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Forever Young: Planning Strategies for Couples with a Significant Age Gap

Forever Young: Planning Strategies for Couples with a Significant Age Gap

January 30, 2024

Marriage brings a myriad of financial and estate planning considerations, especially in situations where there is a significant age gap between spouses.  According to the most recent census data, May-December romances, or age-gap relationships (AGRs) as they are officially called, now make up nearly 10% of marriages.  Within these, most involve a wife who is at least 10 years younger than her husband.  Only 1.3% of marriages involving AGRs consist of the wife being 10 years older than her husband. 

Planning for these AGRs should begin before saying “I do,” and continue throughout marriage so the newlyweds’ financial future is secure.  The need for proactive financial planning is even more critical when one partner is significantly older, often by a decade or more.  The team at Cedar Point Financial Services LLC works with clients and their other advisors in developing and implementing a strategy that involves setting clear financial goals, planning for retirement, establishing a comprehensive estate plan, and ensuring adequate insurance coverage for the surviving spouse.   

Prenuptial Agreements 

Prenuptial agreements are particularly crucial in age-gap marriages.  These agreements can outline the management of financial assets, property rights, and spousal support in the event of divorce or death, providing clarity and protecting the interests of both parties.  Some key considerations for these agreements include: 

  • Asset Protection Identifying and separating pre-marital assets. 
  • Alimony and Support:  Terms of spousal support, considering the potential longer retirement period of the younger spouse.  This can include addressing long-term care and critical illness contingencies. 
  • Estate Planning Provisions:  Clarification on how estate planning will be handled is especially important when one or both parties are bringing significant assets and children to the marriage, including interest in a closely held family business where other family members are involved. 
  • Life Insurance Coverage:  Codifies responsibility for purchasing and maintaining defined amounts of coverage and mandating beneficiaries. 

Cedar Point Financial Services LLC can offer solutions to provide liquidity for liabilities which arise from the terms of a prenuptial agreement. 

Estate Planning 

While many married couples rely upon revocable trusts, these are often insufficient for keeping assets separate and out of a taxable estate.  This can be problematic for those couples where one of the spouses brings considerably more assets and children to the marriage.  What about establishing a standard grantor irrevocable trust where a married couple can move assets into the trust and outside of their estates?  This also can be ineffective in that assets may be co-mingled within the trust.  One increasingly popular estate planning solution to help keep assets separate during a marriage and at the death of each spouse is a spousal lifetime access trust (SLAT).   

Spousal Lifetime Access Trusts (SLATs) 

A SLAT is an irrevocable trust established by one spouse (the donor) for the benefit of the other spouse (the beneficiary).  This arrangement allows the donor to provide for their younger spouse while potentially reducing their taxable estate and passing assets to specific beneficiaries.  Here are the key advantages of SLATs: 

  • Estate Tax Benefits:  Assets in a SLAT (and their appreciation) are generally not subject to estate taxes upon the death of the donor. 
  • Access to Funds:  The beneficiary spouse can have access to the trust assets, which can provide financial security. 
  • Asset Protection:  Trust assets are typically protected from creditors. 

Life Insurance 

Permanent life insurance plays an important role in ensuring that a SLAT functions as intended.  A problem with SLATs is that when the beneficiary spouse dies, the surviving spouse is cut off from the assets in the trust established by the surviving spouse.   The planning specialists at Cedar Point Financial Services LLC recognize not only how life insurance solves this problem, but also how it provides needed liquidity before and after the death of a spouse in cases where SLATs have been established. 

  1. Providing for the Younger Spouse:  The younger spouse, who is the beneficiary of the SLAT, can benefit from the policy in several ways.  If the policyholder (donor spouse) passes away, the death benefit is paid into the trust, providing an income tax-free source of funds for the beneficiary spouse.  This can be particularly important in age-gap marriages where the younger spouse might outlive the older spouse by many decades. 
  2. Access to Cash Value:  During the lifetime of the policyholder, if the trust terms permit, the trustee (who can be the beneficiary spouse) can access the cash surrender value of the policy through loans or withdrawals.  This feature provides financial flexibility to the beneficiary spouse, given that cash surrender values can be access tax-free during the lifetime of the insured spouse. 

Case Study:  David and Emily  

David, 65, and Emily, 35, are getting married.  David has adult children from a prior marriage and a substantial estate, including retirement accounts and a fully paid-off home.  Emily is in the early stages of her career with modest savings.  Here is a potential approach to their estate plan: 

Step 1:  Establish a SLAT 

  • David establishes a SLAT, naming Emily and his children as the beneficiaries. He transfers a portion of his assets into the trust and out of his estate, either by utilizing his federal lifetime estate and gift tax exemption or, if the exemption is exhausted, via a loan made under a private split-dollar arrangement. 

 

  • Emily gains access to these funds for her financial needs, which is especially important, considering the age difference and its potential impact on her future financial security. 

 

  • At a point in the future when Emily has accumulated assets, she establishes a SLAT for David’s benefit and gifts assets to that SLAT.  However, a problem arises at the death of either David or Emily.  While both Emily and David are living, they have access to the trusts’ combined assets, but when one of them dies, the surviving spouse loses access to their deceased spouse’s SLAT. 

 

Step 2:  Integrate Permanent Life Insurance. 
 

  • A solution involving life insurance can replace that loss of access.  Each SLAT should purchase a life insurance policy on the life of the other spouse.  If Emily dies, David will continue to benefit from his SLAT and it will collect life insurance death benefit proceeds to replace access to the value of Emily’s SLAT, which is inherited by the trust’s beneficiaries. 

 

Similarly, if David passes first, Emily will continue to benefit from her SLAT and it will collect life insurance death benefit proceeds to replace access to the value of David’s SLAT, which is inherited by the trust’s beneficiaries, David’s adult children. 

Through these steps, David and Emily have created a plan that addresses their age difference, ensuring that Emily has financial resources available throughout her life, especially in the early years of their marriage when David’s net worth is substantially higher. The SLAT established by David provides Emily with immediate benefits, while permanent life insurance offers long-term financial security.  Once Emily passes away, the remaining benefits in this SLAT will go to David’s children. 

Hybrid Long-Term Care and Critical Illness Insurance 

Among many of the issues to address in May-December marriages is how to handle the substantial costs associated with caring for a spouse with long term disabilities or a critical illness.  Hybrid long-term care insurance, which combines life insurance with long-term care coverage, is an effective tool. This coverage allows the tax-free advancing of a permanent life insurance policy’s death benefits to pay for long-term care and critical illness, providing financial security and peace of mind.  Plus, unlike life insurance with long term care riders that have a fixed pool of benefits, the benefits offered from hybrid policies generally grow through a cost-of-living adjustment rider. 

Cedar Point Financial Services LLC shows their clients that by integrating a permanent life insurance policy into an estate plan, the death benefit proceeds can be advanced to provide a source of liquidity for long-term care and critical illness needs and provides the following benefits: 

  • Flexibility:  Provides coverage for long-term care needs while still offering a death benefit and surrender value. 
  • Cost-Effectiveness:  Can be more financially viable than traditional, standalone long-term care and critical illness policies. 
  • Legacy Planning:  Ensures that the younger spouse (and/or adult children of the older spouse) are not burdened with potential long-term care expenses associated with the older spouse. 

We Are Here to Help 

In age-gap marriages, planning requires careful consideration of various factors, including the following: longevity, future health care needs, and the financial well-being of either spouse, particularly the younger spouse while being mindful of any children.  Prenuptial agreements, hybrid long-term care and critical illness insurance, as well as trusts (especially SLATs), are important tools in ensuring that both parties are protected, and their financial futures are not compromised.  At Cedar Point Financial Services LLC, we work with clients’ legal, accounting, and other advisory professionals in developing and implementing strategies that optimize their legacies to family and community.