Financial considerations around marriage in your retirement years
Baby boomers who get married for the first time, or for an additional time, later in life can face numerous financial issues that are different from those of young newlyweds. Boomers may have to provide for children from a previous marriage, blend retirement benefits, choose which house to live in, or change estate-planning directives.
To ensure these issues are properly addressed in advance of their marriage, retirees and boomers should have a conversation with a Financial Advisor, in addition to speaking with their attorney and tax advisor. During the conversation, discuss assets, liabilities, budgets and sources of income. If one person is bringing substantially more assets or liabilities to the marriage, for example, an attorney might recommend a prenuptial agreement to detail how assets will be divided in the event of divorce. Keep in mind that you may become legally responsible for your spouse’s debts once married (is this true?).
A Financial Advisor can help you work through the financial issues and prepare for discussions with attorneys and accountants about the important decisions which should be made before vows are exchanged. After your estate plan is drawn up by your legal and tax advisors, your Financial Advisor can work with you to implement the plan.
A Few Key Decisions
Deciding the disposition of a family home is important, as it is often a couple’s largest investment. Remarrying boomers and retirees may face some tough decisions about deciding where to live, whether to re-title the house and deciding what happens to the property if either partner dies.
A typical scenario might involve a home that you own and share with your new spouse. You may want your spouse to continue living in the house if something were to happen to you, but still desire to ultimately leave the property to your children. Titling the property in such a way that the surviving spouse inherits the house free and clear is referred to as joint tenancy with right of survivorship and ensures that your spouse can continue to live in the house, but means it will ultimately pass based on his/her will, not necessarily to your heirs.
Another possible strategy would be to title the property as tenants in common. Ownership as tenants in common allows each spouse to leave his or her interest in the property to his or her heirs. . A potential pitfall of this strategy is that neither the surviving spouse nor the deceased spouse’s heirs own the property exclusively. Disputes can easily arise and the property may ultimately need to be sold to resolve.
A better approach may be to place the house in trust or structure your plan such that your spouse inherits the house outright and you meet your bequest objectives for other heirs with other assets.
Titling Your Assets
Becoming engaged is a good time to take a fresh look at how your other assets are titled, as well, particularly if you own an asset jointly, or have retirement accounts or insurance and annuity contracts where the beneficiary designation takes precedence over your will. Ensuring that your assets pass to your intended beneficiaries, requires the coordination of how your assets are titled, your beneficiary designations, your will and any trusts that you establish.
A trust that is commonly used to provide income to your spouse but ultimately pass assets to your children is a Qualified Terminal Interest Property Trust (QTIP). It’s a popular option for couples with substantial assets and children from a prior marriage, but it can also make sense to ensure that your intended wishes are carried out should your surviving spouse remarry. With a QTIP, your assets, including your house, can be passed to the trust upon your death. The surviving spouse can stay in the house and draw an income from the trust. When your spouse dies, the assets pass to your children. A Financial Advisor can provide a range of trust options and you can decide with the assistance of your legal and tax advisor which would work best for you.
Designating Your Retirement Assets
Properly designating beneficiaries is critical for your retirement accounts, annuities and other forms of insurance because the proceeds go to listed beneficiaries outside the dictates of your will. Therefore, the best way to see that your wishes are carried out is to keep your beneficiaries up to date. If you have a 401(k) or other qualified plan and your children are beneficiaries, your new spouse needs to consent to that arrangement. Without written approval, your spouse becomes the beneficiary by law, even if your children are listed. Individual Retirement Accounts (IRAs) do not require spousal consent to change beneficiaries.
Although 401(k)s and IRAs are becoming more popular, you may also be eligible for a defined benefit pension plan through an employer. If you begin taking distributions from the plan before marriage, you won’t be able to change the defined benefit payment option you elected. However, if you have not started receiving benefits, you will have the option of choosing a joint and survivor option which will continue payment of all or a portion on your pension to your spouse if still living upon your death. Alternatively, you could elect payments over just your lifetime, provided your spouse consents. Which option is best for you may depend on whether your spouse would need the income and your respective ages, health and family history of longevity. Your Financial Advisor can help you create a retirement income plan taking into account all of these options.
Review State Laws
While most people are aware of federal estate laws, they are often surprised to learn that state laws may also impact their estate. In that regard, it’s important to work with an estate-planning attorney and tax advisor who practice in the state where you reside. The rules of that state may require a different strategy or require the filing of additional documents. In community property states like Arizona, California and Texas, for example, assets acquired during the marriage are usually divided evenly between spouses (provided no election for survivorship rights was made).
Though these issues may seem to be numerous and complicated, particularly when thinking about all of the other planning which a wedding requires, they can be easily understood and managed with the guidance of a trusted Financial Advisor. Together you and your partner, along with your advisors, can create the foundation for a new and happy marriage in your retirement.
Michael Falcon is Managing Director and Head of the Retirement Group at Merrill Lynch.