How a second marriage affects estate planning

Decisions regarding wills, living trusts, and power of attorney are critical when forming a blended family, according to Joel M. Blau, CFP, and Ronald J. Paprocki, JD, CFP, CHBC.

Joel M Blau, CFP

Ronald J. Paprocki, JD,CFP, CHBC

How is my estate impacted by a second marriage?

In this day and age, it is not at all unusual for a spouse, children, and grandchildren from a second or even third marriage to form a so-called blended family. But these additions to the family can complicate estate-planning options. Keeping that in mind, the following tools may be useful for blended families:

Will. Your will is the centerpiece of your estate plan and should be coordinated with other devices such as trusts. It can be amended through a codicil for minor changes or be completely rewritten to reflect major changes. For example, you might rework a will to include your spouse and your children from a second marriage or even the spouse’s children from a prior marriage.

Living trust. Often viewed as a supplement to a will, a living trust enables you to maintain control over the disposition of assets. Typically, the trust is revocable, so you still have the ability to change the beneficiaries or allocations, or otherwise amend it during your lifetime. Because assets contained in a living trust avoid probate, this can be valuable to someone who wants to avoid public scrutiny.

Prenuptial agreement. This is no longer the exclusive domain of the rich and famous. A prenuptial agreement is often designed to protect assets before entering a second marriage and preserve wealth for the children of your first marriage. It may also be coordinated with other rights and responsibilities (eg, conditions for a second spouse to act as executor of your estate).

Power of attorney. A power of attorney is a legal document authorizing the attorney-in-fact to act on your behalf. With a durable power of attorney, the power continues if you become incapacitated. The decision as to whom to designate as the attorney-in-fact can be a critical one for blended families.

Retirement plans and IRAs. It is likely that much of your wealth is in qualified retirement plans, such as a 401(k) and traditional or Roth individual retirement accounts. Beneficiary designations should be updated as soon as certain life events occur, such as divorce, marriage or remarriage, or a birth. The retirement plan and IRA designations on record with the plan administrator or IRA custodian at the time of your death supersede any declarations in your will or other documents.

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Life insurance. As with retirement plans and IRAs, you may be inclined to amend your life insurance beneficiary designations. Alternatively, you might revise the percentages of proceeds going to the respective parties. Once again, these beneficiary choices take precedence over any other designations.

QTIP trust. A Qualified Terminable Interest Property (QTIP) trust is comparable to a marital trust. However, if the surviving spouse is entitled to a portion of your assets upon your death, he or she receives regular income payments but not the principal. When the surviving spouse dies, the remainder passes to the designated beneficiaries, potentially providing estate-tax benefits.

Estate taxes. The 2016 federal estate tax exemption is $5.45 million for individuals who die in 2016 (up from $5.43 million in 2015). A 40% tax rate applies to the value of an estate in excess of the $5.45 million exemption. The federal gift tax exemption is also set at $5.45 million for 2016 (up from $5.43 million in 2015). Gifts in excess of the $5.45 million exemption will be taxed at 40% as well.

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These are just some of the estate planning considerations for a blended family. Other options may be available in your situation. Your estate-planning attorney can help optimize your estate plan under the current federal estate tax rules as well as point out any applicable state-specific tax rules when making these changes.

What is a passive mutual fund?

When looking at mutual funds as a component of an overall investment plan, many criteria distinguish one fund from another. These criteria include asset class (stocks, bonds, international and industry sectors), and management style. However, every mutual fund will be either actively or passively managed.

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Passive management often refers to index funds. Investors utilize passive management because it provides broad market diversification and low relative internal expense ratios. Passive management is essentially a buy and hold strategy that results in relatively low trading costs despite the large number of security positions within an index portfolio. Passive investing through an index fund also provides significant diversification benefits since index portfolios hold all the stocks comprising their specific asset class universe.

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Send your questions about estate planning, retirement, and investing to Joel M. Blau, CFP, c/o Urology Times, at UT@advanstar.com. Questions of general interest will be chosen for publication. The information in this column is designed to be authoritative. The publisher is not engaged in rendering legal, investment, or tax advice.