Estate Planning For The Blended Family

By: Randall A. Denha, Esq.

Estate planning with one family is hard enough. Unfortunately, divorce is a common part of life today. As a result, more and more people have blended families. Blended families are families where the husband has children from a prior marriage and/or the wife has children from a prior marriage. Sometimes the current husband and wife may also have children together as well. Due to these complicated circumstances, it is very important that individuals with blended families understand the law and know their options when planning their estate. Estate Planning for the blended family can make estate planning more complicated. For example, you may want to leave different inheritances to biological children than you would to stepchildren, or to protect your biological family’s inheritance in the event your spouse remarries.

Blended families take several forms:

• Married couples in which one or both spouses have children from a previous marriage.

• Families with children who are in second or subsequent marriages and who have children from previous marriages.

• Families with children whose spouses have children from previous marriages.

Typically, individuals in blended families want to provide for the spouse as well as the children from the previous marriage. In some cases, they also want to provide for the children from their spouse’s previous marriage.

Several trends related to divorce have increased the number of blended families:

• Approximately 50% of American marriages end in divorce.

• Approximately 60% of remarriages end in divorce.

• Approximately 43% of marriages are remarriages for at least one party.

• The average duration of these marriages is 7.8 years

• 54% of divorced women remarry in five years.

In a blended family, estate planning challenges can include:

• The potential for children to be disinherited.

• Delays in the children’s receipt of inheritance until after the death of their parent’s spouse.

• The need to protect assets from former spouses.

• Disputes over division of authority or responsibility.

What Estate Planning Strategies Can Help?

Estate planning for blended families is a form of asset protection. Depending on a family’s situation and needs, an experienced estate planning attorney can help select and execute any one or several of the following strategies.

Premarital and Marital Agreements.

These agreements should address:

• The parties’ rights and responsibilities during their marriage with regard to living arrangements, division of obligation to pay expenses, and obligation to purchase and maintain long term care insurance.

• The parties’ rights and obligations if they divorce.

• The rights and obligations of the surviving spouse in the estate of the deceased spouse.

Spray Spendthrift Trusts.

These trusts are designed to benefit the surviving spouse and children. When drafting a spray spendthrift trust, the following should be considered:

• Distributions. The trustee may be permitted to make distributions to the surviving spouse and designated children.

• Unitrust distributions. A spouse may be given an annual unitrust distribution equal to a percentage of the trust. For example, the spouse might receive 5% of the total annual return of assets held in the trust or 5% of the total trust assets as calculated on an annual basis.

• Trustee selection. A disinterested trustee may be appointed to help avoid conflicts of interest and strained family relationships while permitting distributions for “health, education, support and maintenance.”

• Death of spouse. The trust may stipulate that, upon your death, the remainder of the trust will be distributed to your children from a previous marriage or to children from both marriages.

• Frank Sinatra Clause, or No contest provision. Including a “no contest” provision in the trust minimizes the risk that the trust will be challenged. For example, when Frank Sinatra drafted his will, he made sure his heirs would accept their inheritance “his way.”

Lineal Descendant Trusts.

These trusts are designed to benefit your child and his or her descendants. With the goal of keeping money in the family, the trust protects assets from the child’s creditors and predators, including divorcing spouses, while maintaining maximum control for the child. The trust may include the following provisions:

• That your child will be the trustee unless he or she is involved in a divorce action or a lawsuit.

• That your child, acting as trustee, can distribute principal to or for the benefit of himself/ herself or to his or her descendants.

• That there will be a disinterested trustee who can distribute principal for any appropriate purpose.

• That the trustee will have discretion to distribute income to or for the benefit of the child.

• That the trust terminates at your child’s death and the remaining principal is paid to your child’s descendants, not to your son- or daughter-in-law.

• A spendthrift provision, a provision that expressly states that your child has no right to terminate the trust, and a provision that protects the assets in the trust from creditors.

Irrevocable Life Insurance Trusts (ILITs).

An ILIT allows you to provide for your children with life insurance and to use your remaining estate to provide for your spouse. The trustee of the ILIT purchases a life insurance policy on your life, and you pay the premiums. ILITs offer two major advantages. They prevent children from being disinherited because the trust names them as sole beneficiaries of the life insurance policy, and they ensure that children will receive inheritances promptly because the policy will pay the trust immediately upon your death.

There are also some variations on this strategy.

• Purchase your own life insurance policy and name your children as beneficiaries. The estate tax consequences of this technique must be considered.

• Have your children from a previous marriage own the policy while you pay the premiums, utilizing your annual exclusion gifts.

Family Partnership and LLCs.

A family partnership is an ideal tool for a family who owns real estate and other investment assets. The real estate and/or other investments is transferred to the partnership, which is composed of parents and children. A limited liability company (LLC), comprised of family members is similar to a family partnership. Both arrangements can be used to protect family assets from the claims of spouses and former spouses. Family partnerships and manager-managed LLCs can also protect family assets from the claims of your children’s spouses or former spouses.

Life Estates.

In a second marriage, one spouse often moves into the home of the other. The home is not always retitled jointly, nor should it be. However, the individual who owns the home often wants the spouse to have the right to live there for his or her lifetime. This can be accomplished by giving the surviving spouse a life estate in the home. Individuals who choose this strategy should attach certain conditions to the life estate, such as an obligation on the part of the surviving spouse to pay the home’s taxes, insurance, and maintenance expenses. Consideration should be given to requiring an automatic termination of the life estate if the surviving spouse moves out or abandons the property or even cohabitates with an unrelated person for a certain period of time. Provisions should also be made regarding whether the property can be rented or sold, and, if so, who is entitled to the rent or proceeds of the sale.

Contracts to make a Will.

When appropriate, a contract to make a will offers a simple estate planning solution. Often, spouses want their wills to stipulate that everything will be left to the surviving spouse, with remaining assets to be divided on some basis between children from both families upon the death of the second spouse. But, at the death of the first spouse, the will of the surviving spouse typically becomes non-enforceable since it can be changed to disinherit the children of the first spouse. It is possible for the parties to enter into a contract to make a will, which essentially prohibits the surviving spouse from changing his or her will. The disadvantage of this strategy is that the surviving spouse may have a valid reason for wishing to change the will, completely unrelated to disinheriting the children of the deceased spouse or to delaying their inheritance.

Qualified Terminable Interest Property Trusts (QTIPs).

With a QTIP, the will or trust of the spouse who dies first gives the surviving spouse the right to income from assets held in the trust. This income interest has the effect of deferring the taxes due at the death of the first spouse. It is also possible to draft a QTIP to include the right for the trustee to make distributions of principal exclusively to the surviving spouse. The surviving spouse has no right to direct payments from the QTIP. Upon his or her death, the trust typically distributes assets to the children of the first spouse. In most cases, a QTIP trust is drafted as part of an overall estate plan, either leaving a portion of the assets outright to the children or leaving those assets to a credit shelter trust for the benefit of the surviving spouse and the children from one or both marriages.

Disclaimer Trusts.

When assets are left outright to a surviving spouse, he or she may be given the right to disclaim them into a disclaimer trust. This very popular type of trust should not be used if there is concern that the surviving spouse may disinherit the children of the deceased spouse.

THIS ARTICLE MAY NOT BE USED FOR PENALTY PROTECTION. THE MATERIAL IS BASED UPON GENERAL TAX RULES AND FOR INFORMATION PURPOSES ONLY. IT IS NOT INTENDED AS LEGAL OR TAX ADVICE AND TAXPAYERS SHOULD CONSULT THEIR OWN LEGAL AND TAX ADVISORS AS TO THEIR SPECIFIC SITUATION.