February is National Weddings Month, and whether it is you or a family member who popped the question or said yes on Valentine’s Day, marriage is among the life events that has the most significant impact on family estate plans. An upcoming marriage for you or someone in your family is a good time to review your overall estate plan. Here are five tips to keep in mind:
#1 Consider a Prenup
Prenups only talk about how we divide our property if we get divorced, right? Not so. A well-drafted prenup deals with important issues affecting your estate plan, too. In Illinois, in the absence of a prenup, a surviving spouse may have the right to claim one-third or more of a deceased spouse’s assets, even if those assets were earned before the marriage or inherited, and even if there is no provision for the surviving spouse in the will. Although this does not present an issue for many families, this can be particularly surprising for blended families where one spouse or both spouses have children from a previous relationship or in families intending to pass significant family wealth directly down the bloodline across many generations. A well-drafted prenup will often address the respective spouse’s waiver (or retention) of implied spousal rights of inheritance.
For spouses with significant inherited family wealth, a well-drafted prenup should address the issue of spousal maintenance (aka alimony). Even though the principal of inherited assets and multi-generational trusts can often qualify as non-marital assets in Illinois (as long as they are not commingled with marital assets), income that a spouse earns from inherited assets or trusts can be considered a factor in determining that beneficiary’s ability to pay alimony or maintenance. In a prenup, spouses can waive maintenance completely or can reach agreement about the amount and duration of maintenance.
The prenup process should be commenced at least several months before the wedding. Both spouses will need to be prepared to make a full disclosure of assets to the other, and both spouses should be represented by separate counsel in order to ensure that the agreement will ultimately be enforced if need be.
#2 Review Closely Held Business Agreements
For corporations, LLCs, and partnerships owned by a small group of family members or trusted business associates, partnership agreements, shareholder (“buy-sell”) agreements and LLC operating agreements often serve an important role to ensure that all shareholders know and have control over who will be involved in business decision making. The marriage of a business owner presents a good excuse for review of the governing documents to verify that they deal appropriately and as desired with not only a scenario where a business owner gets divorced, but also a scenario where one of the owners dies, leaving a surviving spouse. If the surviving spouse of the business owner is not to succeed to the deceased spouse’s ownership interest, the business owners should consider whether they are mutually satisfied with any arrangements they have made for the surviving spouse to receive some payment for all or part of the value of the deceased owner’s share (or whether they are satisfied if no such arrangements are in place).
As a bonus tip, similar issues come up where one spouse jointly owns real estate with someone other than the spouse. Prior to the marriage, both spouses, and the co-owners of the real estate, should understand how ownership of the real estate will be affected by the death of one of the co-owners.
#3 Make Arrangements to Separate Assets Intended to be Kept Separate
Deciding to combine and share assets is relatively easy. Trying to keep pre-marital assets or inherited assets separate is trickier. If one or both spouses wish to keep pre-marital or inherited financial accounts separate, the best way to do so is to assure that the assets are titled in the owner-spouse’s name alone, and no subsequent assets acquired during the marriage (other than gains or income generated within that account) should be added to the account. Similarly, if one spouse owns real estate that is intended to be kept as separate property, then expenses related to the real estate should ideally be paid from income generated by the real estate or from separate pre-marital or inherited assets.
#4 Update Advance Directives
If one or both spouses have executed powers of attorney for property or health care prior to the marriage, these should be reviewed to see if they are still appropriate and should be revised if necessary. Powers of attorney take precedence in determining who should make health and financial decisions for an incapacitated spouse, so the newlywed spouse should be named in these advance directives if he or she is intended to be the primary decision-maker in the event of incapacity.
#5 Update Wills, Trusts and Beneficiary Designations (Possibly for Multiple Generations)
Although the Illinois Probate Act provides for some implied rights of inheritance for both spouses, the better practice by far is for both spouses’ testamentary documents (wills and trusts) and beneficiary designations (for life insurance, IRAs, 401(k) benefits, etc.) to be updated to expressly provide the intended gift for the surviving spouse.
Note that marriage can also be a good time for parents of newlywed children to understand how their estate plans would operate if their child were to die before them. Most estate plans do not include a bequest to the surviving spouse of a deceased child. Whether this is intended or not differs with the personal preferences and priorities of every family. However, whatever the result, the estate plan dictates should ideally be undertaken knowingly and intentionally. An upcoming wedding in the family presents a good opportunity for an estate planning checkup.