With a rise in “gray divorces” in recent years, it’s only natural that remarriage has become more prevalent among seniors. But people tend to be lax about updating their estate plan.
It’s easy to have an estate plan fall out of date following a remarriage, says Steph Wagner, director of Women & Wealth at Northern Trust, but the consequences for even unintentional missteps can be devastating, particularly for children from a first marriage or your new spouse.
“While both genders can be affected, statistically the risk to women being disinherited is greater than men,” she adds.
Here are some common pitfalls and how to avoid them:
Failure to protect your current spouse: If you die without updating your will, laws in some states dictate that your assets (possibly including the home you share with your new spouse) would pass directly to your children, essentially disinheriting your new spouse, Wagner says.
If your children decide not to provide for your new spouse and force him or her out of the marital home, that could leave the spouse with limited resources. People tend to “underestimate how quickly family dynamics can change after they’re gone,” Wagner says.
To avoid this outcome, it’s important to work with your estate-planning attorney to design a custom plan to intentionally and seamlessly distribute assets to both your children and new spouse, Wagner says. You might want to consider specifying that at the time of your death your spouse receives a life interest to remain in the marital home for the rest of his or her life, she says.
Failure to protect your children from a prior marriage: You might think to leave assets to your new spouse with the understanding that he or she will provide for your children when you are gone. But this could leave your children at risk financially.
One option might be to create a revocable trust that provides flexibility for the financial needs of both your children and spouse.
Another strategy worth considering is establishing a separate marital trust to segregate funds for your spouse as opposed to leaving a common pool of assets to benefit your children and your spouse, Wagner says. A separate marital trust allows you to directly allocate funds for your spouse’s benefit. With a marital trust, you can also stipulate that remaining assets in the trust pass on to your children when your spouse dies.
If you have a taxable estate, make sure you are optimizing lifetime gifting strategies to children to move assets outside of your taxable estate, she adds.
Failure to protect against depletion of assets: A person might decide to leave assets to his or her spouse in a marital trust with the intention that the marital trust will pass to the decedent’s children after the second spouse’s death. But those assets could easily be depleted if, say, the spouse suffers a debilitating medical crisis and enters long-term care.
To avoid the possibility that your children receive little or nothing, consider a life-insurance policy, instead of a marital trust, to provide for your spouse at your death, leaving other assets to your children, Wagner says.
If you are worried there won’t be enough left over for your children, a “second-to-die” life insurance policy will provide an additional inheritance upon your spouse’s death, regardless of the status of the assets, she adds.
Failure to protect your estate from your first spouse: Even though a signed divorce decree might automatically disinherit your ex-spouse from your estate, you still need to switch the beneficiary designations on your retirement accounts and company life-insurance plans so your assets don’t inadvertently pass to your ex-spouse.
With respect to a 401(k), a surviving spouse would typically be the automatic beneficiary, unless the spouse waives that right, but this is not the case for life insurance and individual retirement accounts, where the named beneficiary would generally receive the death benefit or asset upon death, depending on state law. Likewise, if you want your children to receive retirement or life insurance funds, you need to update beneficiary designations, as appropriate, keeping in mind the need for spousal consent on a 401(k).
It’s common for people to forget to update beneficiaries on retirement accounts or life insurance policies, but this can wreak havoc in the event of divorce, says Andrew Rosen, president of Wilmington, Del.-based Diversified Lifelong Advisors, a registered investment advisor. Remember to make the necessary changes for all 401(k) plans, including those from a previous employer, he cautions.
Rosen also recommends people update their financial medical powers of attorney to reflect their new circumstances, so their ex-spouse isn’t in control of money or health-related decisions.