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Estate Planning for Blended Families

Posted on November 15th, 2013

As of 2012, approximately 50% of first marriages end in divorce. Of those divorced from their first spouse, over half will remarry. This trend has resulted in a large number of blended families, who have special estate planning needs. Some careful estate planning can address these families’ special needs. The following steps will help you plan your estate with a blended family.

  1. Determine your goals and priorities. Good estate planning requires a specific goal and ordered priorities so that the best plan for your situation can be developed. Some common estate planning goals include:
    • Tax savings: Saving money on estate, gift, capital gains, generation-skipping, and inheritance tax can be a motivating factor for taking the time to estate plan. Some trusts offer tax savings as well as control of your assets even after death. However, most people do not need to create trusts during their lifetime.
    • Protecting a party’s own children: Protecting one’s children can become especially important with blended families. Ensuring that at least a portion of your estate passes to your children instead of your spouse may require a little planning.
    • Providing for a spouse: Making sure that a second or third spouse is taken care of is a common estate planning goal. Ensuring that a second or third, or even a fifth, spouse receives the portion of your estate that you want them to receive requires estate planning. A common misconception is that if you die without a will, all of your estate passes to your spouse.
    • Protecting beneficiaries from loss of government benefits: Social Security Disability and other benefits offered by the federal government are at risk of being lost when a beneficiary receives an inheritance. Setting up a special needs trust can help ensure that an inheritance does not disqualify an heir from receiving government benefits.
    • Protecting beneficiaries from their own mismanagement of money: A number of trusts can be set up to ensure that beneficiaries spend your money the way you want them to spend it. A Trust can allow your adult children to receive inheritance funds only for educational and medical purposes, after they reach a certain age, or if they remain drug free.
  2. Update your designated beneficiaries. Check all of your accounts and your vehicle titles to ensure that your ex-spouse is no longer listed as the beneficiary. Accounts which may list a designated beneficiary, include life insurance, retirement accounts, savings and checking accounts, annuities, stocks, and savings bonds. Depending on your estate planning goals, you may want to update the designated beneficiary to your new spouse, your children, or both.
  3. Close or re-title all joint accounts. When a joint account owner dies, the account automatically passes to the surviving joint owner, regardless of any heirs named in the decedent’s will. For example, if Sarah and Joe, each on their second marriage, are married to one another, and Sarah has an investment account which still has her former husband Brad, listed as the joint owner. Sarah designates Joe as the sole beneficiary of her estate in her Will. When Sarah dies, the account owned by her and Brad, will pass automatically to Brad, even though her will distributes the account to Joe.
  4. Revoke previous powers of attorney. If you participated in any type of estate planning in a previous marriage, you likely executed a power of attorney, granting your former spouse authority to act on your behalf. You may be able to revoke any such power of attorney by tearing up all copies and notifying each party who has received a copy, in writing, that it has been revoked. Check with an attorney or review your state’s probate code for information and instructions on how to revoke a power of attorney in your state.
  5. Decide whether you and your spouse will execute reciprocal Wills. Reciprocal Wills are Wills executed by husband and wife, that are exactly alike. This means that each Will leaves the same asset(s) to the same person(s) in the same proportion. For example, Sarah and Joe, each on their second marriage are married to one another, and each has one child from a previous marriage. They both execute Wills, which leave everything to the other, and in case the other is deceased, one-half of the estate to Sarah’s child and one-half to Joe’s child. Some things to keep in mind when deciding whether to execute reciprocal Wills.
    • When executing reciprocal Wills, your spouse is free to change his or her Will at any time. For example, Sarah and Joe, each on their second marriage are married to one another, and each has one child from a previous marriage. They both execute Wills, which leave everything to the other, and in case the other is deceased, one-half of the estate to Sarah’s child and one-half to Joe’s child. Sarah dies, and Joe inherits the entire estate. He then may change his Will to leave the entire estate to his child, and disinherit Sarah’s child.
    • When executing non-reciprocal Wills, you will need to determine what assets belong to each of you so that there is no confusion about what property each party may leave to his or her heirs. If you experience any difficulty reaching an agreement concerning ownership of your property, a pre-nuptial agreement or your state’s marital property laws may dictate ownership of some or all of your property for you.
    • Your spouse is not required to inform you of changes made to his or her Will. Whether executing reciprocal Wills or not, your spouse is free to change his or her Will at any time and is under no obligation to inform you of the change. This means that he or she may remove your children as beneficiaries and leave their entire estate to their own children, without your permission or knowledge.
  6. Decide who will inherit which assets. You may wish to leave everything to your current spouse or your children from a previous marriage, or you may wish to divide your assets between your spouse and children in some manner. There are many options for distributing your property upon your death, including various trusts and titling options. You may wish to consult with an attorney in order to determine what options are available and find the one that will work best for your family.
  7. Choose a personal representative for your estate. Your personal representative will be responsible for ensuring that the terms of your will are followed and your estate is administered in accordance with your wishes. Some things to consider when choosing a personal representative include:
    • Non-family members: When estate planning with blended families, you may want to choose a personal representative who is not a member of either family. A friend or professional, such as an attorney or asset manager at a bank, may be a good choice of personal representative for some families.
    • A personal representative’s responsibilities: a personal representative has many responsibilities, including collecting assets, consulting with professionals such as attorneys, accountants, and real estate agents, obtaining property appraisals, opening an estate account, paying estate bills, and keeping records for the estate heirs and the Court. Be sure you chose a representative who will be able to manage this responsibility well. Most representatives use attorneys to assist them.
    • Co-executors: You may name more than one person as personal representative, and require the parties to act together, or allow them to each act on their own. Some blended families find that naming one family member from each family, works best. This could be a very good or a very bad idea, however, depending on your particular situation and the personalities of the family member involved.
  8. Execute new estate planning documents. Your estate plan may consist of one or more of the following estate planning documents:
    • Will: A Last Will and Testament, or a Will, is a legal document which specifies who shall inherit what portion of an estate upon the Testator’s death. A Testator is the person who executed the Will.
    • Power of Attorney: A Power of Attorney is a legal document which gives another party the authority to act on your behalf in all financial matters. A person with Power of Attorney for you, can therefore open and close bank accounts in your name, borrow or loan money in your name, sell your property, purchase property for you, and do any other act which the Power of Attorney document and/or the laws of your state allow him or her to do.
    • Advanced Medical Directive: This document is used to designate a person to be in charge of your healthcare decisions, should you become unable to make decisions on your own. You may appoint more than one representative, and allow them to act alone, or require that they act together. In Virginia, this document also works as a “living will” which directs your family and doctors concerning your wishes regarding remaining alive on machines and receiving nutrition and hydration, should you be in a persistent vegetative state.