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.
- 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.
- 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.
- 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.
- 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.
- 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.
