Blended families, or families in which one or both parents have children from a previous relationship, are more common in today’s world than in the past. Not surprisingly, the combination of conflicting emotions and competing interests between members of these stepfamilies is the primary source of inheritance feuds.
The first step to creating an estate plan for the future includes open, honest communication with your children and spouse to determine what they can expect from you financially. In addition, there are a number of effective strategies that should also be considered to help ease familial tension.
Prenuptial or Postnuptial Agreement
In terms of communication, it’s important for an engaged or married couple to discuss what financial support they can expect from each other, especially when children from previous marriages and relationships are in the picture. This goal can be achieved through prenuptial (before marriage) or postnuptial (after marriage) agreements. These contracts provide a detailed outline of the rights and responsibilities held by each party during their marriage and in the event of divorce, specifying items such as payment of expenses or living arrangements. Although these agreements are not always enforceable, they are typically recognized nationwide and can be used to alleviate marital disputes down the road.1
At the minimum, beneficiary designations on assets, such as retirement accounts, life insurance policies and annuities, should be updated in the event of divorce and remarriage. This means that those assets will go directly to the listed beneficiaries. The biggest value of these direct transfers is that they bypass probate, which is the legal process of distributing property in an estate. Therefore, the assets are not subject to the terms of the deceased person’s will and are not included in his or her estate.
In this situation, the last thing most people would want is to unknowingly have their former spouse listed as the beneficiary of their assets. Conducting a review and adjustment of your beneficiaries after experiencing a life-changing event will ensure that those assets go to the intended heirs.
Revocable Living Trust
A revocable living trust is another vehicle that can help direct who receives your assets. It enables a successor trustee to carry out your wishes in the event of your death or incapacity. If you’re part of a blended family, a revocable trust can be particularly beneficial, because you can make changes to them while you are still alive. Although assets in a revocable trust will be considered part of your estate when you die and are therefore subject to estate taxes, they are not subject to probate and are not a matter of public record.
Like revocable trusts, wills are valuable tools that should be in place if you are part of a stepfamily. Wills are essential, because they specify how your wealth should be distributed after your death. They can also be amended at any time during your life. Added advantages of drafting a will are that it can allow you to name a trusted, third-party executor to make fiduciary decisions in your beneficiary’s best interest and name a guardian for any minor children.
The techniques discussed above are just a few of the most common ways to resolve inheritance issues for blended families. More advanced strategies may include utilizing Qualified Terminable Interest Property (QTIP) Trusts or Irrevocable Life Insurance Trusts (ILITs). Keep in mind that estate planning is a complex area that brings significant legal and tax implications. It’s important to consult an estate planning attorney or tax professional to help you coordinate the process.