Thursday, October 9, 2014

Blended Family Estate Planning

Imagine two separate trees growing feet apart from each other for many years.  These trees have grown numerous intertwined branches, but they still maintain separate trunks.  Like the trees in this image, many blended families today have functioned together for decades, sharing close family bonds and lots of common history, but still maintain separate family trees.
Traditional estate planning assumptions come from a time when blended families were far less common than they are today.  A common estate plan for a non-blended family (where all children have the same parents) is for the spouses to have reciprocal wills, with each spouse leaving all property to the other spouse, and if the other spouse is not alive, then all property to the children.  However, indiscriminately applying this estate plan to a blended family can lead to many difficulties down the road, as the children of the first spouse to die may not inherit if the other spouse changes his or her will.  To avoid future hardship, it is essential that parents in second marriages and/or parents with stepchildren hire a qualified attorney to craft an estate plan appropriate to their family situation.  Blended family estate planning is a very complex subject; this article will briefly touch some of the most common strategies:

Using a Joint Living Trust

Both spouses may wish to enter a living trust, which remains revocable (can be changed or cancelled) while both spouses are alive.  The trust may specify that after one spouse dies, some amount of property be held in trust, with an amount going to provide for the remaining spouse every year until his or her death.  The amount could be set at a defined percentage, or keyed to certain criteria, including health costs of the remaining spouse.  The trust might require that the remainder in the trust be distributed to the children of both spouses (including children from prior marriages).  On the other hand, the trust could also provide for some immediate payment to the children.  There are numerous possible combinations.  The key is that once one spouse dies, the revocable trust must become irrevocable, so that the other spouse may not change it to the detriment of the other spouse's children.

Leaving a Portion of Property Outright to the Children

Another option is for each spouse to leave a portion of the spouse's estate outright to his or her own children by will or living trust.  However, estimating the right amount can be tricky, as it is hard to predict a spouse's future needs.  Few people would want their spouse to risk running out of money during his or her life due to unforeseen health expenses, possibly making a trust (like the one described above) a more flexible option.  Additionally, a spouse must leave enough property to the surviving spouse to satisfy state spousal elective share laws.

Lifetime Gifts

Sometimes one of the simplest estate planning strategies is also one of the easiest to overlook.  If you are concerned that your children receive certain pieces of property, family heirlooms, or financial assets, consider giving them away during your life.  This may avoid future uncertainty over what you would have wanted to happen, particularly for items carrying high sentimental value.  If you are giving away substantial assets, this strategy may also decrease your need to provide for your children in your will and/or trusts.  By giving away less than the annual gift tax exclusion amount (not the focus of this article), you may also reduce future estate taxes.  However, as with the option of leaving property outright to children in a will or trust, there can be drawbacks to the lifetime gifts approach as well.

Life Insurance

Particularly if a family's assets are illiquid (difficult to split up or sell), life insurance can be a good option for ensuring an equitable distribution of wealth in a blended family. Guaranteeing that each child receives a set life insurance payout may be preferable to granting them a share of the estate in a will, which might require a rushed sale of family cars, land, personal property, etc.  While we are on the subject of life insurance in blended families, it is imperative that people who have been divorced ensure their life insurance policies (and all death beneficiary elections on IRAs, pensions, etc) are up to date.  It is hard to think of a worse "estate plan" than having an ex-spouse as the primary recipient of one's money!

Wealthy Spouses and Spouses with Substantial Age Differences

The techniques above are commonly used in blended family estate planning for people of modest to comfortable means, and for spouses of a similar age.  The higher the net value of the estate, the more complex the estate planning can be.  Many wealthy spouses rely on more complex devices, such as Qualified Terminable Interest Property (QTIP) trusts, Family Limited Partnerships (FLPs), Marital Deduction Power of Appointment Trusts, and Charitable Trusts.  These are commonly used by people whose individual estates top the $5.34 million estate tax exemption ($10.68 million per married couple).  Additionally, in marriages where one spouse is much older and expects the other to remarry after the older spouse's death, there may be further estate planning considerations requiring specialized estate planning tools.


Blended families are very common, but the estate planning process for these families is surprisingly complicated.  Talk to an experienced estate planning attorney to tailor an estate plan to fit your family's individual needs.

Published by Ian Holzhauer, Esq. of Nagle Obarski PC in Naperville, IL.  

Note:  The information above is not legal advice and is not the basis of an attorney-client relationship.  If you need assistance, you can hire an attorney to assist you with your individual legal needs. 

1 comment:

  1. I read this article, it is really informative one. Your way of writing and making things clear is very impressive. Thanking you for such an informative article. mediation services Victoria