Estate Planning for Blended Families

What are blended families?  Blended families take several forms:

• Married couples in which one or both spouses have children from a previous marriage.

• Families with children who are in second or subsequent marriages and who have children from previous marriages.

• Families with children whose spouses have children from previous marriages.

Blended families can face complex estate-planning challenges. Issues can arise between spouses or between children and their spouses. Typically, individuals in blended families want to provide for the spouse as well as the children from the previous marriage. In some cases, they also want to provide for the children from their spouse’s previous marriage.

Several trends related to divorce have increased the number of blended families.

• Approximately 50% of American marriages end in divorce.

• Approximately 60% of remarriages end in divorce.

• Approximately 43% of marriages are remarriages for at least one party.

• The average duration of these marriages is 7.8 years.

• There are approximately 1,160,000 new divorces each year.

• Approximately one million children a year have newly divorced/divorcing parents.

• 54% of divorced women remarry in five years.

Estate Planning for a blended family can include these challenges:

• The potential for children to be disinherited.

• Delays in the children’s receipt of inheritance until after the death of their parent’s spouse.

• The need to protect assets from former spouses.

• Disputes over division of authority or responsibility.

Here are some of the estate planning techniques that can be used in various situations

Prenuptial Agreement.  Prior to the marriage, a prenuptial agreement should be signed.  Essentially the prenuptial agreement provides that what each spouse brings to the marriage remains their separate property.  In dealing with elderly clients, it is good practice to include a provision in the prenuptial agreement requiring each spouse to carry long-term care insurance.  Medicaid will ignore a prenuptial agreement, and if one spouse becomes sick, the assets of the other spouse become available to pay the medical expenses of the sick spouse regardless of the intent clearly expressed in the prenuptial agreement.  The Uniform Premarital Agreement Act has been adopted by 26 states.

Spray spend-thrift trust.  These trusts are designed to benefit the surviving spouse and children. When drafting a Spray Spendthrift Trust, the following should be considered:

• Distributions. The trustee may be permitted to make distributions to the surviving spouse and designated children.
• Unitrust distributions. A spouse may be given an annual Unitrust distribution equal to a percentage of the trust. For example, the spouse might receive 4% of the total annual return on assets held in the trust or 4% of the total trust assets as calculated on an annual basis.
• Trustee selection. A disinterested trustee may be appointed to help avoid conflicts of interest and strained family relationships while permitting distributions for “any appropriate purpose.”
• Death of spouse. The trust may stipulate that, upon the death of the surviving spouse, the remainder of the trust will be distributed to the children of the first spouse to die or to children from both marriages.
• No contest. Including a “no contest” provision in the trust minimizes the risk that the trust will be challenged.

Irrevocable Life Insurance Trusts (ILITs). An ILIT lets the client provide for their children with life insurance and use the remaining estate to provide for the spouse. The trustee of the ILIT purchases a life insurance policy on the client’s life and the client pays the premiums. ILITs offer two major advantages. They prevent children from being disinherited because the trust names them as sole beneficiaries of the life insurance policy, and they ensure that children will receive inheritances promptly because the policy will pay the trust immediately upon the client’s death.

There also are some variations on this strategy:

• Purchase a life insurance policy and name the client’s children as beneficiaries. The estate-tax consequences of this technique must be considered.
• Have the client’s children from a previous marriage own the policy while the client pays the premiums, utilizing his Annual Exclusion gifts.

FLPs and LLCs. A Family Limited Partnership (FLP) is an ideal tool for a family that owns real estate. The real estate is transferred to the partnership, which is composed of parents and children. A Limited Liability Company (LLC), comprised of family members, is similar to an FLP. Both arrangements can be used to protect family assets from the claims of spouses and former spouses. FLPs and manager-managed LLCs also can protect family assets from the claims of the children’s spouses or former spouses.

Life Estates. Often, in a second marriage, one spouse moves into the home of the other. The home is not always retitled jointly – nor should it be. The individual who owns the home often wants the spouse to have the right to live there for his or her lifetime. This can be accomplished by giving the surviving spouse a life estate in the home. Individuals who choose this strategy should attach certain conditions to the life estate, such as an obligation on the part of the surviving spouse to pay the home’s taxes, insurance and maintenance expenses. Consideration should be given to requiring an automatic termination of the life estate if the surviving spouse moves out or abandons the property for a certain period of time. Provisions should be made regarding whether the property can be rented or sold and, if so, who is entitled to the rent or proceeds of the sale.

Contract to Make a Will.  In second marriage situations, typically both spouses have children by a previous marriage.  They intend to provide primarily for their surviving spouse, but upon the death of the surviving spouse, each party wants their assets to go to their respective children.  If each spouse makes a will leaving everything to the surviving spouse, the surviving spouse can change his or her will after the death of the first spouse and can eliminate the children of the deceased spouse.  One solution to this problem is a contract to make a will.  The contract would provide that each party make essentially a reciprocal will and that the surviving spouse agrees not to change or revoke the will after the death of the first spouse.  Contracts to make a will are provided for in the Uniform Probate Code.  Eighteen states have adopted statutes based on the UPC.

Mutual Waiver of Elective Share.  In situations in which the parties have not executed a prenuptial agreement, they may nevertheless waive their right of elective share.  Waivers may be joint or separate.  Joint waivers are executed prior to the death of the first spouse.  Separate waivers may be executed prior to or subsequent to the death of the first spouse.  A waiver of an elective share constitutes a transfer for Medicaid eligibility purposes.

Trusts.  In second marriage situations, trusts for the surviving spouse are often a solution.  The trust may provide for income only to the spouse or may be a complete support trust for the spouse, with the remainder to the children of the first marriage.

Qualified Terminable Interest Property Trusts (QTIPs). With a QTIP, the will or trust of the spouse who dies first gives the surviving spouse the right to income from assets held in the trust. This income interest has the effect of deferring the taxes due at the death of the first spouse. It also is possible to draft a QTIP to include the right for the trustee to make distributions of principal exclusively to the surviving spouse. The surviving spouse has no right to direct payments from the QTIP. Upon his or her death, the trust typically distributes assets to the children of the first spouse. In most cases, a QTIP trust is drafted as part of an overall estate plan, either leaving a portion of the assets outright to the children or leaving those assets to a credit shelter trust for the benefit of the surviving spouse and the children from one or both marriages.

Written By Thomas D. Begley, Jr. for Beyond Counsel an Estate Planning Software Company

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