Estate planning for blended families

Blended families are more common than ever today, as second or third marriages bring together stepsiblings, half-siblings and stepparents. Combining families can be energizing and rewarding. It also brings special considerations when it comes to estate planning.

Unique dynamics

With blended families, different levels of wealth, expectations around money, parent-child relationships and other family dynamics all can converge. When it comes to estate planning, individuals in blended families often are trying to balance providing for their spouse with taking care of their children from a previous marriage, as well as children from the new marriage in many cases. They also want to provide for the children from their spouse’s previous marriage.

A desire for fairness usually permeates the estate planning discussion. But fairness often does not translate to straightforward, mathematical equality. Concerns abound which include avoiding resentments and rivalries, respecting family legacies, managing age differentials, and navigating all types of family dynamics.

Prenuptial agreements can solve many issues. With spouses coming into a new marriage with separate asset bases, a prenuptial agreement can make clear what will remain separate property and what will be joint. This type of agreement also can set parameters about support of one another and children, if one spouse passes away.

First things first: Prioritize your plans

Questions always arise as families establish new homes, routines and look to the future. When turning to estate planning, the key is to start by addressing your primary concerns, which can then clarify your other planning needs. When you make decisions on primary family support and how certain property will pass, for example, those first discussions can set the table for the following decisions on how extended family and other assets are handled.

• Set estate planning priorities. Start with what you are most concerned about. Maybe you want to ensure your spouse is taken care of in the event of your death. Maybe it is making sure your children receive a certain amount of support. You may want to leave specific bequests to charity, or others, before your spouse or children. Once you’ve decided what is most important, you can build from there to address the rest of your property or others you want to be part of your plan.
• Review guardians and agents. Naming guardians for minor children and agents to make healthcare and financial decisions for you can be some of the harder estate planning decisions. But they are decisions you need to make. Give yourself 10 minutes to make your choices. Nothing is established before you put it in writing, so trust your instincts and see who comes to mind. If you can’t think of someone, that can be a decision in itself and a signal you need to talk with an advisor. To the extent you can make the decisions on guardians and agents, it can be a guide on additional decisions on trustees, executors and who you trust to handle your property responsibly.
• Update your documents. You also need to recognize that documents don’t update themselves. Are there beneficiary designations, POD/TOD designations, healthcare proxies, powers of attorney, wills or trust documents referencing a past marriage that need to be updated or revoked? Does the settlement agreement with a former spouse include inheritance or mandatory life insurance provisions? These should be addressed as soon as possible. Even if you’ve created documents after a new marriage, review them on a regular basis, and work through different scenarios with your advisors. Plans for blended families may not always work the way you intend, as circumstances evolve.

Use the power and flexibility of trusts

Estate planning for blended families requires balance. While assets may pass outright to a surviving spouse or to children, using trusts can help strike the balance allowing you to provide for both at the same time. Trusts can manage interests split between different groups of beneficiaries, make the process smoother and transparent, and add flexibility while ensuring your wishes are documented and followed.

Revocable trusts, also known as living trusts, can be essential to ensure flexibility and efficiency in the event you or your spouse dies or loses capacity. A revocable trust serves in tandem with, or as a substitute for, a will and provides for the disposition of your assets upon your death. A fully funded revocable trust avoids a public probate court process when you die. This arrangement keeps your plans private and in the control of your successor trustee. This arrangement also can be helpful when different groups of beneficiaries exist. Revocable trusts also avoid the delay of a court proceeding known as probate. That fact can be very important when you want to make sure continued support is available for certain beneficiaries immediately after a death. For example, you may want your surviving spouse to stay in your home following your death. A revocable trust can make sure funds are immediately available to pay the bills, without the need for your spouse or other family members to foot the bills until the court appoints an executor.

The other type of trusts, irrevocable trusts, typically are used for gifting purposes, either during your lifetime or at death. For blended families, the following irrevocable trusts are typically included as part of your foundational estate planning:

• Marital trust. Allows assets to pass to the surviving spouse, while earmarking any residual assets for the children after the surviving spouse’s death. The central benefit here for blended families is that it allows you to balance what goes to the surviving spouse and what ultimately goes to the children. The marital trust terms can be adjusted to default in either direction – whether limiting what your spouse receives only to income (and protecting what goes to the children) or giving broad discretion to the trustee to support your spouse as the overriding goal. It also provides for the marital deduction against estate tax upon the first spouse’s death, typically avoiding or minimizing any estate taxes until the surviving spouse passes away. A professional trustee, like Fiduciary Trust, can be helpful with a marital trust, when experience in balancing the competing interests is critical.

• Bypass trust.  Also referred to as a credit shelter or family trust, this trust is designed to shelter the state and federal estate tax exemption upon the death of the first spouse. This trust could be used to benefit your spouse and children at the same time. In some cases, they all can be immediate beneficiaries of the trust, giving your trustee discretion to decide on how to handle distributions for those who need support while also maximizing tax benefits for future generations. This type of trust frequently provides a flexible way to conduct tax planning, while you also can provide guidance on how and when to distribute trust assets based on your intentions for your family.

These trusts are typically created at your death, as part of your estate plan. It is also possible to set up similar trusts during your lifetime. Creating an irrevocable trust for your children, as an example, can be a way to ensure you provide for them in the way you intend and enable the rest of your estate to be focused on your surviving spouse. Gifting in trust during your lifetime can also yield significant tax savings for those with larger estates.

Outright gifts are sometimes the best solution

Immediate bequests, and outright gifts, also should not be overlooked in crafting a plan that works best for your family. A simple bequest, whether large or small, can be a good way to pass assets to your spouse or other family members without necessarily including them in the complications and multi-year process of handling your estate. Making outright gifts during your lifetime sometimes can have the same effect. When taking this approach, an express recital in your will, or within your trust documents, as to why you have engaged in a pre-mortem donative program is helpful in keeping loved ones from becoming troublesome thinking that you have forgotten about them or misinterpreting the purpose of your gifts.

While blended families continue to become more common, each family is clearly unique. Your planning should reflect your situation. Most blended families have previous estate planning documents in place that need to be reviewed, updated or replaced to ensure your cumulative plans work as intended. You’ll likely need to add new elements to acknowledge the new extended family dynamic. As your blended family evolves, grows and circumstances change, remember to review your trust and estate planning documents and beneficiary designations every few years to confirm they remain accurate.