effect on survivor benefits paid to children. (Less common, but worth checking into: If you are collecting your deceased spouse’s pension benefits, contact the plan to be sure payments do not end upon remarriage.)
At the end of the day, how do you wish to be remembered by loved ones? There is no better demonstration of your integrity than to take a positive attitude and approach to estate planning for the future while negotiating your divorce. A financial planner will help you focus on financial strategies most appropriate for your goals: they may include a Prenuptial Agreement, a Qualified Terminable Interest Property (QTIP) Trust, a Special Needs Trust, an Irrevocable Life Insurance Trust (ILIT), a Long-Term Discretionary Trust, Second-to-Die Life Insurance, etc. These tools may help enact your actual intentions, allow for flexibility over time, and help you move forward from divorce to a new secure future with your blended family.
1 U.S. Bureau of the Census (1998), (2002-2005) American Community Survey, Marital status and living arrangements, Washington, DC: Government Printing Office. Tables C3 and S1101, Living Arrangements of Children Under 18 Years/1 and Marital Status of Parents, by Age, Sex, Race, and Hispanic Origin/2 and Selected Characteristics of the Child for All Children: 2010 2 U.S. Bureau of Census (2001), (2002-2005) American Community Survey, Marital status and living arrangements, Washington, DC: Government Printing Office. 3 Estate Planning for Blended Families, copyright Miller, Monson, Peschel, Polacek, and Hoshow, 2002
FPA Member Lili A. Vasileff, CFP®, CDFA™, is President of the Association of Divorce Financial Planners.
