Yours, Mine, and Ours - Financial Challenges of Second Marriages
The marriages of people who marry for a second time experience stresses, particularly when there are children from a previous marriage. Most of these problems are predictable. They are generally solvable with patience, good will, and persistence. Some stresses have to do with step-parenting relationships. Some have to do with unresolved issues with first spouses, or unresolved patterns that play out in the second marriage. These are all best addressed by the parties themselves, and, as needed, counsel from trusted friends, relatives, and professionals, such as trained therapists.
However, there is another very significant set of problems that can arise in second marriages that can best be addressed by attorneys using estate planning, contractual, and other tools. These are essentially financial issues summarized by the following questions:
To what extent shall the new spouses provide for each other during their marriage (and after their marriage due to death or divorce)? To what extent shall their separate pre-marital assets be protected and held for the benefit of their children from the previous marriage? To what extent shall future joint or separate property be held for each other vis-á-vis their children from the previous marriage?
These financial and estate planning issues can drive a wedge between the parties to the new marriage, causing unhappiness, and eventually divorce. This is not a good outcome for a solvable problem.
Some parties choose to take care of these issues by entering into a Prenuptial Agreement (PNA) prior to the marriage. In the past, PNAs were considered legally unenforceable, as creating dissension and strife between the to-be-married couples right before the marriage. It is true that PNAs can be coercive and lead to unfair bargaining and inequitable agreements. Can you imagine a fiancé giving you a draft of a PNA a week prior to the marriage, after a large wedding has been planned and all invitations sent? This has actually happened to people. Most attorneys believe that there is a substantial uncertainty whether a PNA executed under these circumstances would be upheld by a court.
Generally, a PNA is held to be valid if entered into freely and voluntarily by the parties, if each party was vigorously represented by a lawyer as advocate, and if the PNA was fair when executed. It also requires that the terms of the PNA turn out to be fair at the time the parties divorce.
A PNA usually describes what happens to the parties' joint and separate funds and assets during marriage, and may carve out a "marital enterprise" of joint marital economic venture. Perhaps all income earned by the parties after the marriage will be shared. Sometimes increases in retirement and other assets after the marriage are shared by the couple, sometimes they are saved for their respective children. If one party moves into the other party's home as marital residence, there might be provisions regarding what happens to the house and a spouse's occupancy after divorce or death.
PNAs also (generally) have provisions on how to divide property if there is a divorce. Sometimes there are disappearing or "sunset" provisions so that the longer one is married (e.g., 5, 10, 15, or 20 years), the more intertwined the couple's financial resources are allowed to be. This comports with Massachusetts divorce law, and reflects real-life emotional and economic facts: the longer people are married to each other, the more committed they become. Their increase in connection and loyalty also generally spills over into a growing love and affection between each party and the children of his or her spouse.
Some PNAs purposely leave out some issues in the Agreement. This is to allow the couple to build an area of "marital venture" that is uncertain and almost entrepreneurial. These areas tend to positively feed a marriage. And if there is a divorce, absent agreement, these issues are left to the very intricately-developed Massachusetts equitable divorce law. This law (and the judges determining it) generally resolve complex problems with wise solutions.
Another area addressed by PNAs is what happens after death. Generally, parties want to protect each other, but also want to protect their children from the previous marriage. There is usually some allocation between the surviving spouse and the party's own children, depending on the surviving spouse's ability to take care of him/herself after the death.
One of the techniques used to provide income to the surviving spouse (if he or she needs it) and still provide ultimate distributions to the children of the deceased spouse is the QTIP (pronounced "Q-tip") Trust. These are special IRS-favored trusts that have special estate tax implications. They provide for flexibility in treating beneficiaries, can save assets for children of previous marriages, and generate tax savings and deferrals of estate tax in taxable estates.
Sometimes spouses decide to give their children from their previous marriages amounts outright (or in trust) that will fund the parents' estate tax credit shelter, with the surviving spouse receiving the remainder tax-free at their spouse's death under the "marital deduction." There are a myriad of options to consider when planning for these situations. The execution and details of all these estate plans depend on the parties' goals and the levels of assets.
Without a PNA, arrangements between surviving spouses and children of previous marriages are embedded in Massachusetts laws. There is a provision that comes into play if a person dies without a will (i.e., if a person dies "intestate"). This intestacy law (which also applies to first marriages) is based on very old common law, where it was quite usual (due to early death in childbirth or disease) for a spouse to be remarried at the time of death and to have children from his or her first marriage. It is also heavily influenced by European cultural values, where even today, in a first marriage, there tends to be a desire to leave only part of the estate to the surviving spouse, and the rest directly to the children of that marriage.
The intestacy law says that if you die married with children, half your estate goes to your surviving spouse, and half goes to your children. This rule, however, does not apply to joint tenancy and tenancy-by-the-entirety property which goes at death directly to the surviving spouse as a matter of law. It also does not apply to retirement benefits and life insurance, which go directly to the chosen recipient by beneficiary designation. However, intestacy law does affect people with "probate" assets, i.e., assets titled in their own name who did not execute a last will and testament.
I have seen situations where someone with substantial family assets in his or her own name dies in an unexpected early death (without a will), leaving a spouse and young children. Unfortunately, in that case, the surviving spouse only gets half the probate property, and the children get the rest. This scenario involves ongoing probate court supervision for the assets going to the minor children, and detailed and cumbersome probate accounts and filings. Moreover, the children get their share outright at the age of 18 years. This is not a good result.
What if a spouse gives half of his or her property to the surviving spouse and half to his or her children in a will? This may be an excellent solution with grown children. But if a spouse leaves the entire estate to the children, under Massachusetts law, the surviving spouse may "elect" or "take" against the will. As a result, the surviving spouse would receive a "life estate" in one-third of the probate assets. This life estate would be funded by putting one-third of the property of the deceased spouse in a trust and giving the surviving spouse the income from the investments held in trust during his or her life. No principal distributions are permitted to the spouse, or for that matter, to the children, while this life estate is in effect.
Many people ask me the following question: "If I give all my assets to my spouse upon death, how do you prevent my spouse from giving these assets to her or his new spouse instead of to our joint children (or my children from my previous marriage)"? Unfortunately, this is a real question with a difficult solution.
Some people with larger estates place their property in a QTIP trust with limitations of what can be given to the surviving spouse. Generally, the children would be remainder-persons, taking what is left over. In a first marriage (and with a nontaxable estate), I generally recommend that the surviving spouse should be trusted to "do well" by the children of the marriage, even if it means the surviving spouse may share property with a future spouse, and even that spouse's children. We would want our spouse to be in a good situation after our death. Giving the surviving spouse latitude to handle our jointly accumulated funds fosters the present marriage, because our spouse knows that she or he is trusted.
It is not at all uncommon for people in second marriages to run into marital problems resulting from decisions regarding income, assets, and questions regarding ultimate distributions of assets between their spouse and children of the previous marriages. Many people realize the problems and uncertainties after the marriage, without having entered into a PNA prior to the marriage. Is there anything that can be done in such a situation?
The answer is yes. There is an emerging area of law which can address this problem - Postnuptial Agreements. As described by its name, Postnuptial Agreements are agreements between spouses involving financial matters entered into after the marriage. Parties can come to terms on the sharing of current income, and on ultimate distributions of assets in a Postnuptial Agreement.
It was thought that Postnuptial Agreements would be unenforceable as a matter of law for two reasons. There is the doctrine embedded in legal history that spouses were a single person, and therefore could not contract against each other. Also, it was thought that post-nuptial negotiations are against public policy because they had the capability of being coercive and could cause harm to the marriage. However, now (although not without doubt) many practitioners believe that, under the right circumstances, these agreements can be legally binding and valid.
A Postnuptial Agreement, however, is fraught with the potential to hurt rather than help a marriage, even more so, perhaps, than a Prenuptial Agreement. As Postnuptial Agreements deal with financial, divorce, and estate planning matters, an attorney would need to be involved. Due to the delicacy of the negotiations in an ongoing marriage, the first step would probably be for both parties to engage a lawyer/mediator to begin the discussions with them jointly. But more on Postnuptial Agreements in a future column.
ABOUT THE AUTHOR
Laurie Israel is founder and managing partner of Israel, Van Kooy & Days, LLC, a law firm located in Brookline, Massachusetts. She combines a family law practice with estate planning, tax, mediation and collaborative law. Laurie is currently on the board of directors of the Massachusetts Council on Family Mediation and former board member of the Massachusetts Collaborative Law Council. Her writings include articles on mediation to stay married (marital mediation), collaborative practice, marriage, divorce, and pre- and post-nuptial agreements. She is a frequent presenter at professional conferences. Her websites are: www.ivkdlaw.com,
www.laurieisraelthink.com and www.yourfamilymatterslawblog.com.
She can be contacted by phone at (617)277-3774 or
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