King & Wood, P.A.

Estate Planning Considerations for Minor Children

“When preparing estate planning documents, certain beneficiaries may need more protection than others. One particular class of beneficiaries that needs to be intentionally considered is minor children.”

Creating an estate plan with minor children in mind has a host of variables quite different than one where all heirs are adults. If the intention is for the minor children to be beneficiaries, or if there is a remote chance a minor child might become an unintended beneficiary, different provisions will be needed. A recent article titled “Children need special attention in estate planning” from The News-Enterprise explains how these situations might be addressed.

Does the person creating the will—aka, the testator—want property to be distributed to a minor child? If so, how is the distribution is to occur, tax consequences and safeguards need to be put into place. Much depends upon the relationship of the testator to the minor child. An older individual may want to leave specific dollar bequests for minor children or great-grandchildren, while people with younger children generally leave their entire estate in fractional shares to their own minor children as primary beneficiaries.

While minor children and grandchildren beneficiaries are excluded from inheritance taxes in certain states, great- grandchildren are not. Your estate planning attorney will be able to provide details on who is subject to inheritance, federal and state estate taxes. This needs to be part of your estate plan.

If minor children are the intended beneficiaries of a fractional share of the estate in its entirety, distributions may be held in a common trust or divided into separate share for each minor child. A common trust is used to hold all property to benefit all of the children, until the youngest child reaches a determined age. When this occurs, the trust is split into separate shares according to the trust directions, when each share is managed for the individual beneficiary.

Instructions to the trustee as to how much of the income and principal each beneficiary is to receive and when, at what age or intervals each beneficiary may exercise full control over the assets and what purposes the trust property is intended for until the beneficiary reaches a certain age are details which need to be clearly explained in the trust.

Trusts for minor children are often specifically to be used for health, education, maintenance, or support needs of the beneficiary, within the discretion of the trustee. This has to be outlined in the trust document.

Even if the intention is not to make minor children beneficiaries, care must be taken to include provisions if they are family members. The will or trust must be clear on how property passed to minor child beneficiaries is to be distributed. This may be done through a requirement to put distributions into a trust or may leave a list of options for the executor.

Testators need to keep in mind the public nature of probate. Whatever is left to a minor child will be a matter of public record, which could make the child vulnerable to scammers or predatory family members. Consider using a revocable living trust as an alternative to safeguard the child and the assets.

Regardless of whether a will or trust is used, there should be a person named to act as the child’s guardian and their conservator or trustee, who manages their finances. The money manager does not have to be a parent or relative but must be a trustworthy person.

Review your specific situation with your estate planning attorney to create a plan to protect your minor children, ensuing their financial and lifestyle stability.

Reference: The News-Enterprise (Sep. 10, 2022) “Children need special attention in estate planning”

Estate Planning Considerations for Minor Children

“When preparing estate planning documents, certain beneficiaries may need more protection than others. One particular class of beneficiaries that needs to be intentionally considered is minor children.”

Creating an estate plan with minor children in mind has a host of variables quite different than one where all heirs are adults. If the intention is for the minor children to be beneficiaries, or if there is a remote chance a minor child might become an unintended beneficiary, different provisions will be needed. A recent article titled “Children need special attention in estate planning” from The News-Enterprise explains how these situations might be addressed.

Does the person creating the will—aka, the testator—want property to be distributed to a minor child? If so, how is the distribution is to occur, tax consequences and safeguards need to be put into place. Much depends upon the relationship of the testator to the minor child. An older individual may want to leave specific dollar bequests for minor children or great-grandchildren, while people with younger children generally leave their entire estate in fractional shares to their own minor children as primary beneficiaries.

While minor children and grandchildren beneficiaries are excluded from inheritance taxes in certain states, great- grandchildren are not. Your estate planning attorney will be able to provide details on who is subject to inheritance, federal and state estate taxes. This needs to be part of your estate plan.

If minor children are the intended beneficiaries of a fractional share of the estate in its entirety, distributions may be held in a common trust or divided into separate share for each minor child. A common trust is used to hold all property to benefit all of the children, until the youngest child reaches a determined age. When this occurs, the trust is split into separate shares according to the trust directions, when each share is managed for the individual beneficiary.

Instructions to the trustee as to how much of the income and principal each beneficiary is to receive and when, at what age or intervals each beneficiary may exercise full control over the assets and what purposes the trust property is intended for until the beneficiary reaches a certain age are details which need to be clearly explained in the trust.

Trusts for minor children are often specifically to be used for health, education, maintenance, or support needs of the beneficiary, within the discretion of the trustee. This has to be outlined in the trust document.

Even if the intention is not to make minor children beneficiaries, care must be taken to include provisions if they are family members. The will or trust must be clear on how property passed to minor child beneficiaries is to be distributed. This may be done through a requirement to put distributions into a trust or may leave a list of options for the executor.

Testators need to keep in mind the public nature of probate. Whatever is left to a minor child will be a matter of public record, which could make the child vulnerable to scammers or predatory family members. Consider using a revocable living trust as an alternative to safeguard the child and the assets.

Regardless of whether a will or trust is used, there should be a person named to act as the child’s guardian and their conservator or trustee, who manages their finances. The money manager does not have to be a parent or relative but must be a trustworthy person.

Review your specific situation with your estate planning attorney to create a plan to protect your minor children, ensuing their financial and lifestyle stability.

Reference: The News-Enterprise (Sep. 10, 2022) “Children need special attention in estate planning” 

No Inheritance Tax for King Charles III

“King Charles III has ascended to the U.K. throne, but he won't have to pay the U.K.'s inheritance tax on the massive wealth he inherits from his late mother, Queen Elizabeth II. That's because of a deal the royals made with the government nearly 30 years ago.”

British citizens must pay a standard 40% on any part of an estate valued at more than about £325,000 pounds—about $374,000, says the article “No, King Charles III won’t pay any inheritance tax on his massive gain” from National Public Radio. There are exceptions, such as money left to a charity of a spouse.

An agreement was reached between the government and the monarchy in 1993 stating that assets passing from a sovereign to their successor aren’t subject to the inheritance tax. The exemption was part of a broader tax deal when then-Prime Minister John Major stated the danger of the monarch “being salami-sliced away by capital taxation through generations” would change the nature of the English monarchy.

Around that time, both Queen Elizabeth II and Charles agreed to pay a personal income tax after reaching out to the government to ask how they might voluntarily pay taxes. Prime Minister Major said the queen would pay taxes in the same way as every other taxpayer, but a hereditary monarchy required a special arrangement for an inheritance tax.

In addition to becoming King, Charles inherits two properties that generate millions in income annually: the Duchy of Lancaster and the Duchy of Cornwall, which transfers from Charles to Prince William. These two portfolios stand apart from the queen’s personal fortune, estimated in the hundreds of millions of dollars.

The Duchy of Lancaster includes prime real estate in London, ten castles, vast farmlands and an airfield. The monarchy forcibly seized most of the land hundreds of years ago. The Duchy of Cornwall includes assets of about $1.2 billion, and $26.4 million in distributable surplus for the financial year ending March 31, 2022.

However, that’s not all. The Sovereign also receives millions annually through an annual grant from the Crown Estate, a massive property portfolio including much of Regent Street of London. It belongs to the reigning monarch but isn’t their private property.

The complex holdings and secrecy surrounding the monarchy’s wealth is complicated. Their identities and livelihoods are intertwined with official, state-supported roles.

At a time when England is facing an energy crisis, soaring food prices and challenges to the health care system, this kind of private wealth under the name of royalty is coming under scrutiny. With both a new king and a new prime minister, it will be interesting to see whether the new King will maintain the old ways or look towards the future.

Reference: National Public Radio (Sep. 15, 2022) “No, King Charles III won’t pay any inheritance tax on his massive gain”

Benefit Controlled Trust May Be Answer to Protecting Legacy

“Life is messy sometimes. Divorce, bankruptcies and lawsuits happen. They can potentially wipe out the inheritance you’ve carefully set aside for your loved ones. However, there are many trust options to help keep life from ruining your legacy.”

When beneficiaries receive their inheritance in their own names, a legacy becomes vulnerable to creditors, lawsuits, divorce and a second estate tax when they die. Complicating matters further, if the heir receives means-tested government benefits, their benefits may be lost if they receive a direct inheritance.

There is a solution, explains the article “What a Beneficiary Controlled Trust Can Do to Protect Your Legacy After You Are Gone” from Kiplinger. Having each beneficiary’s inheritance go into their own Beneficiary Controlled Trust can protect your legacy. Properly created and funded, the beneficiary may control, use and enjoy their inheritance with less risk than outright ownership. A Beneficiary Controlled Trust protects loved ones from the ups and downs of life. Divorce, lawsuits, creditor claims, bankruptcy are all unpleasant, but they do happen.

A Spendthrift Trust is used for beneficiaries who cannot be trusted to make good financial decisions, or who have people in their lives who can’t be trusted. It’s like a spigot on a garden hose. The trustee decides when the beneficiary should receive access to assets, how much and when.

In a Beneficiary Controlled Trust, the beneficiary can also be the controlling trustee. The beneficiary has the same level of control as they would with outright ownership. They can make investment decisions. Assets, including real property or investment accounts, are owned by the trust.

After inheritance, the primary beneficiary has the ability to alter the level of control or protection, if they are concerned about upcoming risks. If the risk is particularly strong, for example, a contentious divorce, the primary beneficiary may resign as a trustee and appoint a trusted family member or professional to act as a trustee.

Another trust is a HEMS trust, one limited to providing distributions for the beneficiary’s Health, Education, Maintenance and Support. HEMS trusts are used to avoid estate tax. However, in some states, certain creditors, including divorcing spouses or health care providers, are permitted to pierce the trust and access assets.

If the primary beneficiary of a Beneficiary Controlled Trust wishes to enhance asset protection, they can appoint an independent trustee who serves as the distribution trustee. They may make distributions to the beneficiary at their discretion, which can provide another level of protection. The beneficiary may not wish to giver such broad discretion to an Independent Trustee, as in the case of Brittney Spears. This can be minimized by giving the primary beneficiary the right to remove and replace the Independent Trustee. The beneficiary won’t have direct control over the distributions, but they decide who will manage the trust. The person may not be a related party or subordinate person.

Taxes should always be a consideration when creating trusts. Your estate planning attorney should review goals, concerns, and your unique situation to determine which type of trust works best for you and your family.

Reference: Kiplinger (Sep. 13, 2021) “What a Beneficiary Controlled Trust Can Do to Protect Your Legacy After You Are Gone”

Who Pays the Tax on a Special Needs Trust?

 

“The main financial vehicles of supporting disabled individuals—the special needs trust and the Achieving a Better Life Experience (ABLE) account—both come with special tax conditions that advisors need to consider.”

One of the reasons to use a Special Needs Trust (SNT) or open an ABLE account is to prevent federal or state benefits for a disabled person to be put at risk. The SNT is a way to hold property for someone without interfering with their eligibility. However, there are no tax advantages to the trust, according to a recent article titled  “How To Factor In Taxes When Considering Special Needs Trusts, Accounts” from Financial Advisor.

Tax results depend on who creates the trust, the terms of the trust and how it’s administered. The trust pays no taxes on any income it earns, as long as that income is passed on to the beneficiary. Trust tax rates are generally higher than individual tax rates. The income to the beneficiary will be taxable at their income tax rate. In some cases, all of the income of a trust might be taxed to the beneficiary, while in others the parent or person who created the trust might bear a tax burden, or the trust itself may be responsible for the tax liability.

An ABLE account is also a tax-favored vehicle, similar to a 529 college saving account. For a person to qualify for an ABLE account, they must have a disability that began before age 26 or be a recipient of Supplemental Security Income (SSI) or Social Security disability insurance benefits or meet other disability requirements.

The ABLE account will not reduce the major part of SSI benefits under the dollar-for-dollar SSI direct support rules, and it won’t be counted as an asset. The disabled person may also use their ABLE account to save earned income. The ABLE account can be inherited, and new rules allow funds in a 529 college savings account to be rolled into an ABLE account.

You can only contribute $15,000 a year to most ABLE accounts, and if the account plus other resources exceeds $100,000, SSI benefits will be suspended. These accounts must be managed carefully to protect eligibility.

The ABLE account varies, depending on the requirements and rules of the state where it is established. Some states offer additional tax benefits, if the person uses the ABLE accounts offered by their home state.

Depending on the state where you open the account, there can be deductions for contributions to an ABLE account. Earnings in the account are generally not subject to taxes, but the funds in the ABLE account may only be used tax-free for qualified expenses that result from living with a disability. Those include education, housing, employment training and special assistance.

The ABLE account is a useful financial tool for disabled individuals, but it does not completely replace a Special Needs Trust or trust planning.

When there are substantial funds, such as those from an inheritance, litigation settlement or a major gift, most estate planning attorneys recommend that those funds go into a Special Needs Trust.

Reference: Financial Advisor (July 12, 2021) “How To Factor In Taxes When Considering Special Needs Trusts, Accounts”

How to Prepare for Higher Taxes

“President Biden’s proposal to eliminate the step-up for calculating inheritance taxes targets a tactic that has long been a wealth-preservation tool. What are some of the ramifications of the proposal and what, after political wrangling, could be the tax implications for large inherited assets?”

Taxing the appreciation of property on gifting or at death as capital gains or ordinary income is under scrutiny as a means of raising significant revenue for the federal government. The Biden administration has proposed this but proposing and passing into law are two very different things, observes Financial Advisor in the article “How Rich Clients Should Prepare For A Biden Estate Tax Regime.”

The tax hikes are being considered as a means of paying for the American Jobs Act and the American Families Act. Paired with the COVID-19 relief bill, the government will need a total of $6.4 trillion over the course of a decade to cover those costs. Reportedly, both Republicans and Democrats are pushing back on this proposal.

A step-up in basis recalculates the value of appreciated assets for tax purposes when they are inherited, which is when the asset’s value usually is higher than when it was originally purchased. For the beneficiary, the step-up in basis at the death of the original owner reduces the capital gains tax on the asset. Taxes are reduced significantly, or in some cases, completely eliminated.

For now, taxpayers pay an estate tax on the value of the assets and the basis of appreciated assets is stepped up to fair market value. The plan under consideration would treat appreciated assets owned at the time of death as sold, which would trigger income tax and subject those assets to estate tax.

Biden’s proposal would also subject many families to the estate tax, which they would not otherwise face, since the federal estate tax exclusion is still historically high—$11.7 million for individuals and $23.4 million for married couples. Let’s say a widowed mother dies with a $3 million estate. Most of the value of the estate is the home she lived in with her spouse for the last four decades. Her estate would not owe any federal tax, but the deemed sale of a highly appreciated home would generate income tax liability.

The proposal allows a $1 million per individual and $2 million per married couple exclusion from gain recognition on property transferred by gift or owned at death. The $1 million per person exclusion is in addition to exclusions for property transfers of tangible personal property, transfers to a spouse, transfers to charity, capital gains on certain business stock and the current exclusion of $250,000 for capital gain on a personal residence.

How should people prepare for what sounds like an unsettling proposal but may end up at a completely different place?

For some, the right move is transferring properties now, if it makes sense with their overall estate plan. Regardless of what Congress does with this proposal, the estate tax exemption will sunset to just north of $5 million (due to inflation adjustments) from the current $11.7 million. However, the likelihood of the proposal passing in its present state is low. The best option may be to make any revisions focused on the change to the estate tax exemption levels.

Reference: Financial Advisor (June 28, 2021) “How Rich Clients Should Prepare For A Biden Estate Tax Regime”

Succession Planning for Farm Transition and Estate Planning

“Conversations about family succession plans are difficult.”

If you think it’s bad that 60% of farmers don’t have a will, here’s what’s even worse: 89% don’t have a farm transfer plan, as reported in the recent article “10 Farm Transition and Estate Planning Mistakes” from Farm Journal’s Pork Business. Here are the ten most commonly made mistakes farmers make. Substitute the word “family-owned business” for farm and the problems created are identical.

Procrastination. Just as production methods have to be updated, so does estate planning. People wait until the perfect time to create the perfect plan, but life doesn’t work that way. Having a plan of some kind is better than none at all. If you die with no plan, your family gets to clean up the mess.

Failing to plan for substitute decision-making and health care directives. Everyone should have power of attorney and health care directive planning. A business or farm that requires your day-in-day-out supervision and decision making could die with you. Name a power of attorney, name an alternate POA and have every detail of operations spelled out. You can have a different person to act as your agent for running the farm and another to make health care decisions, or the same person can take on these responsibilities. Consult with an estate planning attorney to be sure your documents reflect your wishes and speak with family members.

Failing to communicate, early and often. There’s no room for secrecy, if you want your farm or family business to transfer successfully to the next generation. Schedule family meetings on a regular basis, establish agendas, take minutes and consider having an outsider serve as a meeting facilitator.

Treating everyone equally does not fit every situation. If some family members work and live on the farm and others work and live elsewhere, their roles in the future of the farm will be different. An estate planning attorney familiar with farm families will be able to give you suggestions on how to address this.

Not inventorying assets and liabilities. Real property includes land, buildings, fencing, livestock, equipment and bank accounts. Succession planning requires a complete inventory and valuation of all assets. Check on how property is titled to be sure land you intend to leave to children is not owned by someone else. Don’t neglect liabilities. When you pass down the farm, will your children also inherit debt? Everyone needs to know what is owned and what is owed.

Making decisions based on incorrect information. If you aren’t familiar with your state’s estate tax laws, you might be handing down a different sized estate than you think. Here’s an example: in Iowa, there is no inheritance tax due on shares left to a surviving spouse, lineal descendants or charitable, religious, or educational institutions. If you live in Iowa, do you have an estate plan that takes this into consideration? Do you know what taxes will be owed, and how they will be paid?

Lack of liquidity. Death is expensive. Cash may be needed to keep the business going between the date of death and the settling of the estate. It is also important to consider who will pay for the funeral, and how? Life insurance is one option.

Disorganization. Making your loved ones go through a post-mortem scavenger hunt is unkind. Business records should be well-organized. Tell the appropriate people where important records can be found. Walk them through everything, including online accounts. Consider using an old-fashioned three-ring binder system. In times of great stress, organization is appreciated.

No team of professionals to provide experience and expertise. The saying “it takes a village” applies to estate planning and farm succession. An accountant, estate planning attorney and financial advisor will more than pay for their services. Without them, your family may be left guessing about the future of the farm and the family.

Thinking your plan is done at any point in time. Like estate planning, succession planning is never really finished. Laws change, relationships change and family farms go through changes. An estate plan is not a one-and-done event. It needs to be reviewed and refreshed every few years.

Reference: Farm Journal’s Pork Business (June 28, 2021) “10 Farm Transition and Estate Planning Mistakes”

Celebrity Estate Planning Mistakes

“If you do not learn from your mistakes, you are doomed to repeat them. In Estate Planning, if you do not learn from other’s mistakes, you are likely to repeat them.”

The size and scope of the mistakes made by celebrities may be enormous, but many of the mistakes are common for, well, us common people. Learning estate planning lessons from the mistakes made by celebrities and very wealthy people is a good way to prevent yourself from making those same mistakes, says the recent article “Lessons to be Learned From Failed Celebrity Estates” from Forbes.

Let’s start with James Gandolfini, famed for his role in The Sopranos and many movies and television shows. Strangely, he left only 20% of his estate to his wife. Had he left the entire estate to his wife, the family would not have gotten stuck with a huge tax bill. Instead, 55% of his total estate, including a significant art collection, had to be sold to pay estate taxes.

James Brown, the godfather of soul, left copyrights to his music to an educational foundation, tangible assets to his children and $2 million for his children’s education. That sounds like smart thinking, but his estate planning documents contained a great deal of ambiguous language. His girlfriend and her children challenged the estate. Six years and millions in estate taxes later, his estate was settled.

Michael Jackson’s estate fail is a classic error. He had a trust created but failed to fund it. The battle in the California Probate Court over control of his sizable estate could have been avoided.

Howard Hughes, famed entrepreneur, aviator and engineer wanted his $2.5 billion fortune to go towards medical research, but no valid will was found. Instead, his assets were divided among 22 cousins. Before he died, he did take the step of gifting Hughes Aircraft Co. to the Hughes Medical Institute. The company was not included in his estate, but everything else was.

Author Michael Crichton was survived by his pregnant fifth wife, and a son was born after his death. Crichton failed to update his will to include the future offspring. His daughter from a previous marriage fought to exclude his son from the estate. His will included language that specifically overrode a California statute that would have included his son in the estate. All heirs not otherwise mentioned in his will were to be excluded.

Doris Duke inherited a tobacco fortune. When she died, she left a $1.2 billion estate to her foundation, with her butler in charge of the foundation. The result was a series of lawsuits claiming that the foundation was being mismanaged, and cost millions in legal fees. Foundations of that size need a strong management team to avoid legal challenges.

Few estate failures are as graphic as that of Casey Kasem. The famed radio personality’s estate battle after his death included kidnapping and the theft of his corpse. His wife and children from a prior marriage fought over his care, his end-of-life care and the disposition of his remains.

Iconic artist Prince died without a will. The Queen of Soul, Aretha Franklin, died without a will, then handwritten wills were found in her home weeks after she died. For both families, lawsuits, court proceedings and huge estate tax bills could have been avoided.

If you don’t have an estate plan, get it started. If you haven’t looked at your estate plan in a while, have it reviewed. Make provisions for your family, take a close look at potential tax liabilities and if you have been married more than once, make sure to have a rock-solid estate plan that will withstand challenges.

Reference: Forbes (June 18, 2021) “Lessons to be Learned From Failed Celebrity Estates”

Largest Tax Bill in History Filed in South Korea

“Picasso, Monet and Dalí are among the assets South Korea’s richest family is parting with, as it prepares to pay one of the largest inheritance tax bills in history.”

How’s this for a big inheritance tax bill: $10.8 billion! The Samsung family announced that it would be paying the sizable amount after the death of Lee Kun-hee, the chairman of Samsung. South Korea has one of the highest inheritance taxes in the world, as reported in this recent article, “An Inheritance Tax Bill You ‘Can’t Fathom’: $10.8 Billion” from The New York Times.

The family is required to inform the tax authorities of how it plans to pay the bill by the end of May, and they did so very publicly, appearing in a news broadcast to announce their plans. Their statement was clear and simple: “It is our civic duty and responsibility to pay all taxes.”

Samsung is the biggest and most profitable family-run conglomerate in South Korea.

Mr. Lee was credited for transforming Samsung into a massive tech giant, but he was also reclusive, and one of his secrets was how he wished his wealth to be divided among his wife and three children upon his death.

His only son, Lee Joe-young, is the de facto leader of Samsung. If he inherits his father’s shares in the company’s many subsidiaries, it will boost his control of the company. However, it is still unclear how much he will inherit or how he will raise the $10.8 billion needed to pay the inheritance tax.

Analysts expect that he will sell some non-essential Samsung shares and secure bank loans. How the elder Mr. Lee’s fortune is divided will impact the future of the company.

The Lees are South Korea’s wealthiest family. Samsung reported that the $10.8 billion is more than half of the value of the father’s estate, and more than three times the total inheritance taxes collected by the government last year.

The family announced that it will donate his personal art collection of 23,000 works to national and provincial museums throughout South Korea. The collection has been estimated as worth $2.2 billion.

The Lees have also committed $900 million to fight the growth of infectious diseases and help children afflicted by cancer and rare diseases. Half of the money is dedicated to building the first hospital in the country dedicated solely to infectious diseases.

The generosity is from a family that has struggled with its public identity. In January, the son was imprisoned after being convicted for bribery. Recently, business groups have lobbied the government to pardon him, so he could lead the company as the semiconductor industry faces uncertainty.

The company has long been accused of trying to secure a father-son transfer of power at all costs, even if success required breaking laws, buying political influence and avoiding taxes. The senior Mr. Lee himself received a suspended three-year prison sentence in 2009 for evading taxes for assets he secretly inherited from his own father, Samsung founder Lee Byung-chull. The money was secreted in stock accounts opened in the name of his assistants.

Mr. Lee Jae-yong has run the conglomerate, since his father suffered a heart attack in 2014.

By law, the chairman’s widow is entitled to one-third of the total inheritance, with the rest split evenly between the three children. However, the wealthy families of South Korea often reach private agreements to ensure the eldest son remains in control of the company.

The family has a history of promising to use its wealth to benefit society, but reportedly has not kept its word until this recent announcement. Reaction from South Koreans is mixed, from skeptics who take a wait-and-see attitude, to others who are pleased by the large donations being made.

Reference: The New York Times (April 28, 2021) “An Inheritance Tax Bill You ‘Can’t Fathom’: $10.8 Billion”

What Is Fair in a Second Marriage and Estate Planning?

“If you are planning to take another walk down the aisle, it is critical to take the time to review and revise your estate plan, especially if meaningful assets and debts are being brought into the marriage.”

The assets you and your second spouse bring into the marriage need to be carefully considered when revising your estate plan, says a recent article “Value of an Estate Plan Review With a Second Marriage” from Mondaq. If there are children from one or both partner’s prior marriages, those too need to be considered. If you plan on having children together, the estate plan needs to include this as well.

The best time to prepare this new estate plan would be before the wedding. This way, you can both go forward with the wedding and celebration with clear minds and hearts.

Start with a complete inventory of all assets and debts. List financial accounts, including investments, savings and checking accounts. Real estate and any personal assets, pensions and tax deferred retirement accounts should be included.

Review your wills, trusts, health care plans and directives, powers of attorney and any other estate planning documents at this time.

There may be assets that need to be retitled, and beneficiaries on all assets that permit designated beneficiaries should be updated at this time. Check to be sure a prior spouse is not the beneficiary of any life insurance or pensions. Any debts or liabilities that one partner brings to the marriage should be reviewed at this time. Comingling accounts and marriage will make both spouses responsible for each other’s debts, which should be discussed candidly.

Based on the inventory, one or the other partner may wish to have a prenuptial agreement to protect their individual financial interests. A prenuptial agreement may also be used to waive respective rights to each other’s property. These agreements are also used to serve as a means of retaining control of a business and defining premarital assets and debt.

When children are involved, decisions need to be made as to how assets are to be divided. Does one spouse want to leave their assets to their own children or to all of the children?

One way of addressing children in a second marriage is to create a separate marital trust to ensure that the new spouse receives the share of the assets you want them to have, while preserving your children’s inheritance. In the case of IRAs, it may be prudent to split them into separate IRAs among your spouse and children to protect the children’s inheritance.

When naming new beneficiaries, be aware that your new spouse may have mandatory rights to certain assets, such as qualified retirement plans. The only person who can inherit a Health Savings Account (HSA) without it becoming taxable, is your spouse. Remember to change this from your former spouse to the new spouse. Naming your children as the beneficiary would cause the account to be taxable on your death.

An estate planning attorney who has worked with second and subsequent marriages can help facilitate a discussion about structuring an estate plan. Working with a professional who knows how these situations are resolved can be a great help in getting the process started and keeping it moving forward.

Reference: Mondaq (March 2, 2021) “Value of an Estate Plan Review With a Second Marriage”