The Pew Research Center reports that there is a growing complexity and diversity within American families today – it’s not unusual for a family to include several children from prior marriages. The Census Bureau calls a “blended” family a household with a step-parent, step-sibling, or half-sibling. Today’s fluid family form may even include a dependent grandparent in the same domicile, a same-sex couple, or a couple cohabitating rather joined in marriage.
Everyone and every family deserve a second chance, but it often comes with challenges. Each spouse or partner may have brought different assets into the relationship, and each may have different ideas about passing their wealth on to each other, as well as dividing assets amongst all the children in the new “blended” family. There might even be an elderly dependent parent/in-law/grandparent that needs to be taken care of. Estate complications may lead to challenges in the courts after your death, especially if there are poorly executed documents or obligations with former spouses through divorce agreements or guardianship issues.
Smart estate planning techniques can be used to preserve wealth for your heirs in the manner you wish, with a minimum of estate tax erosion. Better to initiate a conversation about financial support and discuss goals, put a plan in place to protect assets for the family, and consider the tax effects of wills and trusts, and transfers.
Here are some suggestions:
1. Wills: Your will generally determines who gets what, when, where, and how. While you can include a few tweaks for your blended family through a codicil to an existing will, and create trusts, if the intended changes are substantive such as removing an ex-spouse and adding a new spouse, you may want to have a new will prepared. This is a good time to take a look at named beneficiaries on retirement accounts and insurance policies as well.
2. Together or Separate: Will you commingle or separate assets? What are the property laws in your state of residence? Figure out how things such as inheritances, or substantial gifts will be handled. Decide which accounts will be titled as joint accounts so assets go directly to the remaining party. Take proper precautions with property like the family home. Generally, a “prenup” executed before marriage defines which assets are characterized as the separate property of one spouse or community property of both spouses upon divorce or death. As such, prenuptial agreements are often used to preserve wealth for the children of a first marriage before an individual enters into a second union. It may also include other directives, such as estate tax elections, that would occur if the marriage dissolved.
3. Trusts: A trust holds assets on behalf of a beneficiary or beneficiaries and can specify exactly how and when the assets pass to the beneficiaries. Trusts tend to avoid probate, and beneficiaries may receive assets more quickly than when transferred through a will. With a revocable living trust you retain the right to change beneficiaries and distribution amounts. You might transfer assets to a living trust and designate members of your blended family as beneficiaries.
Typically, a living trust is viewed as a supplement to — not a replacement for — a basic will.
For blended families, certain types of properly established trusts can provide financial support for your spouse while guaranteeing something is left for your children. Consider for example:
• Irrevocable life insurance trust (ILIT) holds a life insurance policy and provides immediate benefits to the named beneficiaries when the insured dies, without the necessity of passing through probate. Beneficiaries could be the insured’s current spouse or children from a previous marriage.
• Marital trusts can provide income for the surviving spouse and preserve the principal for the deceased spouse’s designated beneficiaries, who may be the children from prior relationships. If certain tax elections are made, estate tax that is due at the first death can be postponed until the death of the surviving spouse.
4. Tax Consequences. Consider taking full advantage of your gift and estate tax exclusion, which lets you make gifts during your life or make transfers at death without paying federal gift or estate tax. Don’t forget about portability either. Tax Reform (Tax Cuts and Jobs Act) did not change the structure of the estate tax, the unlimited marital deduction, or estate tax rates, and continues the portability of estate tax exemption between spouses. The Act also does not change the provisions of the federal gift tax. The Act increases the amount of estate, gift and generation-skipping transfer exemption of an individual from $5 million (unindexed) to $10 million, effective January 1, 2018. With indexing, the figure should be approximately $11.2 million for 2018. Thus, a married couple now has over $22 million of exemption. There is a sunset at 12/31/2025 however. (Remember the increase in the exemption has immediate implications for Wills and Living Trusts with formula clauses).
People are living much longer than in the past, and so the frequency of remarriage is increasing, even in later years. Estate planning is generally complex, but it can be even more complex with today’s blended families consisting of second and third marriages. While there are a number of considerations when creating an estate plan for a blended family, there will inevitably be some compromise along the way because situations and circumstances change due to age, disability, medical emergencies, a health crisis, etc. Consult with your Fuoco Group professional as well as your attorney to develop a comprehensive estate plan for your newly blended family that protects their future as well as your own.
This article is not intended as legal or financial advice.