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Remarriage is on the rise, particularly among older adults. Approximately 20% of adults in the United States have been married two or more times.
As important as estate planning is for non-blended families, it is imperative for blended families to engage in careful estate planning. Failing to do so can result in detrimental unintended consequences and problems. Smart, thoughtful planning can help avoid such problems by balancing and reconciling potential competing interests.
Let’s start a hypothetical case study so we can begin to explore some important estate planning issues facing blended families. Jay, 65, has children, Jeff and Judy, who are 40 and 35. Years ago, Jay divorced Jeff and Judy’s mother. Jay remarries another divorcee, Bea, 55. Bea has a 20 year old child, Betty.
Jay brought into the marriage a house worth $800K (with no mortgage) and cash, securities and retirement plan funds totaling $200K. He and Bea live in his house. Bea brought into the marriage cash, securities and retirement plan funds totaling $400K.
First, an estate plan cannot be done properly in a vacuum, so Jay and Bea need to answer many important questions before I can help them create an appropriate estate plan, such as those concerning: any premarital agreement they may have, their health, children, income, retirement plans, how long they plan to keep Jay’s house, and how they handle their finances.
Even after knowing the answers to the above questions, many types of plans and choices will be available. One choice would involve Jay and Bea keeping their assets separate and establishing a separate estate plan for each of them (a Living Trust, Will, Power of Attorney and Advance Healthcare Directive). They would each make their own decisions about to whom, how and when their assets will be distributed on their respective deaths. Each of Jay’s and Bea’s Living Trusts may include distributions to his or her children, spouse or a combination thereof; and these distributions might be outright and/or to be held in trust for some period of time.
Another common, efficient alternative is for Jay and Bea to establish a joint Living Trust for all of their collective assets, which trust splits into two pots (“sub-trusts”) on the first death. By the way, contrary to a common misconception, a joint trust can contain both separate and community property assets. On the first death, the assets owned by the deceased spouse go into one sub-trust and the assets owned by the surviving spouse go into another sub-trust.
Once the assets are segregated in these two sub-trusts following the first death, sensitive decisions need to be made by Jay and Bea, related to the assets of the deceased spouse, including: a) what access, if any, will the surviving spouse have to the assets in the deceased spouse’s sub-trust?; b) what assets, if any, that had been owned by the deceased spouse will go directly to his or her children (instead of going into the deceased spouse’s sub-trust to be available for the surviving spouse’s needs)?; and c) who will serve as trustee (“manager”) of the deceased spouse’s sub-trust during the surviving spouse’s lifetime?
Unfortunately, the answers to these questions often lead to a Living Trust that is not optimal; and instead leads to unnecessary conflicts. Most plans allow the surviving spouse access to the deceased spouse’s sub-trust for the survivor’s needs and then, when the surviving spouse dies, the children of the deceased spouse receive the balance, if any. Furthermore, the surviving spouse typically serves as the trustee of the deceased spouse’s sub-trust.
This scenario is not necessarily right or wrong; however, serious consideration should be given to the dynamics created by such structure. During the lifetime of the surviving spouse, his or her interest (e.g. in withdrawing funds from the deceased spouse’s sub trust) is in direct conflict with the interests of the deceased spouse’s children – since the potential inheritance by the children will largely depend on how much their step-parent withdrew. Further, if the surviving spouse serves as trustee of the deceased spouse’s sub-trust, he or she is “the fox guarding the hen house” who not only exercises discretion as to withdrawals but may also invest the trust funds differently than his or her step-children would.
Sadly, a frequent consequence of poor planning is damage or destruction of the relationship, and sometimes litigation, between step-parent and step-children. Next month, my article will explore some strategies that may help Jay and Bea balance and reconcile some of these potential conflicts.
This article is intended to provide information of a general nature, and should not be relied upon as legal, tax, financial and/or business advice. Readers should obtain and rely upon specific advice only from their own qualified professional advisors. This communication is not intended or written to be used, for the purpose of: i) avoiding penalties under the Internal Revenue Code; or ii) promoting, marketing, or recommending to another party any matters addressed herein.
Mr. Silverman is an attorney with R. Silverman Law Group, 1855 Olympic Blvd., Suite 125, Walnut Creek, CA 94596; (925) 705-4474; rsilverman@rsilvermanlaw.com.
ESTATE & TRUST ADMINISTRATION: Need to find an experienced estate & trust administrator in Walnut Creek CA? Contact Robert Silverman at 925-705-4474 for legal advice on a Revocable Living Trust, “Summary” Estate Administration, Trust/Estate Beneficiary Representation and Will & Trust Disputes.