His, Hers, or Ours? – Estate Planning for Blended Families

  • Apr 30 2012

With more than half of marriages ending in divorce, an increasing number of families are “blended families.” The Alert this month examines the unique issues faced in planning for blended families.

Approximately 50% of first marriages, 60% of second marriages, and 75% of third marriages end in divorce. With those statistics in mind, it is not surprising that many couples doing estate planning have children from previous relationships. This can add complexity to the estate plan.

One or more of the parents may want to exclude some of the children. One parent may want to benefit his children only, while the other parent may want to benefit only her children. On the other hand, one or both parents may want to benefit all the children. Even if all children are to be included in the estate plan, one or more children may receive a greater percentage than the others. Some couples want to provide for the surviving spouse, while others believe the surviving spouse will be provided for adequately with his or her separate assets.

Then there is the question of timing. Couples without children from a previous relationship typically want to provide for the surviving spouse upon the death of the first spouse to die and only distribute assets to the children upon the surviving spouse’s death. Many couples with blended families desire that some or all of the deceased spouse’s estate be distributed to his or her children at that spouse’s death. Sometimes there are separate provisions for the surviving spouse and sometimes there are not.

All of this complexity can be quite challenging for the estate planning attorney. Many married couples want to place their assets in a joint revocable living trust for ease of lifetime and post-mortem administration, protection in the case of incapacity, and avoidance of probate. But many individuals coming into a second or third marriage want to keep his or her assets separate. In that case a separate trust for each spouse may be appropriate. In many cases, the estate plan will include a joint trust, as well as separate trusts for each spouse. This may be called a “his, hers, and ours” estate plan.

When the couple has acquired assets during marriage that are being held jointly and they also brought separate assets into the marriage, it may be advisable to have a joint trust and a separate trust for one or both of the spouses. While this type of planning is more complicated in some ways, the existence of multiple trusts may also bring a sense of simplicity to the estate plan. Separate assets can be segregated and clearly identified. Each trust can have a different distribution pattern upon the death of a spouse. The separate trust may distribute assets to the children from a previous relationship, while the joint trust may include provisions for the surviving spouse.

Couples with blended families often forget to update the beneficiary designations on life insurance and retirement accounts. This often leads to unintended consequences, with ex-spouses receiving retirement assets, or life insurance not being distributed to all the children. Accordingly, beneficiary designations should be checked and changed, if necessary, to coordinate with the new estate plan.

If not properly drafted, unintended tax consequences could occur. It is possible that certain beneficiaries could receive assets and other beneficiaries become liable for the estate tax associated with those assets. While sometimes this is the desired result, most often people intend for each beneficiary to pay a pro-rata share of any estate tax. Proper planning can avoid this consequence.

Finally, there is the issue of who will control the couple’s assets after the death of the first spouse, as well as upon the death of the surviving spouse. Naming a surviving spouse or child as trustee or executor over the deceased spouse’s assets can lead to disastrous results. The surviving spouse may feel he or she has a right to use the trust or estate funds however he or she wishes, while the children have a vested interest in preserving the assets to the greatest extent possible. If the new spouse and children from a previous relationship had a strained relationship to start with, having a family member supervise the administration of the estate or trust may be inviting additional hostility and even a lawsuit.

Estate planning for blended families can be very complicated with many issues to consider. Our office has extensive experience with this type of specialized planning. As a member of the American Academy of Estate Planning Attorneys, a nationwide membership organization for estate planning attorneys, our firm is kept up to date with information regarding income, gift, estate, and generation skipping transfer taxes. You can get more information about a complimentary review of your clients’ existing estate plans and our planning and administration services by calling our offices.

Posted in: Educational Alerts