Things You Need to Know About Estate Planning in a Second Marriage

Last Modified on February 5, 2020

Estate planning is the most multi-faceted aspect of financial planning. It involves emotions and relationships, and is perhaps the only part of personal finance that you plan for someone else and not yourself. Unlike your other financial goals, estate planning depends largely on the structure of your family. Your marital status plays a very significant role in estate planning and should never be neglected. For people who have only been married once, it is quite a simple process. Spouses either leave their estate to each other or to their children. But, if you are widowed or divorced, and decide to remarry, you may be liable to include your ex-spouse, current spouse, children, and probable stepchildren into your estate plans. How do you justly distribute your estate to the right beneficiaries? Let’s find out!

Evaluate Your Relationship

The first and foremost thing to do is to evaluate your relationship with all your family members who are potential beneficiaries of your estate, from all of your marriages. This includes: 

1. Your relationship with your ex-spouse.
2. Your relationship with your children from the previous marriage. Keep in mind that if your ex- spouse decides to get married, your children may inherit a step parent’s estate as well. 
3. Your relationship with your biological children from the second marriage. 
4. Your relationship with your step-children. There are chances that your step children may inherit estates of their biological parents.
5. You must also take into consideration the ages and dependency of all your children from all your marriages. Your children could be minors, or have special needs. Also note that if they are married or divorced, their inheritance can further be split with their spouses which could have other tax implications.

Now that you have carefully examined your equation and obligations to probable beneficiaries, you need to make a list of all your retirement accounts, real- estate, insurance policies, liquid cash, etc., and then decide how you wish to distribute your estate among your kin. Primarily, the following two are the most overlooked components of estate planning and end up creating the biggest family feuds.  

1. Retirement Accounts

In the unfortunate event of someone’s demise, retirement accounts are not passed on via a probate. They simply go to the beneficiary that is nominated by the account holder. The beneficiary, in most cases, is the spouse. The first thing to do in estate planning after a second marriage is to update the beneficiary. Keep in mind that even if you explicitly allocate your retirement accounts to your new spouse in your will, as long as the beneficiary on the retirement account is not changed, the will stands null and void. 

2. Life Insurance

In case of a divorce, if you have children from your previous marriage, the court mandates that you keep aside enough money to take care of the kids. This includes day-to-day expenses as well as college funds. Your life insurance is likely to be accounted for as a fund to take care of these expenses. Although, this is decided by evaluating all other sources of funds, if the court mandates you to allocate your life insurance for the well-being of your children, the nominated beneficiary of your insurance policy will not receive any benefits. 

Apart from the two accounts mentioned above, here are some other common scenarios that people tend to overlook in a second marriage: 

Not having a will

If you pass away without a will, your ex-spouse will have the custody of your children. This also means that the funds that your children inherit will likely be managed by your ex-spouse. In cases where people don’t share a good relationship with their exes, this can pose a huge problem. Therefore, you must explicitly specify who gets your children’s custody in such a scenario. It is advisable to set up a trust to take care of your minor children. This way, your funds are not likely to be misused. 

Not being precise in the will

The language you use in your will is very important. You may have created your will a while back and used generalized terms like ‘children’. But if you remarry and have step-children, you need to specify the names of all your children. Normally, if your will is considered invalid or unclear, the court will mandate a large part of your estate to your current spouse and the remaining will be distributed among all your children and step-children. If your spouse passes away too, their share will go to their biological children (your step-children). In such a scenario, your children will lose out on their inheritance. 

Not accounting for probable outcomes

Imagine an instance, where you jointly buy a house with your husband from your second marriage. Now you may pass your share of the house to your children in your will, when you are not around. But as per law, since the joint-owner of the house (your husband) is still alive, the property will solely belong to him. When your husband passes away too, the property is likely to go to his children and your children will most likely end up with nothing. 

To sum it up 

Divorce, remarriage, and estate planning need to go hand in hand. As soon as you are remarried, you must update your estate plan. Also, pay special attention to your separation document when you get divorced. If your separation documents state your ex-spouse as the beneficiary of your accounts, then regardless of what you write on your will, your estate is likely to go to your ex-spouse. You also need to decide what happens to the property that you may have owned with your ex, especially if you or your ex decide to have more children. 

You are likely to have your hands full with the preparation of your second marriage and dealing with newer transitions requires a lot of time and effort. But no matter what, you should never overlook the importance of estate planning. 

Do you need help in discussing the terms of your separation and drafting a new estate plan after a second marriage? Consult financial advisors for advice on how and where to start.