A blended family (where one or more spouses have children from a previous
marriage) presents some difficult estate planning issues, but the following
strategies can greatly reduce the likelihood of unintended outcomes or
bitter inter-family conflict.
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Prenuptial & Postnuptial Agreements: Prenuptial and postnuptial agreements are a great way for couples to
clearly spell-out their expectations and intentions for certain assets.
If they have money earmarked specifically for a child’s college
tuition or their own long-term care, this is a good way to indicate those
things to avoid confusion and possible conflict in the future. These kind
of agreements also help couples achieve clarity regarding living arrangements,
rights and obligations if they divorce, and division of various expenses.
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Review of Beneficiary Designations: It is important for every divorced person to review the beneficiary designations
they may have on various policies or accounts such as bank or brokerage
accounts, retirement accounts, insurance policies, etc. Make sure that
your ex-spouse is not a beneficiary, unless that is what you truly still
intend. Note that beneficiary designations will override anything you
say in your will or trust. So it doesn’t matter if your will or
trust says that all your assets go to your new spouse – if you did
not change the beneficiary designation on your account, your ex-spouse
will receive those funds.
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QTIPs (Qualified Terminable Interest Property Trusts): A QTIP trust allows a surviving spouse to receive income from the trust
assets (and potentially principal as well) while still preserving the
underlying assets for the children of the deceased spouse. The surviving
spouse cannot be the trustee and indeed has no authority to direct any
distributions from the trust. If the trust provides at least a lifetime
income to the surviving spouse, the grantor’s funding of the trust
qualifies for marital deduction so no estate taxes are incurred.
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ILITs (Irrevocable Life Insurance Trust): This kind of trust allows for a payout from a life insurance policy to
pass outside of the grantor’s estate and thus avoids incurring any
federal taxes on the proceeds. Usually a grantor places money in a trust
and the trustee uses the money to purchase a life insurance policy on
the grantor’s life. Often parents in a blended family will use this
method to leave an inheritance for their children, while transferring
other assets (outside of the ILIT) to the surviving spouse.
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No Contest Clauses: A “no contest” clause placed in a will or trust provides
that if a person challenges the beneficiary designations in that will
or trust, he or she forfeits his or her share of the estate. These clauses
can serve as a deterrent for litigation, and are especially helpful if
you feel that your will or trust instructions may be controversial and
not well received by certain family members. Note, however, that “no
contest” clauses are not enforceable in every state (but are enforceable
in California).
There are many challenges to having a blended family that are understandably
heightened in the context of grief and financial matters. Having a well-thought
out estate plan may be one of the best ways to provide for your loved
ones and leave a legacy of family harmony. Contact Hannah Sargent, Alameda
County probate and estate planning attorney for a free consultation today.