There are common estate planning goals and issues for all people. Avoiding probate. Protecting assets. Minimizing taxes. Determining who your trusted financial and health care decision makers are. Deciding how to divide and distribute your assets.
At the same time, these estate planning goals and issues look different for blended families. Blended families almost always have more complicated family dynamics if there are children on one or both sides. These challenging family dynamics can be between the children of each side of the family and/or one spouse and the children of his or her spouse. This is often further complicated when each spouse brings a different amount of assets into the marriage. Finally, the ownership of the marital house and what rights a surviving spouse has to live in that house can be another difficult issue to navigate.
Because of these issues, estate planning for blended families involves similar but different planning tools. These are the most common:
1. Creating a joint trust with limited amendment or distribution rights. A joint trust is a very effective planning tool for blended families. It allows them to avoid the cost and stress of probate. It’s also very simple to administer or transition if one spouse passes away. In addition, it can be structured to distribute a certain amount to a spouse’s children upon the passing of that spouse and retain the balance for the surviving spouse. That being said, a joint trust is often different than in other contexts in that it often includes limitations on a spouse’s right to change the trust if the other spouse is disabled or passes away. This is done to avoid one spouse from changing the trust in a way that leaves out the children or beneficiaries of the spouse who becomes disabled or passes away. A joint trust might also limit how a surviving spouse can take a distribution from the trust. This is done to minimize the risk that a surviving spouse or someone who is now in a relationship with that spouse may undo the planning and change the way assets are ultimately distributed to the children or other beneficiaries.
2. Having two trusts. In some cases, it’s beneficial for both spouses in a blended family to have a trust. Each spouse can then determine how the assets of that trust are held or distributed upon him or her passing. The trust can be structured so that some assets are distributed outright to the surviving spouse or held in trust for that spouse and later distributed to the children of the first spouse. It can also be drafted so some assets are distributed outright to the children of the spouse who created the trust. Having separate trusts essentially allows each spouse to have his or her own estate plan. On the contrary, each spouse having a trust can complicate the estate planning of a blended family. It’s more involved to determine how to title assets and set up the beneficiary on certain assets. Should one spouse’s trust, the other spouse’s trust, or maybe a combination of both trusts be the owner or beneficiary of an asset? Also, each spouse having a trust complicates the administration process if one spouse passes away. In situations like these, the trustee of a deceased spouse’s trust will need to get a tax ID number and annually file tax returns. The taxation of that trust will further complicate the process. These issues need to be considered in weighing whether separate trusts are more beneficial than a joint trust.
3. Entering into pre- or post-marital agreements. These agreements are commonly used to address the risk of having to split assets equally in a divorce. But they can also be an important estate planning tool for blended families. They create a legally binding agreement that locks a blended family’s estate plan and what assets are left either outright or in trust for a spouse if one passes, including the right to a marital home. However, there are some limitations to these agreements. They need to be reviewed frequently and updated as circumstances change. Also, they are sometimes inadvertently overlooked when estate planning documents are drafted. Further, they can be complicated to draft, and a number of legal requirements must be met for them to be enforceable. Finally, they may not be enforced in certain cases due to the unfairness of the result. Notwithstanding these issues, they are an important estate planning tool for blended families to consider.
If you have any questions about these issues and estate planning for blended families, feel free to contact me at phmulder@cunninghamdalman.com.
At the same time, these estate planning goals and issues look different for blended families. Blended families almost always have more complicated family dynamics if there are children on one or both sides. These challenging family dynamics can be between the children of each side of the family and/or one spouse and the children of his or her spouse. This is often further complicated when each spouse brings a different amount of assets into the marriage. Finally, the ownership of the marital house and what rights a surviving spouse has to live in that house can be another difficult issue to navigate.
Because of these issues, estate planning for blended families involves similar but different planning tools. These are the most common:
1. Creating a joint trust with limited amendment or distribution rights. A joint trust is a very effective planning tool for blended families. It allows them to avoid the cost and stress of probate. It’s also very simple to administer or transition if one spouse passes away. In addition, it can be structured to distribute a certain amount to a spouse’s children upon the passing of that spouse and retain the balance for the surviving spouse. That being said, a joint trust is often different than in other contexts in that it often includes limitations on a spouse’s right to change the trust if the other spouse is disabled or passes away. This is done to avoid one spouse from changing the trust in a way that leaves out the children or beneficiaries of the spouse who becomes disabled or passes away. A joint trust might also limit how a surviving spouse can take a distribution from the trust. This is done to minimize the risk that a surviving spouse or someone who is now in a relationship with that spouse may undo the planning and change the way assets are ultimately distributed to the children or other beneficiaries.
2. Having two trusts. In some cases, it’s beneficial for both spouses in a blended family to have a trust. Each spouse can then determine how the assets of that trust are held or distributed upon him or her passing. The trust can be structured so that some assets are distributed outright to the surviving spouse or held in trust for that spouse and later distributed to the children of the first spouse. It can also be drafted so some assets are distributed outright to the children of the spouse who created the trust. Having separate trusts essentially allows each spouse to have his or her own estate plan. On the contrary, each spouse having a trust can complicate the estate planning of a blended family. It’s more involved to determine how to title assets and set up the beneficiary on certain assets. Should one spouse’s trust, the other spouse’s trust, or maybe a combination of both trusts be the owner or beneficiary of an asset? Also, each spouse having a trust complicates the administration process if one spouse passes away. In situations like these, the trustee of a deceased spouse’s trust will need to get a tax ID number and annually file tax returns. The taxation of that trust will further complicate the process. These issues need to be considered in weighing whether separate trusts are more beneficial than a joint trust.
3. Entering into pre- or post-marital agreements. These agreements are commonly used to address the risk of having to split assets equally in a divorce. But they can also be an important estate planning tool for blended families. They create a legally binding agreement that locks a blended family’s estate plan and what assets are left either outright or in trust for a spouse if one passes, including the right to a marital home. However, there are some limitations to these agreements. They need to be reviewed frequently and updated as circumstances change. Also, they are sometimes inadvertently overlooked when estate planning documents are drafted. Further, they can be complicated to draft, and a number of legal requirements must be met for them to be enforceable. Finally, they may not be enforced in certain cases due to the unfairness of the result. Notwithstanding these issues, they are an important estate planning tool for blended families to consider.
If you have any questions about these issues and estate planning for blended families, feel free to contact me at phmulder@cunninghamdalman.com.
