Overcoming the Challenges of Legacy Planning That Plague Blended Families
July 9, 2017
As you’ve probably already noticed, estate planning can be challenging – not only for the “traditional” nuclear family but, also for the millions of “non-traditional” families. Blended family scenarios are virtually endless – a spouse with independent wealth that marries a younger new spouse, children from a previous marriage but no children from this marriage, children from a previous marriage plus children from this new marriage, and more.
Sometimes, an estate “plan” of a blended family seems less like a plan and more of a grab bag of joint and solely owned assets with no clear plan about who gets what and why! Although the increased complexity and variety of family structures makes effective planning more challenging, the need is greater now than ever before. Let’s take a look at a few common estate planning challenges that blended families present to financial advisors.
Your Assets to Your Children, My Assets to Mine
In this scenario, one spouse wants to leave all assets to their children and wants the other spouse to do the same. However, a lopsided situation can occur. If the couple has been married for some time, and if they have acquired joint assets, someone might get the short end of the stick. Don’t be afraid to address this potential problem with your clients. Relying on joint accounts and “plain” beneficiary designations is a recipe for disaster in these situations.
Let’s Be Fair to the Kids
In this scenario, one spouse wants to leave the entire estate (or a substantial part of it) to the surviving spouse but also wants to be “fair” to his her or children. If you notice outright gifts in existing trust documents or wills, joint accounts, or no estate plan at all, there is a potential problem on the horizon. In a blended family situation, any plan that leaves full decision-making authority for the full estate to the surviving spouse can (and often does) result in a messy situation with the children of the first-to-die spouse. Fortunately, we can use trusts that provide benefits to the surviving spouse while still protecting the deceased spouse’s children.
Infighting among children and stepchildren, while the spouses are still living, is a definite warning sign that comprehensive planning is necessary. Sadly, sibling rivalry often gets heightened when parents pass on and when emotions in the family run high. Step-sibling rivalry can be much worse and lead to complicated, troubling fights if left unchecked. Your clients need a plan that prevents an intra-family civil war in the future, especially if the children and stepchildren already aren’t getting along already.
Sometimes, spouses may struggle to agree how to divide assets fairly. Being a referee isn’t easy, but you can be a hero if you develop solutions and recommend resources (like a qualified estate planning attorney or the addition of specific, targeted financial products) that achieve both spouses’ goals.
Often, designations of beneficiaries and trustees might leave the impression that parents are playing favorites. Position the family for success and harmony. Work with your blended family clients to uncover potential rivalries within the family and develop a strategy to ensure equitability as well as the perception of equitability.
Communication and proper planning overcome all of these challenges.
Planning Options Available for Blended Families
The new couple should be ready to discuss their existing finances, their financial goals, and how they expect their assets to be distributed should one of them become incapacitated or die. Your role as financial advisor is to point out pitfalls and set the stage for an equitable, calm process that minimizes losses due to creditors, predators, and possible family infighting. We have multiple approaches at our disposal, depending on the scenario.
- Two individual estate plans. Under this scenario, the couple should plan to keep all of their individual assets separate. If you are advising newlyweds or couples who have yet to tie the knot, be sure you point out this simple solution.
- A single joint estate plan. The couple can keep certain assets separate. Bear in mind that a significant amount of work and thinking may need to be done to ensure that the plan works as intended in a variety of situations.
- A combination of the two. The couple creates a legal framework to designate some assets as separate and some as joint assets. In these cases, a prenuptial or a postnuptial agreement might be a useful piece of the puzzle.
Investment and Insurance Considerations
From my own time as a financial advisor, I know that previous marriages can present awkward and complicated investment and insurance situations. You obviously want to ensure that investment and insurance plans are shaped appropriately for the blended family.
For example, if the goal is ongoing income transfers now rather than later, then income-oriented investments (dividend paying stocks or ETFs, specific-duration immediate annuities, or high-yield bonds and alternative investments) might be worthwhile. On the other hand, if the goal is to leave some form of inheritance—possibly to one or both spouses, or to the children from one or both marriages—then life insurance in an irrevocable life insurance trust (ILIT) might be used to augment existing assets. One planning option may include awarding the surviving spouse in the second marriage all the income from an irrevocable trust or marital trust while the children from the first and second marriages split the insurance now and the rest of the estate later. Key takeaway – there’s probably a solution to your client’s problems.
Helping a couple in a second or third marriage plan their estates can lead to additional business opportunities for you and earn you trust and gratitude from your clients. At the Forrest Firm, we’re here to help when you have a question or need solutions for your clients. Please feel free to email me directly at the firm to get started.