For baby boomers getting remarried, there are several financial issues to consider that younger couples do not usually face – especially as it relates to estate planning.
It is often the case that estates are left first to the surviving spouse (especially for first marriages), and then subsequently to any children of the marriage. This is a routine and tax efficient course of action. However, if there are children to consider from a previous relationship then such decisions can become complicated. In these scenarios, it is necessary to move beyond a "standard" tax efficient plan. In a second marriage, a possible glitch that can occur is when an estate is left entirely to the spouse (thus allowing for a tax deferral), and he/she neglects to provide for the children from a previous marriage (or to their bequests). Therefore, the children may be left out of the estate entirely.
To prevent this from happening, you can create an alter ego (or joint-partner) trust that would allow you and your new spouse to receive the benefits and income of your assets while you live. Meanwhile, you can name your children as the ultimate capital beneficiaries upon the death of both spouses. If properly enacted, this structure is better than specific bequests to your children in your will because of the added benefit of deferring taxes until the death of both spouses, and avoiding probate fees (on the assets placed within the trust). This structure is only available if the "settlor," (the person who is transferring the assets) is 65 or older.
Upon the death of a spouse, the surviving spouse may opt to receive their entitlement under the existing will, or they may elect in favour of equalization of net family property under the Family Law Act (FLA).
When opting for the FLA election, then arises yet another complication for silver newlyweds. Electing under the FLA is similar to the entitlement which the surviving spouse would have received had the spouses separated. Stated simply, equalization allows for a surviving spouse to receive half the combined net worth of both spouses with some possible adjustments. These adjustments would allow the estate and the surviving spouse to deduct the assets that each spouse had contributed to the marriage. These include the equivalent worth of what each had on the first day of marriage with the possible exception of the family 'matrimonial' home and excludes any gifts/inheritances received during the marriage (as long as they have been kept separate and are identifiable).
Notwithstanding a long and happy marriage, (and an otherwise well thought-out estate plan), the surviving spouse could circumvent the planning and potentially receive a larger share of the estate than was contemplated under the will. The FLA election (which can be made up to six months after death) prevents any interim distributions from the estate of the deceased spouse without the surviving spouses' consent (or as authorized by the court).
In order to avoid the possible complications that may arise with a FLA election, a couple may want to enter into a marriage contract, known as a prenuptial agreement. This contract can set out what the specific entitlements of each spouse will be upon separation (or death of the other spouse). As such, if the marriage contract is written in harmony with (to mirror) the estate planning, then it should be possible to prevent differences in entitlements between the estate plan and the FLA election.
Proper planning can allow you to minimize and defer tax, streamline the resolution of your estate, and ensure your final wishes are carried out.
About the Author
Mitchell Ornstein is a manager in Crowe Soberman's Valuations | Forensics | Litigation Group. He is knowledgeable in a wide range of business and intellectual property valuations, securities valuation, shareholder disputes, family law matters, and succession planning.
This article was originally published in the Comments Winter '14 Issue.
The content of this article provides a general guide to the subject matter. Specialist advice, including that from a lawyer who practices in family law, should be sought about your specific circumstances.
