With close to 100 million Americans living in blended families, it’s a specialized area of financial planning that’s garnering increasing interest. Our article last summer entitled “Managing Finances When You Remarry” proved to be one of the most popular articles we published all year. It’s understandable considering the unique and often difficult financial challenges faced by blended families. These challenges tend to extend far beyond simple day-to-day financial management matters.

When existing families come together, estate planning also becomes considerably more complex. If both spouses have children from previous marriages, there are inevitably going to be conflicting loyalties, responsibilities and wishes. At first blush, it can all seem a bit daunting – determining who will receive what and when they will receive it. This, combined with the fact that few of us wish to seriously contemplate our own mortality, leads many blended family clients to procrastinate and put off their estate planning.

The fact remains, however, that a thoughtful and carefully crafted estate plan is a vital tool for safeguarding your loved ones’ financial futures.

Unintended consequences

By avoiding the topic of estate planning, you not only give away control over your assets, you actually increase the likelihood of family conflict and potential litigation. Don’t you want to divide your assets among your loved ones according to your wishes – rather than the orders of a probate court? Don’t you want to minimize any potential estate taxes? Wouldn’t you prefer to avoid resentment between your current and former spouses as well as children from different relationships?

Your properly constructed and well thought out estate plan can achieve all of these aims and more. It can:

  • Help ensure that your surviving spouse is well cared for, without running the risk of disinheriting your children from a prior marriage.
  • Meet the financial needs of younger children from a current marriage while still providing a legacy for older children from a previous relationship.
  • Serve to alleviate family tensions in situations where one of the spouses in a blended family is significantly wealthier than the other.

If your new spouse happens to be considerably younger than you, have you ever stopped to realize that your new marriage could unintentionally disinherit your older children? Estate plans are typically designed to achieve principal goals: to benefit a surviving spouse while at the same time minimizing any estate taxes. Without mechanisms in place to direct specific assets to children from a previous relationship, they might never receive any inheritance until the death of your spouse (who may be much closer in age to them).

Beneficial planning solutions

A blended family estate plan allows for the orderly and equitable distribution of your assets among ALL your loved ones. And, it starts with a simple conversation. Take time to sit down with your family members and your BLB&B advisor to talk about your legacy goals, wishes and concerns. Once everyone is on-board with your objectives, you, your advisor and your attorney can then translate them into a comprehensive estate plan that addresses your unique issues and concerns.

By carefully wording the language in your will, along with leveraging the benefit of certain trust structures, you can help ensure that everyone who matters most is provided for after you are gone. Two types of trusts that can often be particularly beneficial for blended families are:

Qualified Terminal Interest Property Trusts (QTIPs)

Suppose you have children from a previous marriage who you want your assets to go to upon your death. At the same time, however, you want to ensure that your current spouse can financially maintain his or her current lifestyle. A QTIP trust can be provisioned so that your surviving spouse receives the annual income generated by the trust assets, and upon the second spouse’s death the principal passes to your children from your first marriage.

Irrevocable Life Insurance Trusts (ILITs)

Alternatively, you could create an ILIT which uses the assets you place in trust to purchase a life insurance policy on your life. Because the trust (not you) owns the policy, death benefit proceeds are transferred directly to the policy beneficiaries tax-free outside of your estate. This affords blended family parents an opportune way to provide a guaranteed inheritance to children from a first marriage, while preserving the balance of the estate for a surviving spouse and new family.

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Naming a Corporate Trustee

If conflict exists anywhere in the family dynamic, there’s a strong chance of litigation against either your surviving spouse or any trusts you may have established. By naming a fiduciary to serve as a corporate trustee, you can help protect your spouse from becoming a target of any beneficiary anger or frustration.

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Fairly and equitably distributing your assets in a blended family situation is a challenging but not impossible undertaking. It simply requires a little thoughtful planning and clear communication as to your ultimate intentions. Your BLB&B advisor, in conjunction with your estate planning attorney, is more than capable of helping you navigate these turbulent waters. Don’t procrastinate any longer. A little planning now can prevent a great deal of friction, headaches and potential litigation from angry heirs down the road.

 
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