Smart Planning for Second Marriages
by Lindsay Guido, CFP®
Be open and honest about finances, get a prenup, and protect the other people in your life.
In first marriages, many people learn the tangible financial benefits associated with partnership. Shared living costs are often funded by two incomes, and there are savings in insurance and taxes. Married couples have better access to credit, protection for medical purposes, and importantly the unlimited marital deduction for financial transfers between spouses.
But what about subsequent marriages? These have additional complexities, especially when significant financial assets or liabilities and children need to be considered. Open and honest financial conversations linked with careful planning (including a prenup) will protect the other family members and – hopefully – minimize disagreements over money.
Transparency is essential to maintaining a healthy relationship including full disclosure of each partner’s financial standing, past and present. Couples should share financial histories including values towards money, existence of accumulated assets, liabilities and debts, bankruptcies, credit scores (think future joint accounts), income expectations, spending habits, and responsibilities to ex-spouses, children, and other family members.
In addition, understanding a spouse’s view on credit is key as it relates to future expenditures. Obligations to previous spouses may be relevant if there are children involved; an ex-spouse may seek higher financial support if the new marriage results in an improved financial status for their former spouse. Prior divorce settlements may also include maintenance of life insurance policies benefiting children.
Frequently, emotional baggage may be an issue because of how money was handled in the previous relationship and the circumstances of its end. If one fiancé’s former partner took advantage, secretly squandered shared assets, or died without imparting knowledge of the family finances—and the result was a substantial decline in living standards, panic, or outright disaster—this will likely inform attitudes going forward in terms of prevention, increased engagement, and even confidence in money management. Unpacking the past ensures that both individuals enter the marriage with a sense of honesty and fairness, and as equal financial partners.
Combining Finances: Like a Piece of (Wedding) Cake
A big part of merging any two lives involves deciding a strategy to combine finances. There are many ways to approach this hurdle: Pool it all; Everyone for themselves; or Yours, Mine, and Ours. The first two options are the extremes, the first holding the most risk and the second being the least like a partnership. The hybrid third version minimizes some of the risk while also promoting some of the partnership. In such a case, each partner maintains individual accounts for accumulated assets (usually intended for heirs) and independent spending, but also participates in new joint accounts for shared daily living expenses, vacations, or a new home.
With any of these strategies, the couple can benefit from creating a budget, building an emergency cash reserve, and agreeing on some ground rules for spending and saving. Discuss priorities and create clarity around funding and timelines for big budget items such as supporting aging parents and children’s educations. This may necessitate involving a previous spouse in discussions, which can be uncomfortable, but will help to ensure everyone is on the same page.
In a second marriage, if a significant wealth or earning disparity exists, a system of proportional contribution may make sense. When there’s a large age gap between spouses, young children are involved, or one spouse doesn’t work, life insurance can be a useful tool to hedge against the untimely death of either the breadwinner or a stay-at-home parent (whose contribution would likely equate to paid childcare). Meanwhile, anyone receiving Social Security benefits on behalf of a former spouse may wish to delay remarriage until after age 60 to preserve the Social Security income stream.
“Marriage is the triumph of imagination over intelligence. Second marriage is the triumph of hope over experience.”
― Oscar Wilde
After the Wedding
“My mother buried three husbands – and two of them were only napping.”
– Rita Rudner
When the honeymoon luggage has been unpacked, it’s time to update the family estate plan. This is essential for second marriages and is another occasion to revisit each partner’s assets and liabilities, their relative values, and what is marital versus individual property. Titling and state laws matter because a new spouse doesn’t necessarily inherit everything from the other automatically. For example, one spouse may individually own a home the couple makes their shared residence. The other may (or may not) financially contribute to maintenance and improvements, assuming he or she will share in its capital appreciation. But without a valid estate plan in writing, there is no guarantee that assets will be divided as intended. Prenuptial agreements also impact estate planning.
Blended families may require additional consideration because probate laws aren’t generally written with them in mind. Inform adult children about financial plans concerning the second marriage, including the possibility of one spouse eventually requiring extensive medical care that could deplete shared assets as well as the healthier spouse’s time and energy. A partner in a second marriage, wanting to provide for a surviving spouse and preserve assets for children from a first marriage, could consider a Qualified Terminal Interest Property (QTIP) Trust. This allows the surviving spouse to enjoy assets during his or her lifetime while enabling the remainder to later pass to the children of the first marriage.
The next most important step is updating beneficiary information on life insurance policies, investment accounts, retirement vehicles, and TOD (transfer on death) bank and trust accounts. Beneficiary designations will override directions in estate planning documents. So, failing to make these essential changes creates a risk of leaving assets to an unintended party (such as a former spouse). If planning to jointly retitle automobiles, property mortgages, deeds, or financial accounts, now is the time to do so. And new spouses electing a name change must initiate the steps involved, beginning with legal documents and ending with changes to banking, investment and retirement accounts, credit cards, and insurance policies.
How Conifer Bay Capital Can Help
One way the Conifer Bay Capital team helps clients is by improving their financial literacy. Ideally both partners in a marriage will be knowledgeable about financial matters including the locations of bank accounts, investments, life insurance, and important documents that govern health and finances in the event of an emergency (e.g., power of attorney, medical directive). Both partners do not need to know the intricate details of every financial subject, but every investor should understand the strategy guiding the management of their investments.
Discussing shared finances doesn’t have to be stressful and can be a great way for a couple to discover ideas for a lifestyle they would like to pursue together. With proper planning, money can be an effective tool to enhance the lives of newlyweds and their loved ones whether it’s exploring a new vision for retirement, a next vacation, hosting family gatherings, or finding new experiences to pursue.
