Estate Planning: What Blended Families Need to Know
If you’ve been married more than once, or if you or your spouse have children from a previous relationship, you’ve likely faced some of the complexities of becoming a “blended” family. From navigating new step-relationships to managing basic logistics, your family unit might have a number of moving parts – both practical and personal.
Blended families also face several unique financial planning considerations, especially when it comes to estate planning. Where “single-marriage” families might have a simple order of operations for bequeathing assets – typically spouse, then children – blended families might need to consider their spouse, children, and any children from a previous marriage.
The order of operations can quickly get confusing – but there are ways to manage it.
Define your priorities
As a first step, we recommend taking the time to develop a firm understanding of your priorities.
To do this, it can help to work through several important questions about the future:
- Who would you want making decisions for you if you were to be incapacitated? Key issues would likely include health care choices and financial control.
- If you were to pass away, who would provide for your children, or take over as guardian for any minor children?
- Who would provide for your surviving spouse?
- How would you want your property to be distributed in the event of your death?
The answers can get complicated. For example, if you live in a community property state like California, the law assumes that marital assets are jointly held. That would have an effect on your estate planning outcomes. If you provide substantially for your spouse, you might want to ensure his or her care after your death. But what if you also want to ensure that your kids get the inheritance?
Having an open and honest conversation about some of these issues is critical to the process of building a set of shared priorities – and from there, you can start the process of building an estate plan that suits those priorities.
Lay the groundwork
Now that you have some key decisions in place, it’s time to start by updating two critical documents:
- Your healthcare proxy or healthcare power of attorney
- Your financial power of attorney
The first document lays out the basic guidelines for how you’d like healthcare decisions to be made and who should be empowered to make them in the event of an emergency. Generally speaking, doctors tend to look to spouses first. But to avoid conflict and confusion it’s important to spell it out – especially if your current healthcare proxy is outdated and has your former spouse’s name! This document will always supersede custom or social norms, so be sure it’s current.
Similarly, your financial power of attorney empowers someone to manage your financial affairs if you aren’t able to. You don’t have to have the same person for both jobs – you don’t even have to choose your spouse if you don’t want to! However, we do recommend choosing someone who is familiar with your affairs and capable of managing them.
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Update your beneficiary designations
It’s also critical to update the beneficiaries of your retirement accounts and insurance policies. Of course, the decision as to who should receive what might not be simple – you might want to provide a death benefit for your spouse to help provide for their financial security, for example, or an immediate payout of assets to your children so they get an immediate inheritance.
The “best” course of action for your family depends on your unique objectives. But whatever those might be, don’t forget to take a look – your beneficiaries may be outdated. It’s a very common occurrence!
Why is this so critical? The beneficiary listed on the account always takes precedence over other instructions. That means that if there’s a conflict between your will and your stated beneficiary on a particular account, the beneficiary instructions will prevail.
Just remember these key points before making any changes:
- Your minor children should not be direct beneficiaries of your assets because they’re not allowed to receive them. Talk to your estate attorney about alternatives.
- Making your children contingent beneficiaries with your spouse as primary beneficiary does not guarantee that they’ll get anything. The contingent beneficiaries only receive funds once the primary beneficiary passes away.
- You can nominate more than one primary beneficiary, just be sure to explicitly state which percentage of assets each person should receive. You should also have contingent beneficiaries just in case.
For retirement accounts like IRAs, it’s also helpful to make sure you’ve worked through the tax implications of your beneficiary designation. If possible, we also advise putting your family members in touch with your financial advisor or urging them to retain one of their own. Inherited IRAs are especially prone to tax mistakes, and working with an advisor can help your heirs avoid the most common pitfalls.
Establish any necessary trusts
For couples who are marrying later or who bring greater wealth into a marriage, a separate property trust could make sense. This helps to ensure that your assets remain, well, separate, and that your designated beneficiaries will ultimately end up receiving them.
That’s not to say that you can’t share with your spouse. Some families select the spouse as the beneficiary of the trust until their death before wealth is passed to the children. Others choose to provide for heirs in other ways, unifying assets into a spousal trust left to the surviving spouse’s discretion.
However you decide to structure your trust directives, it’s important to:
- Consider what assets you’d like to maintain as separate property
- Think about how you’d like to provide for your spouse and respective heirs
- Anticipate the potential changes that could arise from the birth of a new child
- Nominate an executor who is familiar with your and your spouse’s respective wishes and able to help carry them out if needed
In these situations, we advise working with a qualified estate attorney to help ensure that you’ve covered your financial and personal bases. It can also help to use a neutral third party, like a bank or advisor, as your executor.
Finally, keep in mind that non-financial assets or those that aren’t in the name of the trust aren’t included in your trust document. For these items, it’s important to provide clear instructions in your will so that your heirs know who should receive what.
Start thinking ahead
As of 2013, 40% of new marriages included a previously-married partner. People are also marrying later overall. The age of first marriage for the average groom was 28.7 in 2010; in 1960 it was 22.8. Women are also marrying later, with the average age rising from 20.3 to 26.5.
These demographic trends can and do impact financial planning, which is why it’s so important to do your homework, communicate your wishes, and lay the groundwork for your estate plan. Generally, it’s easiest (in a manner of speaking) to do this before you marry, but these activities can occur at any time.
In fact, for many families, estate planning is an evolving process – children grow, assets change, and our needs evolve. Working with an advisor can help you stay on top of your needs within the overall context of your goals, preferences, and lifestyle.
Remember: Long-term wealth management begins today
Blended family or not, if you’re looking one or two generations into the future chances are you’ve got a full plate. Our free guide From the Bucket List to the Bank covers a number of key factors in multi-generational financial planning, including common risks, intra-family financial help, education, and estate planning. We’ve also included special features for business owners and philanthropists.
Take your multi-generational planning into the future: Download our free guide today!
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