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IL Estate Planning Blog

Tuesday, February 19, 2019

Should your late-in-life marriage have a prenup?

Should your late-in-life marriage have a prenup?

By Laurie Israel

Published: Dec 3, 2018 10:43 a.m. ET

MARKET WATCH

 

More older couples are getting divorced in their

middle years or even after reaching 65 years of age.

A Pew Research study shows that although the

overall divorce rates have been declining, the

frequency of divorces among people 50-and older

has more than doubled. Among the 65-and older

set, the divorce rate has tripled. Some of these

divorces are among people whose marriages lasted

30 or even 40 years.

 

The new term for a later-in-life divorce is a “gray

divorce”. And many of these newly divorced people

are getting married again. They are concerned about

their retirement, and what happens if they get

divorced again.

 

Balancing loyalty between a new spouse and children from previous

marriages

Many seniors remarrying want to leave a legacy to the

children of their first marriage when they die.

Depending on their financial situations, they also may

be concerned about protecting the financial security of

their new spouse.

 

As a result, many seniors are considering whether or

not to have a prenup (a “gray” prenup) in place before

their marriage. One of the planning issues in a gray

prenup is how to address the financial well-being of

the new spouse as well as the desire to leave assets

to one’s own children at death. Balancing these

interests is an important way to create harmony and

trust in the newly blended family.

 

A prenup can be used to solidify a specific estate plan

that balances the needs of the new spouse with the

desire to give one’s children a leg up. Without a

prenup, an estate plan can be changed at any time,

without warning. In a prenup, a couple can decide

what percentage of an estate can be left to each

other, and what percentage will go to the children of a

prior marriage.

 

It can set a minimum floor on transfers to each other

upon death, which can be exceeded if one wishes. All

or some of the assets designated for the surviving

spouse can be put into a credit shelter trust or

QTIP trust. These trust assets can be used to

support the surviving spouse during that spouse’s

remaining lifetime, with the remainder going to the

children of the prior marriage.

 

A prenup can also specify what the newly formed

couple will tell their children about the prenup. It can

range from specifics (including showing the

agreement to their children), to just saying, “We have

a prenup, and it takes care of ourselves, and also all

of you children.”

 

How to handle retirement assets in a late-in-life marriage

Retirement assets are an important source of income

to retirees in a gray marriage. A couple can decide in

a prenup whose retirement assets they will draw from

to support themselves. At death, surviving spouses

can delay starting required payouts of

retirement assets (RMDs) until the year after the

age 70. A non-spouse beneficiary such as a child

must start withdrawing RMDs from an inherited

retirement account or IRA immediately according to

their own life expectancies.

 

In a gray marriage, the couple can think about how to

divide their retirement accounts at death between the

surviving spouse and the children of a prior marriage.

Will the surviving spouse need all of the retirement

funds, or can it be divided at the first spouse’s death

between the surviving spouse and the children of the

prior marriage? Perhaps the surviving spouse does

not need the funds, and they can be given by the

participant spouse to the children at his or her death.

 

A prenup can modify the beneficiary rights of surviving

spouses to retirement assets (such as 401(k) and

some 403(b) plans) that are subject to ERISA law.

Traditional IRAs are not subject to ERISA.) In this

way, more of a retirement asset can go to a gray

spouse’s children, if that’s what the couple wishes. It

is important, however, to follow up the prenup

commitment to waive spousal rights with a written

consent required to be filed after the marriage takes

place.

 

When preparing a prenup, life insurance policies and

plans also should be reviewed and updated as

needed. Sometimes couples find when they review

their life insurance beneficiary designation forms, they

may find that an ex-spouse is still named as

beneficiary.

 

The nursing home cost risk in a gray marriage

There are lots of upsides to marriage, both financial

and emotional. This is why people get married despite

the high divorce rate. However, a noteworthy

consequence of legal marriage has to do with

payment of skilled nursing facility bills.

 

Medicare benefits coupled with a Medigap insurance

policy will cover only about 100 days in a skilled

nursing facility. After that, private payment is required.

Nursing home costs now range from $120,000 to

$200,000 a year, depending on the geographical

area. Engaging trained aids to provide 24-hour care in

your home (plus the costs of running your home) can

cost even more.

 

It is not clear what percentage of people end up in

nursing homes for more than 100 days. One trade

group says of the people who enter a skilled nursing

facility, 44% stay less than one year and 30% stay

between one to three years. It is those longer stays

that can have a severe impact on a couple’s financial

assets and security.

 

A married couple is responsible for each other’s

nursing home costs under federal and state laws

before a spouse’s nursing home costs are paid for by

Medicaid. The separate assets and income of the

spouse in the nursing home are generally used first to

defray costs with that person being about to retain

$2,000 in financial assets. But after that, the assets of

the spouse who is not in the nursing home will be

used for payment, until that spouse has only about

$124,000 in financial assets left, plus the family home.

 

A prenup cannot change this law because it a private

contract and is (in this aspect) overridden by Medicaid

laws. As a result, couples marrying later in life might

consider purchasing long-term care insurance to

mitigate the financial damage that would result if one

of them ends up in a nursing home for a long stay.

 

If you decide on a prenup, what process is best?

One of the good aspects of prenups, is that they can

lessen the risk of litigation if the new marriage ends in

divorce. It can even address conflicts that might arise

after a spouse’s death at a time the marriage is

ongoing. An alternative dispute resolution (ADR)

method such as mediation, collaborative law or binding

arbitration can be written into the prenup as a

requirement.

 

If a couple has decided to have a prenup, many have

found mediation to be the best first step in starting the

process. The couple mutually determine the terms

that will be in the prenup together during discussions

in real time, facilitated by a trained mediator.

 

 


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