Estate Planning for Blended Families

Estate Planning for Blended Families | The Pollock Firm LLC

Estate planning for blended families can be very tricky. Even when there is a simple family dynamic, creating an estate plan can involve intricate planning. After all, beneficiary designations on accounts and joint ownership of assets can all trump a Will. Accordingly, in this post, I will explore some of the specific problems Blended Families can face when creating an estate plan and discuss ways to solve them.

What is a Blended Family?

First, let’s make sure we are on the same page regarding what a blended family is. For purposes of this post, a Blended Family is generally any family in which you have a married couple and at least one spouse has a child from a previous relationship.

Why Do Blended Families Require Special Estate Planning?

In order to understand why Blended Families have special estate planning needs, it is helpful to understand what a typical estate plan looks like. The standard simple estate plan for a traditional couple with children consists of each spouse leaving money to the surviving spouse. On the death of the surviving spouse, everything is left to the children. Each spouse is usually the executor for the other. Occasionally we will set up a trust for a spouse or child for tax planning or asset protection purposes. If a traditional couple does not create a Will, the state’s intestacy scheme will send the money in the same direction – but without any trust planning or tax planning.

Clients in a Blended Family often have competing goals. They want to provide for children from a previous relationship, a spouse, and other loved ones AT THE SAME TIME. There is often no guarantee that the surviving spouse will financially provide for the deceased spouse’s children. Moreover, even having this conversation can be uncomfortable.

Another area that requires thought is who will be in charge of an estate, trust, or your medical power of attorney. When two or more unrelated parties are competing for an inheritance, or to be in charge of your health care decisions, conflicts can arise. 

Sometimes, the couple got married late in life, and the children do not know each other. Other times, both spouses helped to raise all the children and they wish to treat everyone equally. There is no one size fits all solution for Blended Families when it comes to estate planning.

The Survivor Take All Problem – The Biggest Mistake Blended Families Make

The biggest mistake that Blended Families make is failing to adequately consider the “Survivor Take All” problem. The Survivor Take All problem is best described with an example. Let’s say that H and W are married. H has 2 children from his first marriage and W has one child from her first marriage. H has a retirement account worth $1M and a bank account worth $300,000. W and H also have a house titled in both names as husband and wife. The house is worth $1,000,000. W has her own assets. When he dies, H wants everything to go 50% to his wife and 50% to his children. He even has a Will directing that the money go equally between his wife and his children.

The Survivor Take All problem occurs because the house won’t go equally to W and H’s children. It is a joint asset that automatically goes to the surviving spouse. Nothing requires W to leave half of the house to H’s children when she dies. Essentially, H’s children lose out on $500,000 because of poor estate planning.

The Survivor Take All problem can also occur when a couple owns a joint bank account or other joint assets. Moreover, this problem can be exacerbated by an improper beneficiary designation. In the example above, if H named W as the sole beneficiary on his retirement account, his children would not receive any of it.

How an Estate Planning Attorney can Help a Blended Family

The first job of a good Wills and Trusts attorney is to help clients understand your family dynamic and your asset structure. Once we know more about our clients and their assets, we can work backward from your goals to custom-design an estate plan. We try to ensure that a client’s assets will go where they want them to go, in the amounts that they want, and in a tax-efficient manner. Moreover, attorneys need to work closely with the client and financial advisors to revise beneficiary designations on retirement accounts and life insurance policies. We often recommend that clients obtain (or repurpose) life insurance to achieve the desired outcome when preparing an estate plan.

We can discuss common solutions to these complex problems. Here are some ways that a Blended Family can ensure that both a surviving spouse and children from the previous relationship are provided for:

  • You can leave a certain dollar amount to children, with the rest to a spouse (or vice versa)
  • You can leave a percentage of your assets to go to your children and the rest to a surviving spouse.
  • You can leave your assets in trust for a surviving spouse, with the remainder being paid to your children when your spouse passes.
  • We can also create a joint trust to avoid the Survivor Take All problem.
  • If you wish to name your spouse and children as your agent, we can system to break ties so that all your loved ones can be involved, but in a meaningful and productive way

We also work with clients to retitle assets (such as bank accounts and deeds to property) to ensure that the beneficiaries are not accidentally cut out. To understand why titling of assets is so important in Blended Family situations, please read this post: https://willstrustsestates.blogspot.com/2017/01/why-titling-of-assets-is-so-important.html

An experienced estate planning attorney can also provide many helpful suggestions based upon your specific situation. Furthermore, a knowledgeable attorney will also be able to spot red flags that may cause litigation and suggest ways to mitigate a lawsuit.

How Clients in a Blended Family Can Get Their Estate Planning Started

For individuals in a blended family, estate planning is often a sore point.  Because of the competing goals at play, some find it difficult to have a conversation about what they really want or need.

Ignoring the issue not only leads to estate litigation, but a more expensive estate administration process and higher taxes. If you are in a Blended Family, I strongly recommend seeing an experienced estate planning attorney in a jurisdiction near you to flush out all the issues that affect you.  We can often suggest solutions that may not have occurred to you so that you can provide for everyone in your life in a clear way that is designed to minimize conflict.