Estate Planning for Blended Families

Blended families are now nearly as common as traditional families. However, they still face unique estate planning decisions, says a recent article, “Considerations For Financial And Estate Planning Professionals Who Work With Blended Families” from Forbes.

Estate planning starts with a will. Naming an impartial executor may require more consideration than in traditional families where the eldest child is the likely candidate. The will also needs to nominate a guardian for minor children and appoint a power of attorney and healthcare proxy in case of incapacity. Traditional wills used to provide instructions for asset distribution may have limitations regarding blended families. Trusts may provide more control for asset distribution.

Wills don’t dictate beneficiaries for life insurance policies, retirement plans, or jointly owned property. However, wills are also subject to probate, which can become a long and costly process that opens the door for wills to be challenged in court.

Wills also become public documents once they are entered into probate. Any interested party may request access to the will, which may contain information the family would prefer to have private.

Trusts allow greater control over how assets are managed and distributed. Their contents remain private. There are many different types of trusts used to accomplish specific goals. For instance, a Qualified Terminal Interest Property Trust (QTIP) can provide income for a surviving spouse, while passing the rest of the assets to a client’s children or grandchildren.

Another type of trust is designed to skip a generation and distribute trust assets to grandchildren or those at least 37.5 years younger than the grantor. Some may choose to use this Generation-Skipping Trust (GST) to keep wealth in the family, by bypassing children who have married.

An IRA legacy trust can be the beneficiary of an IRA instead of family members. This option lets owners maintain creditor protection only sometimes afforded to one who inherits an IRA. The account owner may also want to use an IRA’s required minimum distributions (RMDs) to benefit a second spouse during their lifetime and leave the remainder to their children.

Couples entering a second or third marriage need to be transparent about their expectations of what each spouse will receive upon their death or in the event of divorce and whether or not they agree to waive their right to contest these commitments. A prenuptial agreement is a legal contract spelling out the terms before marriage. For example, in some instances, the prenup requires each spouse to maintain life insurance on the other to ensure liquidity, either from the policy’s death benefit or its cash value.

A final consideration is ensuring that all documentation created is easy to understand, clear and concise. Make sure to spell out the full names of beneficiaries for wills, trusts and life insurance, and include their birthdates, so it is easy to identify them and they cannot be confused with someone else. Estate planning is an ongoing process requiring review regularly to keep the estate plan consistent with the family’s evolving needs and goals.

Contact attorney John A. Laine to learn more.

Reference: Forbes (April 19, 2023) “Considerations For Financial And Estate Planning Professionals Who Work With Blended Families”