Estate Planning for Blended Families

  • Private Banking
BBH Wealth Planner Michael Shapiro provides a primer on estate planning for blended families and considerations for couples who are remarrying to create blended families.

Blended families – any family in which at least one spouse has a child from a previous relationship – create unique estate planning challenges. Families often struggle with the balance between caring for a surviving spouse and ensuring they leave assets to children from a prior relationship. Tension can also arise if plans are not properly communicated across generations. While every family and estate plan are unique, there are several estate planning techniques every couple with a blended family should consider before and during their marriage.

More than 40% of U.S. families are blended families, according to Pew Research Center. Approximately 63% of women in remarriages are in blended families, and about half of these remarriages involve stepchildren who live with the remarried couple, based on data from the National Center for Health Statistics.

Marital Property Agreement

Creating a marital property agreement is one of the best ways for spouses to discuss the assets each brings to the marriage as well as their expectations for those assets during life and at death. Often called a premarital or prenuptial agreement, or simply prenup, it is not limited to a time before marriage. In most states, spouses may enter into a marital property agreement even after they are married.

Marital property agreements generally require spouses to disclose their assets to each other. Property and income typically are classified as either belonging to only one spouse (separate property) or to both spouses (marital property). The agreements also usually prescribe the minimum amount of property each spouse agrees to leave to the other at death through his or her will or by other means.

These provisions are especially important for families in which one spouse does not want to leave all his or her property to the other spouse, perhaps preferring to leave his or her separate property to children from a previous marriage. In most states, absent an agreement to the contrary, a spouse has a legal right to receive one-third of the deceased spouse’s estate (known as the elective share), even if the deceased spouse’s estate plan otherwise leaves less than one-third of his or her estate to the surviving spouse. The spouses may waive the elective share in a properly drafted marital property agreement.

Other states do not provide the surviving spouse an elective share. Instead, absent an agreement to the contrary, property acquired during the marriage is considered owned equally by the spouses. This is known as community property. The specific rules vary by state. The surviving spouse generally has a legal right to receive 50% of community property at the death of the other spouse. In these states, it is essential to clarify in a properly drafted marital property agreement which property is separate property and which is community property.

Update Your Will (and Revocable Trust)

Every estate plan starts with a will, and many include a revocable trust. If you do not have a will, we recommend that you get one. Every state has rules governing inheritance when a decedent dies without a will. In many states, a surviving spouse in a blended family would receive half of the decedent’s property (with the other half going to the decedent’s descendants) if the decedent has no will. This may be an undesirable result for many blended families. If you have a will (and revocable trust) that was executed before your current marriage, review its terms, and update it as necessary to reflect your current desires and current spouse.

Titling of Assets

The title of property may control what happens to that property at your death. Many property types are formally titled, including real estate, vehicles, and bank and brokerage accounts. Assets that are titled with you and your spouse and designated joint tenancy with rights of survivorship (JTWROS) will pass directly to your spouse at your death. Your will does not control what happens to property so titled. If you’d like to bequeath certain property, say your primary residence, to your spouse, consider titling the property as JTWROS to avoid the hassle of probate for that property. If, however, you’d prefer to permit your spouse to live in the residence after your death, with the property ultimately passing to your children, consider titling the property in your name only and setting up a marital trust (discussed later in this article), or titling the property in the name of your revocable trust, to accomplish your goals.

Beneficiary Designations

Other types of property cannot be titled and are not controlled by your will. Instead, the property will pass at your death to the beneficiaries you have designated with the institution holding the property. The primary types of property that pass according to beneficiary designations are retirement accounts, such as 401(k)s and IRAs, and insurance policies. Most banks and brokerage firms also allow accounts to pass on death in accordance with beneficiary designations if you specifically request it. Review your beneficiary designations to ensure this property will pass in accordance with your overall estate plan.

Life Insurance

With many blended families, a fear is that if one spouse leaves his or her entire estate to the surviving spouse, the surviving spouse will consume the assets or will write the decedent’s descendants out of his or her will, leaving nothing for his or her stepchildren. One solution to consider is life insurance. Depending on your circumstances, the primary beneficiary of the policy could be either the surviving spouse or your descendants (or a trust for their benefit). This will ensure that the beneficiary or beneficiaries of the policy will have assets to support themselves after your death while leaving the rest of your wealth as you desire under your estate planning documents. Life insurance also is a common solution if there are young children or one spouse is not working. Either way, now is a great time to review your policies to ensure that you have adequate coverage and you’ve named beneficiaries in accordance with your overall estate plan.

Lifetime Gifts

If you want to ensure that your children have access to adequate resources after your death, you don’t need to wait until you die. Consider making gifts during your lifetime. With gift and estate tax exemptions at the highest levels ever, now is a great time to transfer wealth to younger generations. Gifts can be made outright to your children or to an irrevocable trust on terms that you dictate. If you have a family business, consider giving equity interests in the business to your descendants. Any gifts made during your life will be out of your estate and unavailable to a surviving spouse. This ensures that you leave a legacy to your children that cannot be consumed or mismanaged by a surviving spouse.

Marital Trusts

Trusts are powerful tools: They allow you to retain a certain level of control over your assets after your death. They are especially useful if you’d like your surviving spouse to be supported financially during his or her life but want to ensure that there will be property remaining for your children when your spouse passes away. Trusts also ensure that if your spouse remarries, he or she cannot leave your wealth to the new spouse. A marital trust is a popular form of trust because it accomplishes these goals, and it allows your estate to defer estate tax liability until your spouse’s death. The trust must pay all income at least annually to the surviving spouse, but you may restrict payment of principal to the surviving spouse to ensure that your children inherit the bulk of your wealth after your spouse’s death.

Choose Fiduciaries Wisely

One of the most important considerations is who to choose as your fiduciaries. Your fiduciaries include your agent under power of attorney (who has power over your property during your lifetime, typically following incapacity), the executor of your estate (who collects your assets, pays your debts, and distributes your assets after death), and the trustee of your trust(s) (who manages the property after your death for the benefit of your beneficiaries). Your fiduciaries ultimately will have control over the property. You are trusting them to act in your best interests during your life and to faithfully honor your instructions after your death. The most important factors to consider in choosing a fiduciary are competency and trust. The individual or institution must be competent to carry out their duties, you must trust them, and, importantly, the beneficiaries should trust them as well.

Every blended family is unique, as is the relationship between each stepchild and stepparent. In some families, choosing a spouse or child as fiduciary may be appropriate. In other families, a third party or corporate fiduciary should be considered for the role. We recommend that you choose fiduciaries who are qualified for the job and will not cause unnecessary friction or enmity among family members. Think of the selection of fiduciaries as a business decision, rather than an emotional one.

Communicate Your Plan

Once you have thought through these considerations with your spouse and made the best decisions for your family, it’s critical that you communicate the plan with your children. Discussing the decisions you have made across generations while alive will help alleviate any tension during and after death and help foster family relationships and harmony for the long term.

If you are interested in discussing estate planning for blended families in more detail, please reach out to our Values-Based Wealth Planning team.

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