Blended families have outpaced the traditional nuclear family in the U.S. In fact, less than half of the children in the U.S. are living in a family with two married parents in their first marriage.
Whereas we maybe used to only see it reflected on a shows like the Brady Bunch — where a single father and his three boys cleanly become a united family with a single mother and her three girls — it has grown to become more commonplace as the media reflects the culture shift, bringing on shows like Modern Family and Fuller House.
Combining family financials can be complicated
Blended families face unique challenges when it comes to estate planning. It’s important to plan your estate in a way that allows you to choose who inherits your assets in a way that every family member feels valued. It’s because of this that blending two families together can be more complex and require advanced planning, with clearly defined goals and open communication with all family members. You may need to protect assets from former family members, spouses or partners, or want to ensure your estate plan aligns with your current relationships in life.
Other challenges that could arise include the potential for family members to become disinherited, the potential for wills or beneficiary designations not being updated or delays in inheritance for siblings until their parent’s spouse has passed away.
Some of the most common ways to resolve inheritance questions for blended families are:
- Pre- and postnuptial agreements
- Reviewing your beneficiary destinations
- Considering revocable living trusts
- Ensuring you have a sufficient will in place.
Read our in-depth article for more details on these.
Beyond these methods, there are a number of additional advanced planning strategies that blended families should consider in order to minimize opportunities for conflict and stress.
Qualified Terminable Interest Property (QTIP)
A QTIP is a type of irrevocable trust that is useful if you are in a second or later marriage and want to ensure that your assets end up with your children from an earlier marriage after your late spouse’s death.
With a QTIP, income is paid to the surviving spouse to ensure they are taken care of for the rest of their life. Once they pass away, the balance of the funds held in the QTIP are then paid out to the beneficiaries specified by the grantor of the trust.
An advantage of a QTIP is the ability for the grantor to “control from the grave” by having final say over the remainder beneficiaries of the trust. The surviving spouse cannot add more beneficiaries or make any changes to the estate.
For example, if a husband wanted to provide income for his second wife when he passed away, yet still have all his assets ultimately pass to his sons from his first marriage at her death, he could accomplish this by establishing a QTIP trust. He can set it up to provide income to his second wife for the rest of her life after his death, and he can to elect the final beneficiaries for the trust (his sons). The wife would not have the ability to make changes or add her own children from a previous marriage as beneficiaries.
Irrevocable Life Insurance Trust (ILIT)
Additionally, an ILIT could be a good solution if the wife from the above example was concerned that after her death the husband would leave everything to his boys and disinherit her children — assuming she was planning to leave her entire estate to him.
An ILIT is a type of irrevocable trust that’s specifically set up to have the trust own a life insurance policy on your life. After your death, the proceeds from the life insurance policy can be designated as an inheritance for your children, giving you the option to leave your remaining estate to your spouse or partner.
ILIT’s are beneficial because they ensure children or other family members will receive an inheritance. The policy proceeds will be placed in the trust soon after your death and will not go through the probate process. Since you elect the beneficiaries of the life insurance policy, ILIT’s also prevent family members from being disinherited.
(If you’re interested in learning more about how much life insurance you need, read our article.)
Life estates
It’s common in a re-marriage for an individual to move into their new spouse’s home. However, the home may never be re-titled to be owned jointly; or maybe the new spouse wants to keep their house in their name only.
A life estate gives the surviving spouse, or “life tenant,” the exclusive right to live in a home during their lifetime and expires automatically upon their death. At their death, the interest in the home goes straight to the remainder beneficiaries. The life tenant remains responsible for taxes, insurance and all other costs associated with the property until their death, at which time the remainder beneficiaries become responsible.
So, if one spouse owned a home and wanted to ensure that their new spouse could continue living in the home after their death, they could establish a life estate for this spouse. If both spouses die, the property-owning spouse could decide to leave the home to all of their children or to only some.
Get professional advice
Estate planning is complex, and, in addition to the emotional impact, it can result in significant legal and tax implications.
It’s important to work with an estate planning attorney or tax professional to help guide you through the process. Contact Wipfli Financial Advisors to discuss your financial situation, or read more articles on financial planning issues facing families.
