Blended families have many of the same estate planning problems to solve as other types of families, but they also have a few problems unique to their situation. Typically, two partners come to a new marriage with separate assets and liabilities - real estate, inheritance (or anticipated inheritance), retirement savings, life insurance, credit card debt, student loans, ongoing financial obligations from divorce decrees, and on and on. Beyond separate assets, partners also often have separate children and priorities for how and when their assets flow to their children. For these reasons, it is critical to plan carefully how property will be titled, assets will be protected, and beneficiaries will be identified.
This post is meant to introduce some simple strategies every blended family should consider.
Separate Property Agreement
If you're not married yet but blending two families is in your near future, you need to create a prenuptial agreement. If you're already married and you never signed a prenup, you need to create a separate property agreement.
This is NOT just about hedging your bets in case the relationship ends in divorce. While property agreements are helpful in case of divorce, they can do some heavy lifting even when the relationship is stable and strong. The point is to preserve the nature of assets and liabilities in case of a crisis, which may be divorce but more likely will be the disability or death of one partner.
Note: Prenuptial agreements are ALWAYS preferable to post-nuptial agreements. Separate property agreements created prior to a marriage are much more easily enforced than those created after marriage. We know that a prenup is a romance-buzzkill, but just do it anyway.
Accurate Beneficiary Designations
If you come to your new marriage with retirement accounts and insurance policies, carefully consider whether and how you want those assets to benefit your new spouse at death, or if you'd prefer those assets, in whole or in part, to flow to your children or other beneficiaries even if your new spouse is still alive.
Some clients want to know if they can leave their new spouse out of their retirement planning without having to discuss their beneficiaries with their spouse. The answer is almost certainly an emphatic "No." If you want someone other than your spouse - such as your children or a charity - to be the 100% primary beneficiary of your tax-deferred retirement accounts, your spouse must sign a "spousal consent" on the beneficiary form.
Before making such a designation, you should seek advice from an accountant or financial advisor about the tax benefits and consequences of naming a spouse, children, trust, or charity as the beneficiary of your tax-deferred savings.
Revocable Trust with Credit Shelter Trust for Surviving Spouse
If new partners wish to jointly own assets during life but still protect specific assets for separate children or beneficiaries, it is best to create a joint revocable trust that includes a couple of key provisions.
First, the revocable trust can contain within it a schedule of assets which are to be considered joint or separate property. Second, at the death of one spouse, the deceased spouse's separate assets, inheritance from family, specific percentage of joint assets, or other separately identifiable assets should be placed in a newly-created, irrevocable trust share.
The creation of this irrevocable share does a few things. In some cases, it reduces estate tax liability. But even if the asset values aren't high enough to trigger estate taxes, it still does some important work:
- The irrevocable share can make sure that assets are protected from a surviving spouse's future remarriage. If one partner dies before another, it is very likely that the survivor will get remarried. Especially if the survivor is a man. When this happens, the new spouses may not take important steps to protect and preserve assets - like getting a prenuptial agreement or being smart about beneficiary designations or setting up a well-drafted trust. You may have wished for your life insurance or your business or retirement or that land you inherited from your family to eventually flow to your children, but instead it may very likely flow to your surviving spouse's new partner and their children. This happens all the time.
- The irrevocable share can make sure your surviving spouse isn't taken advantage of during a sensitive time. It may be that people, often well-meaning, come to a surviving spouse with ideas about how their assets should be used. If your spouse is vulnerable emotionally or mentally, they may spend the assets or make changes to their beneficiaries or your trust in ways that undermine your wishes for your property and your children. This happens all the time.
- The irrevocable share can make sure that the children of your spouse, years after you have passed away, convince them to "update" their plan, leaving everything to your stepchildren and nothing to your children. This happens all the time.
- The irrevocable share can make sure your assets are preserved ONLY for your surviving spouse and not exposed to the creditors that may arise due to their bad luck. This, too, happens all the time.
Big picture: If you are about to enter a blended family or if you already have a blended family, you need to recognize that there are financially and emotionally charged complications unique to your situation.
There is no sense in making your loved ones deal with all of that later.
Make the decisions now on your own terms.
Here's the stuff we always put at the end:
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Disclaimer: Reading this blog post does not create an attorney-client relationship, and it is not formal legal advice. This is for information purposes only. It is always best to speak with an attorney about your questions, assets, concerns, and needs.