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WHAT BLENDED FAMILIES SHOULD KNOW ABOUT ESTATE PLANNING

Posted by: Begley Law Group

by Thomas D. Begley, Jr., CELA

What Are Blended Families?

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.

Blended families can face complex estate planning challenges. Issues can arise between spouses, or between children and their spouses. 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.

Are Blended Families Common?

Several trends related to divorce have increased the number of blended families.[1]

  • 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.
  • There are approximately 1,160,000 new divorces each year.
  • Approximately one million children each year have newly-divorced/divorcing parents.
  • 54% of divorced women remarry in five years.

What Estate Planning Challenges Do Blended Families Face?

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 estate planning attorney can help select and execute one 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.

Life Estates in Primary Residences and/or Vacation Homes

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 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.

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:

  • 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 4% of the total annual return on assets held in the trust or 4% 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 “any appropriate purpose.
  • Death of Spouse. The trust may stipulate that, upon the death of the surviving spouse, the remainder of the trust will be distributed to the testator’s children from a previous marriage or to children from both marriages.
  • No Contest. Including a “no contest” provision in the trust minimizes the risk that the trust will be challenged.

 

Irrevocable Life Insurance Trusts (ILITs)

An ILIT allows the client to provide for the client’s children with life insurance and to use the client’s remaining estate to provide for the client’s spouse. The trustee of the ILIT purchases a life insurance policy on the client’s life, and the client pays 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 the client’s death.

There are also some variations on this strategy.

  • Purchase life insurance on the client and name the client’s children as beneficiaries. The estate tax consequences of this technique must be considered.
  • Have the client’s children from a previous marriage own the policy while the client pays the premiums, utilizing the client’s annual exclusion gifts.

FLPs and LLCs

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

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.

[1] Divorce Magazine, http://www.divorcemag.com/statistics/statsUS.shtml

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