November 14, 2019
Love is lovelier the second time around, or so Frank Sinatra crooned. Old Blue Eyes knew what he was talking about, but ask an estate attorney or two and they’ll agree that second loves and the blended families that may result merit special consideration when it comes to estate planning.
According to Pew Research Center, 40 percent of new marriages include at least one person who was previously married. And 20 percent of weddings feature two people who have both been married before. These statistics breed yet another phenomenon. Blended families. These families, in which one or both spouses have children from a prior marriage, are on the rise, and they’re complicated. When it comes to estate planning, blended families and the complex relationships they involve have thrown the traditional family, in which the children are children of both spouses, a curve ball.
Blended families, new estate planning issues
Today’s changing family dynamics from divorce, midlife remarriage, domestic partnerships, etc. have brought additional challenges to estate planning. While there’s no such thing as a “simple” or “traditional” Will, poses unique considerations. In a Will for a traditional family, the issues are pretty clear cut. Most assets are left to the surviving spouse. Upon the death of the surviving spouse, the remaining assets go to the couple’s common children.
But using the same distribution strategy for a blended family may have negative consequences for your kids from a previous marriage. If you predecease your new spouse and planning has been ignored or inappropriately addressed early on in the second or subsequent marriage, even the best of relationships between your biological children and your new spouse could fall apart. The situation could become dicey, even ugly, upon your death when each parties’ expectations regarding inheritance differs from the reality.
When there’s no Will, the inheritance issue is left to the intestacy statutes. The state dictates what percentage of your estate goes to your new spouse and what percentage, if any, your children from a prior marriage may receive. In both cases, the inheritance may not be what either side expected or may be insufficient to address your family member’s specific needs. And, if the assets are passing by beneficiary designation outside of the estate and the new spouse is the primary beneficiary, your kids could be left with nothing.
There’s also planning that begins with fine intentions but may backfire. For instance, your plan provides that your assets go to your new spouse when you die and then, upon his or her death, to your kids. But what if those assets have been spent or exhausted? Or, what if, over the years, your kids and your new spouse drift apart and lose touch? Even worse, relationships between your children and your surviving spouse sour, and your kids are disinherited. That would be like Carol Brady of the famed, fictional six-kid Brady Bunch predeceasing husband, Mike, and Mike redoing his estate plan to leave everything to his boys, cutting Carol’s girls out of the inheritance. Surviving spouses can create their own estate plans and leave your assets to their biological children, or for that matter, to a new spouse or any organization or charity. Bottom line: Your new spouse, who is not related to your kids, has absolutely no obligation to your children.
And then there are stepchildren
While laws on stepchildren vary from state-to-state, stepchildren typically do not have the inheritance rights of a biological or adopted child. If you want to leave your stepchild cash, property or other bequests you must specifically include that stepchild in your Will. In this case, your stepchild is a Class A beneficiary which means that he/she will not be subject to an inheritance tax.
Still, say you’ve become attached to but never adopted your new spouse’s little daughter who you’ve helped raise along with your own kids since preschool. Now she’s a grown woman and single parent struggling to raise her own two children. Your partner has predeceased you, you have no biological children and you die suddenly from a heart attack. Unless you’ve specifically designated a bequest in your Will to your stepdaughter, she is likely not entitled to an inheritance.
Uncomfortable but manageable
Developing a plan may seem complicated, if not uncomfortable to discuss or contemplate. As a result, too many couples in second marriages actually don’t have Wills, perhaps because they have avoided confronting the issues. Don’t be one of them. You don’t want to short-change your children, and there are precautions you can take with planning to protect your assets for all of your loved ones. Uncomfortable as these subjects may be, discussion is imperative along with a coordinated effort with financial planners who can help you take a deep dive into your assets by analyzing those that pass outside the estate and those that pass under the terms of a Will or trust so that the distribution you desire is reflected in your plan. Your estate attorney and your financial planner can work together with you to help you develop a plan that will fulfill your wishes and adequately take care of your kids and your new partner.
Workarounds to consider
Here are some strategies to consider in both your preplanning conversations and your planning to protect your children from a previous marriage along with your assets.
Understand that each situation is different and customize your plan. This requires you to ask the right questions. If you’re a spouse in a blended family, one of the first things to decide is who to provide for, and to what degree. Does it make sense for everything to go to your surviving spouse, especially if he or she already came to the marriage with substantial assets? Or, should all or a portion of your assets go to your children from your previous relationship? Does one child require more support than either your spouse or another of your children?
Just as spouses in a blended family may have children they describe as mine, yours and ours, the same goes for their assets. They could have assets they independently brought to the marriage from prior employment earnings, a family inheritance or a deceased spouse. How those assets were acquired could have an effect on how they are viewed by each spouse and the strategy each uses in estate planning. When determining a course of action, a lot depends on what assets the new spouse already has in his/her name, what his/her income is, what the needs of the kids are and how the assets are held.
Consider a trust. You can set up a trust which will put conditions on your assets. The trust could specify that if you predecease your new spouse, your assets will go to your spouse for his/her lifetime and the balance will pass to your children upon his/her death. This helps to ensure that your spouse will be taken care of and so will your kids.
A trust can also be set up to govern other conditions that divide your assets fairly and preserve as much principal as possible for your descendants. With guidance from professionals, you might decide to set up a trust in which your new spouse receives income from your assets and is able to draw on principal for medical expenses or other necessities. While dependent on your surviving spouse having sufficient independent assets and the income from your assets being sufficient to cover your spouse’s living expenses and lifestyle, this is another example of the strategies you can develop to make certain your assets are distributed fairly to all the people you care about.
A trust can also establish what happens to your assets in the event your new spouse remarries.
Think about leaving an immediate inheritance to your children upon your death. This eliminates the kids having to wait for assets until some undetermined time when your spouse dies. If the estate isn’t large enough to make an upfront gift to the children, their inheritance could be funded with an insurance policy that passes to them as beneficiaries outside of the Will. The insurance proceeds provide immediate liquidity for the children.
Give thought to a prenup. Prenuptial agreements can be a big part of the estate planning process. With a prenup—or even post-nup—both parties agree in advance about estate distribution. They also commit that they will not sue to contest your will. In New Jersey, a spouse cannot disinherit a spouse. The surviving spouse has a right to a percentage of the estate. However, that right is only enforceable if the surviving spouse sues to obtain their interest. If there’s an agreement (which is essentially a contract), your new spouse may have waived the right to sue.
Choose a responsible trustee. Your trustee will make the financial decisions about investing and distributing assets after you have passed. Tension and differences of opinion could arise without you there to mediate. Choosing a family member or objective third party who is adept at managing money as well as clear-headed will help to avoid discord. You might also consider appointing a professional trustee such as a CPA or attorney, even a corporate trust company. But be aware, that in the case of a professional trustee, the administration expenses and fees can be hefty.
Decide who you want to make healthcare decisions. This is a potentially big issue and often one that people do not think about in advance of a health emergency. It can happen that a stepparent cuts off access and information to their spouses’ children when the spouse has been hospitalized. A kid may be out of luck unless they’re willing to pursue a court action to obtain the right to be involved in the decisions. But at the end of the day, the new spouse is likely to trump the kids unless you have created a proxy document that says something different.
Clear the air before you walk down the aisle anew. The most sensible approach is to iron out these matters prior to tying the knot with Partner Number Two. And, even then, after you’ve done the heavy lifting, continue to review your plan at intervals, say every five years, to make sure that the state of your relationships is consistent with your plan.
For couples who have fallen in love for the second time, it is especially important to be clear on the strategies you want to pursue and to get things in order and in writing well ahead of any life-threatening illness or emergency.
Everyone needs a written estate plan. Getting the specifics of the plan on the table early on and reviewing the plan periodically may well be a factor in ensuring that Mr. Sinatra was indeed right: Love is truly lovelier the second time around.
At Phelan, Frantz & Ohlig, LLC, we take our responsibility in helping your family address these issues very seriously. Please contact us if we can be of assistance to you in establishing a sound estate plan that will benefit all the loved ones in your blended family.