With many people marrying two or three times over the course of a lifetime, blended families—a couple and their children from previous relationships—are rapidly redefining the traditional nuclear family. As family dynamics become more complex, so do the intricacies of creating an estate plan. While the details of each family’s situation dictate what we would recommend, there are a few options that we find work for many blended families.
Qualified Terminable Interest Property Trust (QTIP)
A QTIP is a trust structure often created in a will that allows for distributions to the surviving spouse during his or her lifetime. It also identifies the recipients of the assets at the time of the surviving spouse’s death. This allows individuals to maintain control of the ultimate disposition of their assets so that children from a prior marriage are not disinherited.
In certain cases, a QTIP is not the appropriate solution. Instead, a couple could execute an agreement to not revoke their wills without each other’s knowledge. The intent with this agreement is to avoid a scenario in which the surviving spouse immediately executes a new will that leaves everything to his or her children, excluding the deceased spouse’s children. While these agreements are less costly and complicated than forming and managing trusts, they are not as secure.
An additional alternative to a trust is to leave specific bequests to children in a parent’s will. Though simpler than trusts, specific bequests might not always be the most appropriate solution. For example, outright bequests to a minor requires an adult custodian or guardian to safeguard the bequest until the child reaches legal age. Also, one must be careful to ensure that bequests are not disproportionate to the overall estate. As an example, if assets are depleted during one’s lifetime, specific monetary bequests could represent a much larger piece of the overall estate, possibly altering the intended distribution.
Increased Life Insurance Coverage
Often, an irrevocable life insurance trust (ILIT) is recommended, as opposed to simply purchasing insurance policies in each spouse’s name. This vehicle adds a layer of control and ensures that beneficiaries are not changed. Further, it removes the life insurance proceeds from the decedent’s estate and can reduce estate or inheritance taxes.
Pre- and Post-Nuptial Agreements
These documents have an important place in the estate planning of blended families. They can direct the distribution of assets, waive a spouse’s right to his or her elective share, and can assist in providing an orderly transition following death or divorce. For example, if a couple lived in the wife’s house during their marriage, and she wanted the home to pass to her children, this agreement could allow her surviving spouse to live there until his death. At that time, the home would go to her children.
Managing the conflicting needs of a surviving spouse and children from a prior marriage is often complex. Wescott Financial works closely with our clients, conducting in-depth reviews of estate plans and overall financial needs. We collaborate with our clients’ attorneys, accountants and other professionals to implement the endorsed plan.