Estate Planning Tips For Your Blended Family
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Jun 23, 2015, 09:13am EDT |
By Judy Martel
When it comes to estate planning for a blended family, the concept of "yours, mine and ours" can complicate the process to the point that family dynamics become permanently strained.
These days, many families include children, stepchildren, former spouses and in-laws. According to the Pew Research Center, the number of remarriages has been steadily rising over the past few decades. In 2013, 40 percent of unions included at least one spouse who had already walked down the aisle. In 20 percent of remarriages, both spouses had previously said "I do."
Such situations require advance wealth planning with clear goals. "The biggest issue in blended families is, 'where does my money go when I die?'" said Cyndy Ranzau, associate wealth strategy consultant with RBC Wealth Management.
Challenges Of Retying The Knot
In many cases, remarried couples want to ensure the surviving spouse will be cared for in the event one partner passes away—with the children from their previous marriages becoming the ultimate beneficiaries of the assets their parents brought to the union. The challenge comes from designing a plan that keeps all parties satisfied. The first step is to agree on a course of action.
Van Pate, a wealth strategies consultant with RBC Wealth Management, said he typically draws a flowchart to demonstrate the ultimate path of the spouses' assets no matter who passes away first. Once a couple determines the best path and how much control they want the surviving spouse to exercise, they can move forward with executing the plan.
Here are some tips for planning your estate while maintaining family harmony:
It's All In A Name
"One of the biggest mistakes people make when determining who will inherit their assets is in the beneficiary designations on retirement accounts and insurance policies," said Ranzau. "The best-laid estate plan can be destroyed by an incorrect beneficiary designation."
That's because beneficiary designations trump everything else, Pate noted. Regardless of what a will or trust says, the asset goes directly to the primary beneficiary or beneficiaries. For example, if your will states that a particular asset, such as an IRA, is to go to your current spouse, but you've named your child as primary beneficiary, the IRA will go to your child.
Family dynamics can change in a hurry if a remarried spouse neglects to remove the former spouse as primary beneficiary on a document. "That makes all types of people unhappy, except maybe the former spouse," he said.
Another error occurs when a spouse names the current spouse as primary beneficiary and the children as equal contingent beneficiaries, believing that everyone will get something. In truth, the primary beneficiary receives all the assets in this situation and will be free to act as he or she wishes.
"If a spouse is a primary beneficiary on an IRA, it becomes his or her IRA when the owner dies," Ranzau said. In this case, contingent beneficiaries don't matter, she added, because the IRA will go to the spouse alone.
That's not to say contingent, or secondary, beneficiaries are not important. If the primary beneficiary passes away at the same time as you, and there is no contingent beneficiary named, the asset will pass to your estate and be distributed per the terms of your will. If you don't have a will, the assets will pass to your next of kin.
One way to avoid a potential problem is to name each beneficiary as primary and designate the percentage of the asset each will receive. "It is possible to have multiple primary beneficiaries," Pate noted.
Remarried couples often use a trust to spell out the distribution of assets. The trust—either revocable or irrevocable, depending on their situation and amount of assets—does not preclude the will, however. A will is still needed to ensure that assets not titled in the name of the trust are transferred according to the decedent's wishes.
Pate described a common trust scenario for remarried couples: A husband sets up a living trust and names himself the trustee during his lifetime, with the intent that the surviving spouse will receive income for life and the remainder of the trust will go to his children after her passing.
While it may seem like a simple solution, the problem arises when naming the successor trustee, who will take control when the husband passes. Many times, the husband names the surviving spouse or one of the children as the trustee without really considering the consequences, Pate said.
"If you think about it, the wife and the children have conflicting interests," he added. "The wife might invest in bonds for income and if she lives another 20 years, the investments lose value, leaving the kids with very little. But if one of the kids is successor trustee, he or she could invest in pure growth funds, leaving the wife with little to no available income." For that reason, he said a professional third-party trustee without a personal interest in the family is often the best option.
Pate said another challenge with trusts occurs if a spouse sets up income for the surviving spouse with the remainder going to the children and then dies prematurely. In this scenario, the children could have a long wait before receiving their inheritance. "Where this really becomes an issue is where one spouse is not much older than the children," he noted.
Pate suggested couples implement a strategy that leaves an immediate inheritance to the children, perhaps naming them as primary beneficiaries on an insurance policy so they receive some money upon the first spouse's passing.
Prenuptial Wedded Bliss
The mechanics of designing an estate plan are bound to run more smoothly if a couple makes decisions about their assets and puts them on paper before tying the knot. A prenuptial agreement will start a couple on the right road to an understanding, though it doesn't replace a written estate plan, Pate noted.
Because the prenuptial agreement is a contract, be sure the terms of the will and/or living will are in line with the intentions spelled out in the prenuptial agreement. Otherwise, you could set up a potential court battle for your heirs.
If the intent going into the marriage is to keep assets separate so that each spouse can pass an inheritance to their own children, then be sure to maintain that separation, Pate said.
"Once you start blending assets in accounts, then the other spouse has a claim," he added.
If one spouse decides to claim "elective share" (a percentage of the estate), the claim is only against marital assets, said Ranzau. Non-marital assets and separate property are considered separate and not subject to the elective share. The amount of elective share is determined by state law, but typically is between one-third and half of the estate.
Aside from finances, Ranzau said remarried couples should discuss health care powers of attorney and living wills. If the new spouse is the designated agent in the event one spouse becomes incapacitated, the children need to know.
In blended families, which are typically more complex because of the additional players, "it becomes more important to have the conversation about incapacitation," she added.
Not All Surprises Are Fun
Drafting an estate plan by no means ensures a smoothly blended family. That's why it's critical to maintain meaningful and ongoing communication among all concerned parties.
"I've seen a lot of families set up family meetings to inform everyone what's expected of them," said Ranzau.
Regardless of the chosen method of communication, a well-thought-out estate plan will have a better chance of a seamless transition, she said. "It's the surprise that gets you every time. If there are no surprises, everything generally goes smoothly."
In fact, communication is probably the secret weapon to ensuring a blended family maintains harmony, said Pate. "I like to think conversations happen not only before the marriage, but all the way through."
Judy Martel blogs about wealth on Bankrate.com and is the author of The Dilemmas of Family Wealth, published by Bloomberg.
RBC Wealth Management, a division of RBC Capital Markets, LLC, Member NYSE/FINRA/SIPC.