Estate Planning for Blended Families
According to the Pew Research Center, two-parent married households are declining while rates for divorce, remarriage and cohabitation are growing. Today, 40% of births occur to women who are not married, and less than half of kids are living with two parents who are both in their first marriage.
At the Heights Law Group, we work with a lot of blended families. By “blended families,” we mean clients that are married, but have children from a prior marriage or relationship. Estate planning with blended families is not one size fits all. As such, we wanted to dedicate today’s blog to examining more about the unique challenges faced when drafting wills and trusts for blended families.
Blended families require a different approach
Take a “traditional” family, with two married parents who are on their first marriage and have children from that marriage. When the first spouse dies, most couples are confident that the surviving spouse will make it a priority to provide for their children. This makes sense- the children are just as much the children of the surviving spouse as they are of the spouse who is deceased. The financial obligations for the couple’s children will now rest solely with the surviving parent, and therefore it is a priority for the couple in planning their estate to give the surviving spouse sufficient resources and flexibility to take care of their children.
Now consider a blended family. With a blended family, there is often one or more ex-partners who share children with one of the spouses in the household. That’s complicated. By having another parental force out there, the duty of the surviving spouse to take care of their non-biological children may be impacted.
When partners in a blended family plan their estate they now have competing concerns. If something were to happen to one of them, they want to provide for the surviving spouse. At the same time, they want to make sure their biological children from a prior relationship or marriage are also taken care of, even if the surviving spouse does not die for many decades or remarries. This balancing act is a huge part of what makes estate planning for blended families so different.
What do we do differently when working with blended families?
Blended families are more complex than traditional families. As a result, when we work with blended families, we need to do our research and understand the family on a number of different levels, including getting to know the members of the family, understanding the financial picture, confirming whether there are legal obligations owed to a prior partner, and getting the truth about the family dynamics.
Who is part of the blended family?
First of all, it’s important that we fully understand the family structure. To do this, we ask a lot of questions to get to know our clients better. What kinds of questions do we ask? Expect to hear things like: Which children are biologically from which spouse? At what point did the clients get married? How old were the children when the clients got married? How old are the children now?
While these questions may feel prying, they help us to understand how the family was formed, and whether any special planning is needed.
What does the money look like within the family?
Second, we need to understand the financials of the family. Getting to understand the financials is about a lot more than determining whether estate taxes are a concern. With blended families in particular, the financials help inform us of issues that one spouse may be particularly worried about. For instance, did one of the spouses enter the marriage with a lot more money than the other spouse? If so, that spouse might be worried about things being fair to their biological children. Does either spouse maintain separate property? If so, that spouse might want a plan to keep their separate property separate, and pass that property to their biological children when they die. Does one spouse earn a lot more than the other spouse? If so, both spouses might be worried about how to balance the competing concerns of providing for the surviving spouse and providing for the deceased spouse’s biological children.
What’s the legal picture?
Third, we need to understand the legal stuff going on. This includes the obligations that each spouse may have to prior spouses and biological parents. These legal obligations are typically outlined in a divorce decree or other similar document. In fact, most divorce decrees take into account the possibility that one party will die before all obligations in the divorce decree have been satisfied. To that end, the divorce decree will often state what would happen if a party to the divorce dies before all parental support obligations have been fulfilled. Any estate plan created that is subject to a divorce decree needs to allow for these pre-existing obligations.
Another legal element often present in blended families is the existence of prenuptial (and postnuptial) agreements. Prenuptials (often referred to as “prenups”) are contracts entered into by both spouses before getting married. The prenup is best known for stating what will happen if the parties get divorced. But a prenup can do more than that. Many prenups state the rights of each spouse to control assets that were owned by that spouse before getting married. For instance, a prenup could state that a house owned by one spouse prior to getting married not only stays that spouse’s separate property, but any increase in value to that property is separate, and any income earned by that property is also separate. Knowing the obligations and rights of each spouse in a prenup lets us know what the possibilities are for dividing assets at the death of each spouse.
How does everyone get along? No, really…
Finally, we want to get a better sense of the family dynamic. Family dynamics are complicated and all-encompassing. At the heart of this is understanding the needs of the children and the likely worries each spouse has. Questions we may ask here include:
- Do any children have special emotional or medical needs? If one child has health issues or a drug addiction, special consideration will need to be given in protecting that child.
- What is the relationship like between each client and their own biological child? Any estrangement that we should be aware of, or resentment for the parent having gotten remarried?
- How is the relationship now between each client and their spouse’s biological child? This is the more obvious question and is equally important. Whether the kids get along with and are close to their step-parents will naturally impact the long-term financial relationship that exists.
- How old are the kids now? If one spouse has young kids from a prior relationship and the other spouse has much older kids, the spouse with young kids is going to be much more worried about financially providing for their kids than the spouse whose kids are grown and financially independent.
An estate planning attorney cannot make an estate plan that addresses your concern if the attorney does not know what they are. As such, honesty is critical in assembling an estate plan that truly addresses your unique situation and needs.
What strategies are used when preparing wills and trusts for blended families?
There are a number of different strategies that may be effective depending on the specific needs of the client. Some options include:
- Holding assets in trust for the surviving spouse rather than giving all assets to survivor outright. That’s right- at the death of the first spouse, all assets going to the surviving spouse do not necessarily need to be given outright. Instead, assets can be held in trust with terms of your choosing. This may include terms which give the surviving spouse access to income from the trust during their lifetime, yet allow the biological children of the first spouse inherit the remainder of the trust when the surviving spouse ultimately passes.
- Giving gifts to biological children at the death of the first spouse. Often the easiest way to protect the biological or legally adopted children of one spouse in a blended family is to identify assets that will immediately pass to those children when their parent dies. Life insurance policies, family heirlooms, bank accounts, and even real estate can be devised to children to guarantee those children will not be left behind. The greatest disadvantage to this type of planning is that it limits the assets available to the surviving spouse, however with proper planning this issue can be mitigated.
- Encouraging giving gifts to children during life. There are a multitude of ways to give to children throughout our lives, including investments in education through the use of 529 savings plans. We recommend working with a certified financial planner to discuss the best use of gift giving during life to invest in your child’s future.
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or give us a call at (832) 810-3373.