Our Monthly Tip, as featured in Family Lawyer Magazine:
If your planned remarriage will create a blended or stepfamily, make sure your estate and financial plans are up to date with your evolving family dynamics.
Did you know that September 16 is National Stepfamily Day? Often for the second, third or further time around, one or both partners will have children from a prior union. There is perhaps no relationship as maligned as one prefaced by the word “step.” It will be important to proactively address these new stepparent/stepchild relationships to position yourself for a successful future.
Here are to help blended families live in harmony for many years to come.
1. Sign a prenuptial agreement
A prenuptial agreement allows a couple to enter a marriage with full financial disclosure, to clearly document their financial expectations during the marriage, and to specify what will occur in the event of divorce. A prenuptial agreement can be particularly important in marriage situations when each party typically their own assetsto the new union. If one or both spouses have previously divorced, it will be important to review prior divorce decrees or settlement agreements—which may contain child support, alimony, life insurance, or other inheritance provisions—to ensure into account. If the couple wishes to protect their assets for children a prior marriage, documenting that intent in a prenuptial agreement can help ensure that the marriage begins with open communication and shared expectations. Furthermore, virtually every state require that a certain percentage of each person’s estate, commonly a half or a third, pass to a surviving spouse. If these marital rights are not waived in a prenuptial or other agreement, surviving spouses can elect to receive their statutory entitlements, potentially havoc with an individual’s intended estate plan.
2. Establish trusts
While a couple may share an understanding that the first-to-die will leave everything to the survivor, who will in turn split the assets among all of the children, if there is no legal obligation to benefit the children of the first to die, the survivor is typically free to leave all the assets to a new spouse or children of another marriage, possibly disinheriting their deceased spouse’s children. Trusts can be an important estate planning technique for blended families because a trust can be structured to benefit a spouse during that spouse’s lifetime, while providing that the trust assets pass to the trust creator’s own children at the spouse’s death. The trust creator can also pick an independent trustee to serve as a neutral independent third party to invest the trust assets in a way that balances the interests of the spouse and the children, minimizes friction among all the parties and ensures that the trust is administered pursuant to the creator’s intent.
3. Consider life insurance
Life insurance can be a valuable mechanism to provide equalization funds for blended families. One concern with splitting an estate into a trust structure with the surviving spouse benefiting during his or her lifetime and assets passing to children on the spouse’s death, is that the surviving spouse and the children can be close in age. This could potentially result in the children having to wait until a very advanced age to receive the funds, if at all, before the spouse’s death. Life insurance proceeds may be a solution to provide liquidity either to the surviving spouse or to children of a prior marriage, if the estate assets are sufficient to provide for both sets of beneficiaries.
Utilizing an irrevocable life insurance trust (ILIT) can be an advantageous way to purchase and maintain life insurance. To create an ILIT, an individual establishes a trust and transfers funds to the trust. The trustee then purchases a life insurance policy payable to the trust upon the insured’s death. The primary benefit of using an ILIT, as opposed to the insured owning the policy, is that policy proceeds pass to heirs free of estate taxes upon the insured’s death. Since estate assets that pass to a U.S. citizen surviving spouse—outright or in an appropriately designed trust—pass free of estate taxes until the death of the second spouse, a common technique to maximize estate tax deferral is for the estate to pass to the surviving spouse in trust, to defer taxes until the death of that second spouse. Life insurance proceeds, which can pass free of estate taxes, can be left to children, either outright or in further trust, avoiding the imposition of estate taxes.
4. Update estate planning documents
All planning documents, account titles and beneficiary designations should be updated to be certain chosen heirs are still appropriate, as well as designees for healthcare and power of attorney documents.
Wills and revocable trusts
Wills and trusts should be reviewed immediately so a spouse from a previous marriage does not receive an unintended inheritance. Typically, unless a current spouse has waived marital rights in an agreement, an individual cannot disinherit a spouse, making it key to dovetail prenuptial planning with estate planning. When minor children are part of the blended family, parents may want to include guardianship provisions to make sure minors are adequately taken care of in the event of their passing. From a financial perspective, specific bequests can be made in a will to chosen beneficiaries, children from a prior marriage. If individuals want to their stepchildren, they need to specifically provide for them under their wills stepchildren will not typically have any legal inheritance rights from their stepparent’s estate, no matter how close they .
Powers of ttorney and healthcare directives
Carefully review powers of attorney, which allow a designated person to conduct financial transactions, and healthcare directives, thereby permitting that individual to make important health care and potentially end-of-life decisions. Reviewing these documents is key both to ensure that an ex-spouse is removed from those roles, and to ensure that individuals carefully consider the dynamics of their blended family situation when updating agents—particularly if there are tensions between a new spouse and the adult children of a previous marriage.
5. Check beneficiary designations
Individuals should review beneficiary designations on 401(k) accounts, other retirement accounts, life insurance policies, or any account with a directly named beneficiary. These assets do not pass under a will and beneficiary designations must be separately updated; a prior divorce does not necessarily revoke a designation of an ex-spouse as a beneficiary. Spousal rights in retirement plans governed by the Employee Retirement Income Security Act of 1974 (ERISA) are subject to special rules and may require the new spouse to waive rights if the owner wishes those assets to pass to children of another marriage.
6. Choose trustees wisely
Many estate planning techniques in blended family situations involve the use of trusts. Appointing an experienced professional trustee can often prevent tensions within a blended family. Corporate trustees in particular are neutral, independent and can eliminate suspicion even perceived suspicion—that may attach to a friend or family member acting in that role, which can actually save unnecessary, prolonged, and costly litigation.
As families grow and blend over time, it is important to make sure your estate and financial plans reflect your current family dynamics. Building a trusted team of advisors, including financial advisors and estate planning attorneys, can help you take a holistic approach that is foundational for blended families to build successful lives.
Please visit our Matrimonial and Divorce Advisory Solutions resource page for more timely divorce planning content.
This article is for general information only and is not intended as an offer or solicitation for the sale of any financial product, service or other professional advice. Wilmington Trust does not provide tax, legal or accounting advice. Professional advice always requires consideration of individual circumstances.
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