ESTATE PLANNING FOR BLENDED FAMILIES

With 50% of US marriages ending in divorce, estate planning for blended families is something all practitioners must deal with.

Blended families, often where one or both spouses have children from a prior marriage, present issues that are often concealed until after death. Having an estate plan that addresses your family dynamics can help to prevent issues from arising. Ignoring the potential conflict can result in hurt feelings, strained relationships, disinheritance, and of course, litigation.

Often, the breadwinner wants to provide full support for the life of the surviving spouse, while protecting those assets from spouse’s potential future spouse, or surviving spouse’s children, and even to protect from people taking advantage of surviving spouse in later years. The concern may increase when there is a considerable age or health disparity between the spouses. Below is just one strategy to protect the interests of all beneficiaries after your death through the use of beneficiary trusts.

SCENARIO

Husband (“H”) is married to 2nd Wife (“W2”) and has one child from his previous marriage (“Child”).  W2 has no biological or adopted children, and she is 20 years younger than H.

1. Marital or QTIP Trust

One way for H to protect the interests of W2 and Child is by creating a Revocable Trust that becomes a Marital or QTIP Trust upon H’s death. The Trust provides distributions to W2 for her lifetime of all the trust’s net income, as well as distributions of the trust’s principal for W2’s health, education, maintenance, and support in reasonable comfort. Any Trust assets remaining at W2’s death go to Child (outright or in a continuing trust for the benefit of Child). W2 is not allowed to change the remainder beneficiary and has no Power of Appointment (assets go to Child then Child’s descendants, in trust).

1. Trustee of Marital Trust

For maximum protection of assets, you can name an Independent Third Party as trustee of the Marital Trust (ensuring distributions are made in line with trust provisions). You can also have W2 as a Co-Trustee with the Independent Third Party trustee. Or, Child, W2, and a Third Party can all serve as Co-Trustees, which provides a natural tiebreaker if decisions require a vote. This way, each beneficiary’s voice is represented and there is a Third Party tiebreaker, if necessary. For some families, this would prevent issues, and for some, this would cause issues.

There is no single right answer as to how an estate plan is designed. Planning for blended families requires genuine diligence from the practitioner and open and honest communication from the client. Without purposeful, tailored planning, the results can be disastrous.