This day in age blended families come in all sorts of different sizes and often need estate plans that go beyond a simple will because their relationships, responsibilities, and goals may be more complex than a traditional planning template assumes. A blended family may include spouses or partners, children from prior relationships, children together, stepchildren, adopted children, former spouses, co-parents, grandparents, chosen family, or loved ones who play important caregiving roles—and no two families look exactly alike.
Thoughtful estate planning can help clarify intentions, protect a surviving spouse or partner, preserve inheritances for children or other beneficiaries, and reduce the risk of misunderstanding or conflict. Most importantly, a well-designed plan should reflect the family you actually have, not a one-size-fits-all idea of what a family is supposed to look like.
As blended families become more common, it’s important that financial planning take into account the special needs that arise when people bring children from a previous marriage into a new union. Whether formed by death or divorce, blended families who are developing financial and estate planning strategies must deal with some particular issues that original families do not face.
How do you treat children equitably versus equally?
You may have seen a picture illustrating this question: three kids are trying to watch a baseball game from behind the outfield fence. One of them is tall enough to see over the fence without any help; a second is just a bit too short to see the game, and the third one’s height reaches only about halfway up the fence. An equality-driven approach would be to provide each of the youngsters a box of equal height to stand on. However, in this scenario, while the tallest kid can still see the game and the middle kid can just barely see it if he stands tiptoe, the shortest kid still can’t see over the fence. In the second scenario, the equitable approach, the tallest kid doesn’t get a box (since he can already see the game without it); the second kid gets a box tall enough to permit a good view, and the shortest kid gets the tallest box, allowing him to see the game as well as the other two.
The contrast, of course, is implied in the difference between the words “equal” and “equitable.” Though, in the first example, the solution featured equality (all the kids got boxes of the same height), it didn’t really solve the problem for everybody. The second example, however, was based on equity: providing a solution that actually met the differing needs of everyone involved.
For example, suppose that one of the children in a blended family has special medical or intellectual needs that will require intensive treatment, equipment, or other support services. Should that child participate equally in the inheritance process with the other children, or should a special trust be designed that is capable of funding the child’s needs into the future? Estate planning in the blended family should carefully consider questions like these as they apply to each individual situation.
Blended families and separate property
Especially in cases where one spouse comes to the marriage with contractual obligations from a previous relationship (such as child support arrangements or trust agreements executed as a part of the previous relationship), careful and transparent communication around these matters is essential. This is also necessary when one partner inherits property, either before or during the subsequent marriage; such property will often need to be designated as separate (non-marital) property and appropriately segregated from the couple’s other assets to avoid commingling, which can greatly complicate estate and inheritance questions. In some cases, a pre-nuptial agreement may be the best way to handle these matters.
When are trusts advisable in blended families?
As suggested above, the particular needs of various children in a blended family may require the type of individual estate planning best ensured by a well-designed trust. For example, one of the spouses may have established an educational trust for the benefit of their biological child; such arrangements should be carefully communicated to avoid misunderstanding or the perception of favoritism.
In some cases, the new spouses may wish to maintain separate revocable living trusts to contain assets acquired before the marriage and segregate them for the use of each spouse and/or their biological children. Alternatively, some situations may call for a two-part approach (sometimes called an A/B bypass trust): Upon the death of the grantor (the spouse who created the trust), one part is allocated to the use of the surviving spouse, while the second part is secured by an irrevocable trust for the use of the children of the deceased spouse.
There are various other forms of trusts that might be considered, depending of the family’s circumstances. The point is that use of appropriate trusts can address the needs of both surviving spouses and the surviving children of one or both parties. The trust holds the assets and directs their use as dictated by the terms of the trust, reducing potential for misunderstanding and conflict among the survivors.
How should beneficiary designations be reviewed?
Even the best estate plan is useless when beneficiary designations on insurance and annuity policies or retirement accounts are not updated to account for the family’s new circumstances. For example, suppose that one of the spouses owned a life insurance policy naming a former spouse as beneficiary. If that person dies, the proceeds of the policy will be paid to the named beneficiary, regardless of the terms of any wills or trusts. For this reason, both spouses in a blended family should review life insurance and annuity policies, all retirement accounts, and pensions (if applicable), to make sure that the beneficiary designations match their current circumstances and intentions.
The Planning Center, as a fiduciary financial and wealth advisor, understands the complexities that can accompany the formation of a blended family. Especially when one or more significant estates is involved, appropriate solutions may involve more than a simple will. We work with clients to help them understand the financial implications of estate planning and to take the needed steps to protect themselves and those they care about. If you have questions, we can help you find answers.
Disclosure: The tax and estate planning information offered by the advisor is general in nature. It is provided for informational purposes only and should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.
