Blended families and second marriages create a number of issues in the context of estate planning. Difficult decisions must be made and competing interests must be prioritized. Some of the common concerns include the following:
- Providing for the new spouse.
- Providing for children from a prior marriage.
- Providing for children born during the new marriage.
- Protecting assets from prior spouses.
- Whether and to what extent to provide for a new spouse’s children from a prior marriage.
What Happens to Your Assets After You Die
The key to estate planning for blended family is understanding two things: (1) the natural or default rules for distribution of your assets after death; and (2) your wishes for how those assets should be distributed. Then it merely becomes a matter of prioritizing those interests, making tough decisions, and putting together a plan that accomplishes your objectives. This plan may use a variety of tools such as a last will and testament, a trust or trusts, and marital property agreement.
For example, do you want to distribute all of your assets outright to your new spouse? If so, do you know that your new spouse then has complete control over how those assets are distributed at his or her death? What if your new spouse chooses to cut your children out of his or her will?
Do you want to provide for your children from a prior marriage? Should they have to wait until your new spouses death or should they receive some sort of distribution immediately? If they wait per the terms of a trust, that can often lead to bad feelings between your children and your new spouse – especially if the children must wait a long time to receive what they see as their rightful inheritance.
What about children born during your new marriage? Should they receive some priority in the inheritance? Should they receive the same percentage as children from your prior marriage?
What about your new spouse’s children from a prior marriage? Should they receive any of your assets you acquired prior to marrying their parent?
How much control should your prior spouse have over your assets if your children are minors? If you pass away leaving your assets to minor children, your prior spouse, as their parent, is a natural guardian of their property as well. Should that spouse be able to use and dispose of your assets (for only the children’s benefit of course!) during their years of minority? Perhaps those assets you left to your children would be better protected by an independent trustee?
Wills versus Trusts as Estate Planning Tools for Blended Families
A Last Will and Testament is the most basic estate planning tool and even if you choose to plan through some type of trust, you should always have a will in place to take care of any forgotten assets. This is commonly referred to as a pour over will in that it leaves any remaining assets to the trust established as your main planning vehicle.
The problem with relying on a will as the primary planning tool in blended family estate planning is that once an asset is distributed under your will, you lose all control over how that asset is used or distributed upon the beneficiary’s passing.
For example, if you leave all of your assets to your new spouse, then you have no control over how your new spouse chooses to distribute those assets via his or her will. While you may be aware of the contents your new spouse’s will now, your new spouse can always change their will after you pass. This is one of the most common ways in which children from a prior marriage get left out.
Those assets you dispose of with a will are also subject to the beneficiary’s complete control – and therefore – subject to claims by their creditors or gifts to people you may not want to receive the benefit of all your hard work.
For example, if leave your assets to a spouse who remarries – then their new spouse now has access to all of your assets and hard work. It would be a shame for those assets to go to waste and not be available to provide for your children.
That is why most blended family estate planning will involve the use of trusts. A trust allows you to plan for who should benefit from your assets through multiple generations.
For example, your trust might provide that your new spouse gets the benefit of any income from your assets during his or her lifetime, but upon her death that right passes to your children. In this case, your children might be children from a prior marriage or children from your new marriage.
A trust also allows you to protect your assets from creditors of your spouse or children, and also from greedy deadbeat spouses if your spouse remarries after your passing or your children choose their spouse poorly.
Trusts also allow some flexibility – for example – your children or spouse may hold a special power of appointment allowing them to designate who should receive future distributions from the trust when they pass. However, you can place restrictions on that power of appointment such as limiting the potential appointees to individuals in your bloodline or within another defined group.
Beneficiary and POD Designations on Retirement Accounts and Life Insurance
Regardless of whether you conduct your estate plan through a will or a trust, you must ensure that your beneficiary and POD designations on any retirement accounts and life insurance plans are consistent with your estate plan.
If your primary planning vehicle is a trust, but your primary assets are in retirement accounts or life insurance policies that name an individual beneficiary, then your well thought out plan will be wasted.
Beneficiary designations can also be an important tool in estate planning for a blended family by providing opportunities to benefit different interests at the same time.
When assets are tied up in a trust for a new spouse’s benefit during his or her lifetime, the children from a prior marriage who might expect to receive the benefit of those assets down the line can develop ill will toward the surviving spouse. This may lead to litigation between the surviving spouse and children over distributions made to the surviving spouse.
Using life insurance or retirement account distributions to provide some immediate benefit to children from a prior marriage can help avoid these complications and provide some immediate use of your estate by everyone with an interest in it. This can help avoid conflict between your family members interested in your estate. But these designations should be well thought out and consistent with your overall estate plan.
Planning for a Second Marriage with Pre and Post Marital Agreements
Pre-marital agreements are also a commonly used tool in estate planning for blended families. Texas is a community property state and there is a presumption that all assets are community property unless you (or your executor) can establish that the assets as separate property acquired prior to marriage, by gift, devise, or descent. Income from separate property is also community property.
But property agreements between spouses can be used to change these rules including characterizing property as community or separate as well as characterizing future income from that property. While pre-marital agreements are the most common type of marital property agreement, in Texas marital property agreements may be entered into during marriage.
Pre and post marital agreements are often an important tool to balance the interests between new spouses, children from prior marriages, and children from a new marriage. This is because only those assets that are your separate property or your share of community property are subject to your estate plan.
You cannot control or dispose of your spouse’s separate property nor their interest in community property, and likewise, your new spouse cannot control or dispose of your separate property or your interest in community property.
This makes pre and post-marital agreements important in clearly defining which assets will be available to each set of beneficiaries under their estate plan. This also helps avoid nasty disputes that often arise among blended family members by allowing the blended family spouses to clearly define which assets are subject to disposition under each of their individual estate plans.
If you are about to remarry, or are already in a blended family marriage, and would like to schedule a consultation to discuss putting together an estate plan, then please visit my contact page and schedule a free consultation today.
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