Doing Separate Finances Right

Today, more spouses and unmarried cohabitants maintain separate finances. This is probably due to a number of factors, including increased salaries for women and an increase in second marriages and relationships with children from a previous relationship. While these arrangements may work amongst couples during life, they present significant estate planning challenges upon the death of one or the other. How much should the surviving partner get (which could conceivably be left to a future partner) and how much should the children get (to the detriment of the partner)?

There is no easy answer. The majority of clients in this position have very concrete opinions about what they want, which makes my life far easier: I’m not a fan of initiating a domestic quarrel. These same clients also typically come in alone, without their spouses. Representing an individual in this case is also easier than dealing with a couple that may fight.

For those of you considering separate finances, here are my suggestions:

  1. Do estate planning separately from your spouse, and use different attorneys. While this doesn’t sound very “family friendly,” it ensures your individual desires will be dealt with appropriately. Indeed, an attorney attempting to represent a couple with differing estate planning goals should by law only represent one client, or completely disengage from the couple if he can’t commit to doing so.

2.In the event that you are the first to die, you will want to have left  your assets to a Trust that supplies income to your spouse—make sure the term “income” is specifically defined.  Leave the rest to your children upon your spouse’s death, and consider including terms that allow for your children’s health and education needs during this time.

  1. Make sure the terms of the Trust are precise. Example: I leave a life estate of our Condo to my Husband provided he is living in the Condo; all expenses for the Condo should be paid by my Husband from his funds.
  2. Ensure that no decision is irrevocable during your life. Circumstances change, and making an irrevocable decision between spouses generally has minimal tax incentives as between spouses.
  3. No matter the situation, people who name their child as Trustee generally incur difficulties. For example, if the child is both your and your surviving spouse’s child, that child may spend too much of the Trust’s assets on your spouse. If the child is not related to your spouse it is a good bet your spouse will not be taken care of, or perhaps even humiliated, by the child. I am not generally a supporter of Corporate Trustees, but in this particular case it is best to use a bank or trust company as the trustee rather than the child.
  4. Make sure that your attorney takes copious notes to your file regarding your concerns. While these notes may or may not be admitted in the event that a future conflict arises, at least they will let all parties know of your and your spouse’s intentions.
  5. Tell your spouse. Seriously, tell them. I don’t mean dollar figures, but let them know “I am only leaving you income from my estate” or “I have decided to leave everything to the kids.” This way your spouse is placed on notice and can plan for the possibility of living off his/her own finances if you predecease them. I know this may be a difficult discussion, but probably not as difficult as the discussion you initially had regarding separate finances, and much less pricy than the legal expenses that may follow upon your passing in the absence of this discussion.
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