Financial Considerations for Second Marriages

By Teresa Talton, CFP^®, Wealth Advisor and Partner

Finances can be a sticky part of any relationship, and it’s been documented that money conflicts are one of the leading causes of separation, with up to 40% of divorces citing finances as the driving issue². Even if you picked “right,” the cards can feel stacked against you from the start. While money is not a romantic issue to discuss with your partner, it’s important to look before you leap and have financial conversations up front, so future disappointments don’t surprise you from around the bend. Second and third marriages are inherently more financially complex, as you are entering with more assets, debts, and perhaps financial obligations for children or ex-partners. While an honest, frank conversation is important, you also need to know where to start.

Alice & John’s Story

Alice and John, both in their late 50s, are entering their second marriage. Alice, a small business owner, and John, an IT professional, have stable incomes and their own retirement accounts.  While they have each accumulated assets, Alice’s net worth is significantly higher than John’s. Alice has adult children from her previous relationship, and both John and Alice own their own homes. John will be ready to hang up his suit and tie the day he turns 65. Alice is a dedicated operator of her business and wants to work as long as she can. John has a couple of remaining years of alimony payments to his ex, and Alice’s children have started their own families with children of their own. Both Alice and John don’t want to spoil the fun they’ve been having together by worrying about finances, as they both feel financially stable.

Considerations for Alice & John

Home Ownership: Since both John and Alice have pre-marital properties, they need to decide whether they want to buy something together or keep what they have. If they decide to buy a home together, they should discuss titling and co-mingling of their assets. A home purchased with co-mingled funds is now jointly owned property.

The most common forms of joint ownership are Joint Tenancy, Tenants by Entirety, and Tenancy in Common. The first two ensure the surviving spouse automatically inherits the property. The latter allows you to specify distinct shares, which allows that portion to pass to your beneficiary of choice.

If they decide to keep what they have or one moves into the other’s home, they may want to discuss how they contribute to that home’s expenses and whether they expect to share in the appreciation.

Titling does determine what occurs upon the first-to-die. Does their portion move to the surviving spouse and then to his/her children, or does it pass to the deceased’s children?

Alice and John ultimately decide to move into Alice’s home. John keeps his home as a rental. Upon her death, she would like for John to be able to live in her home for the remainder of his life if he so chooses. When John dies, she would like for the home to pass to her heirs.  In this case, Alice could keep the home titled in her individual name and create a life estate to allow John to remain in her home if she predeceases him.

Spending Money Together:

Alice and John have to decide if they want to merge their finances or to keep things separate. Some couples keep their individual bank accounts, agreeing on which expenses each will cover while others open a joint account for combined expenses.  Other considerations include:

• How will large expenditures (travel, car, large repair) be paid?
• How will kids’ expenses be covered (college, wedding, gifts)?

Alice and John decide to open a joint account and contribute their portion of the combined expenses pro-rata to their incomes. 

Social Security Benefits: Because Alice and John are both under the age of 60, remarriage will affect their Social Security benefits, particularly their survivor or spousal benefits. (i.e. Alice and John both will not be able to receive spousal or survivor benefits from their first marriages.) Alice & John will need to be married for at least one year before being able to claim spousal benefits.

Retirement Planning & Beneficiaries: John harbors some feelings of being “taken to the cleaners” from his first divorce.

While his alimony payments are about to end, his ex-wife did keep a portion of his retirement savings. Alice learned how to live on her own while she was single and feels confident navigating retirement planning. She and John believe it is likely in their best interest to keep their retirement accounts separate and create a joint account for their new household expenses.

Estate Planning: Naturally, Alice and John would want to take care of the other in the event one of them passes. On the other hand, Alice wants to protect the pre-marital assets for the benefit of her children. 

In a late marriage, entering without a will or estate plan in place is inadvisable. It’s tempting to create a simple will (also known as an “I love you” will) that leaves everything to your partner with the understanding that they will “do the right thing” upon your passing – but it’s rarely that simple and can have unintended consequences (ex: gift taxes). In this case, Alice should consider creating a trust that would provide for John during his lifetime, with the remainder of her estate passing to her children upon John’s death. 

Additionally, they should both revisit their beneficiary designations on all retirement accounts, pensions, life insurance policies, annuities, etc. to ensure alignment with their goals.

Durable Powers of Attorney and Health Care Proxies: John and Alice are having the time of their lives and squirm at the thought of health care decision-making. However, the “default rules” in North Carolina specify that unless otherwise stated, the spouse is the health care power of attorney – meaning they stand at the top of the decision-making process in the event of incapacitation. This might not go over so well with Alice’s children. Over time, John may earn the trust of Alice’s children through smart financial decisions and deepened trust, but if Alice’s children have cause for concern about John’s ability to handle Alice’s medical and financial care, then conflict is sure to arise.

It would be wise for both Alice and John to update their health care directives, health care proxies and durable power of attorney upon remarriage. They could both consider secondary agents or co-agents (two people who will serve as POAs together as equals.)

Should Alice and John get a Pre-Nuptial Agreement?

A pre-nuptial agreement can provide clarity and protection for both Alice and John, helping ensure that their individual assets and interests are safeguarded while also addressing potential conflicts that may arise in their second marriage. It allows them to better enjoy their time together without worrying about financial issues.

Pros

1. Protects assets and wealth – defines what belongs to whom in the case of divorce.
2. Protects from debt – shields one spouse from the other’s personal or business debts
3. Provides for children from previous relationships
4. Business protection – Prevents a spouse from acquiring a stake in the business owned prior to marriage.

Cons

1. Unromantic/Distrustful
2. Not always enforceable
3. May not cover everything
4. Legal and financial costs

Decision

As Alice is the sole proprietor of her business, and started the business before the marriage, the business is considered her property. However, in North Carolina the increase in value of the business can be considered marital property, and would be subject to equitable distribution in the event of a divorce. It may be in Alice’s best interest to consider a pre-nuptial agreement to solidify the business ownership throughout the course of marriage. However, business ownership is nuanced, and the best course of action would be for Alice to speak with an attorney prior to marrying.

Second marriages come with a unique set of financial considerations that require careful planning and open communication. In order to avoid future conflicts, help ensure that both partners’ interests are protected, and maintain the ability to plan for a bright future, couples like Alice and John should consider working with a financial advisor. An experienced financial advisor can help with easing the awkwardness of these types of financial conversations by facilitating the right discussions. Professional support, especially in complex financial situations, can help mitigate the stress and uncertainty that often accompanies financial planning in second marriages, allowing couples to focus on building a strong and harmonious relationship.

While this story is representative of the work Stearns Financial Group does to support the clients we serve, all individuals are fictional and do not represent actual clients.

Sources:

1. Bowling Green State University, Age Variation in Divorce Rate, 1990 & 2021
2. TD Bank, Love and Money Survey, 2021

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Teresa Talton, CFP®, MBA
Partner and Wealth Advisor

Teresa is an advisor in our Chapel Hill office where she provides financial planning and investment management services to help clients align their goals for success.

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