Understanding the Importance of Estate Planning in Blended Families

Individuals in blended families should consider prenuptial agreements before remarrying and revisit their estate plans every three to five years. Please do so to avoid heirs being disinherited.

In addition, it is important to openly discuss the finances of each spouse’s children to avoid unintentionally disinheriting them. A skilled estate planning attorney can help.

Prenuptial Agreements

A prenuptial agreement is an important estate planning tool for blended families. By entering this document before tying the knot, couples can ensure their separate assets are protected in case of death or divorce. Although many consider this an unromantic practice, it can provide peace of mind to both parties and help prevent financial tension between spouses and children.

Another estate planning option for blended families is the use of trusts. This allows individuals to transfer their assets into an irrevocable trust for the benefit of a designated beneficiary. These beneficiaries can include their children from a previous relationship. This type of trust also offers tax benefits that can benefit a blended family.

Individuals should also review and update their existing documents, such as their will, power of attorney, and health care and property powers of attorney, to reflect their new family situation. Discussing these changes with an experienced attorney who can guide the best strategies for a blended family is important.

Joint Trusts

In blended families, issues can arise when it comes to the distribution of assets. Traditional estate plans often give the surviving spouse control to amend their documents as they choose, which can disinherit children from prior relationships or cause them to pass on their inheritance to family members they don’t particularly care for. So, this is what blended families should know about estate planning to prevent future conflicts.

Instead, some couples may use trusts to accomplish their goals more efficiently. In this scenario, the assets of the first spouse to die are placed into a joint syndicate with the surviving spouse named as co-trustee. Upon the surviving spouse’s death, those assets, such as their biological children and possibly grandchildren, will pass to the beneficiaries designated in the trust document.

Some trusts may also provide income to the surviving spouse during their lifetime, giving them access to their share of the faith until remarriage or the end of their life. Sometimes, those trusts can be structured as qualified terminal interest property or generation-skipping trusts to help mitigate transfer taxes.

Special Needs Trusts

Many blended families have children with special needs, and advisors must understand how these situations can impact an estate plan. They may need to create or update a Special Needs Trust (SNT).

SNTs are designed to hold funds for beneficiaries with special needs and restrict their access to those assets so the government can’t take them back. They can be revocable or irrevocable, and they’re often funded through third-party sources, such as gifts, inheritances and proceeds from life insurance policies assigned to the SNT.

Beneficiary designations on retirement accounts, financial assets, real estate and cars can also impact the effectiveness of an SNT. These designations should be reviewed and updated regularly to ensure that the right people receive the assets entitled to. Some families may use a pooled SNT, a set of sub-accounts within one larger, multi-beneficiary trust. This is an effective alternative to setting up a standalone SNT. It can also help keep costs down for the family.

Irrevocable Trusts

Depending on a family’s situation, they may consider irrevocable trusts to address specific estate planning goals. These include convictions that provide income for a spouse and children after the surviving spouse’s death (a qualified terminal interest property or QTIP trust) and those that pass assets directly to grandchildren (generation-skipping trusts).

Another important consideration is a power of attorney, an arrangement for someone to make legal and financial decisions if you are incapacitated. It’s vital that your powers of attorney reflect your new familial status and do not disinherit your children from a previous marriage.

It’s also important that individual documents, such as beneficiary designations on RRSPs and insurance policies, reflect the new family structure. It’s best to review these regularly so that they stay current. It can be a time-consuming process, but it will prevent issues down the road. Regular family conversations also help ensure everyone is on the same page regarding their wishes and goals for the future.

Life Insurance Trusts

Life insurance trusts (ILITs) can be useful estate planning tools in blended families. ILITs are irrevocable living trusts tied to life insurance policies to provide for children from prior relationships after a spouse’s or parent’s death. This plan can also help prevent disinheritance by preventing a surviving spouse from changing the will and cutting out children from previous relationships or even their biological children.

The bottom line is that advisors can do many things to ensure that their client’s desires and the wishes of their biological and step-children are met after they die. The key is open and frank communication between spouses, as well as the assistance of an experienced estate planning attorney.

It’s also important for clients to review their beneficiary designations on their life insurance policies, retirement accounts and other assets to make sure they reflect their current family situation. Failure to do so could result in unforeseen consequences, such as a deceased child’s ex-spouse receiving a substantial portion of their inheritance.