Estate planning for blended families comes with its share of complications.
Most of us have been foolish in the name of love at some point in our lives. And that can be especially true when it comes to money. Each year, 2.1 million couples get married in the U.S., reports the CDC. And two-fifths of those are second or subsequent marriages, according to the Pew Research Center.
But how many of those new brides and grooms are thinking about their estate plans?
Not many.
And that’s unfortunate, because merging household finances — especially when there are children from prior relationships involved — can be tricky. It requires thoughtful planning about how to handle inheritances for both biological children and stepchildren.
Here are five tips to help you avoid common mistakes with your estate plan after you discover new love.
When money, ex-spouses, and children’s needs come together, tensions can run high. That can get uncomfortable, and it’s hard to blame people for wanting to avoid the tough conversation.
Unfortunately, ignoring the issue does not make it go away. So, it is best to begin by talking at a high level. Make sure that each side has full knowledge of all financial obligations to an ex-spouse or children from a previous marriage. Then, you can dig into the details and talk about your desires for taking care of your biological kids and stepchildren.
As with other high-stakes financial conversations, consider starting the discussion in private first. At some point in the process, you may choose to bring in a financial advisor to help facilitate, clarify, and provide technical guidance as the conversation evolves. You may also find that having a professional in the room helps keep the discussion productive and constructive.
One commonly overlooked aspect of blending new families is updating beneficiary designations. Does your 401(k) or IRA beneficiary designation list your previous spouse? How about your life insurance policy?
Many people don’t realize that beneficiary designations can override your will. The person who is the named beneficiary on your retirement accounts and life insurance policies can get the money — regardless of what your will says. So, make sure that all important accounts and estate documents list the intended beneficiaries. It is also a good idea to check beneficiary designations any time you’ve gone through a major life event.
In some situations, leaving the bulk of your estate to your spouse makes sense. But for blended families in which one or more spouses have children from previous marriages, that simple approach may not work.
For example, consider that a will that leaves everything to your spouse could have unintended consequences for your biological children. If you were to pass first, your spouse could decide to cut your kids out — and leave your money to his or her own children, a new spouse, or anyone else for that matter.
Even if your new family blends seamlessly, you may still want to capture your wishes for your biological children to receive an appropriate inheritance. With the right assistance, you can design an estate plan that puts those wishes in writing.
Nine U.S. states have community property laws that can directly affect marital assets. Community property refers to the idea that your assets are also your spouse’s assets. Those can include your savings, investment accounts, and other personal property.
Some laws may overlook individual earnings, treating each spouse as if they made equal financial contributions to the marriage. Therefore, your assets could be divided equally in the event of a divorce or death.
The nine community property states are: Arizona, California, Idaho, Nevada, New Mexico, Texas, Louisiana, Wisconsin, and Washington. Alaska has an “opt in” community property law if both parties agree. Registered domestic partners are also subject to community property laws in California, Nevada, and Washington.
Applying state laws to pre- and post-marriage property can get tricky, especially for blended families. Be sure you work with an attorney to understand how the laws might affect your estate plan.
A trust can allow you to set aside assets for specific beneficiaries. In many blended families, establishing a trust could be a viable solution that helps ensure assets are allocated in accordance with your wishes. A trust could balance your desire for financial wellbeing of your surviving spouse — and also give your children a portion of your estate.
For instance, someone could decide to leave his assets to his current spouse for the remainder of her life. Then, when she passes, the balance would get passed on to his biological children.
Planning can be challenging enough for singles and couples in their first marriages. Estate planning for blended families is even more complex. If you want to understand your options, work with a financial advisor and an attorney who can help guide your decision.
Disclosures
The information described herein is distributed for informational and educational purposes only and should not be construed as legal advice. WealthSource Partners, LLC is not a law firm and does not provide legal advice. The information described herein is derived from sources believed to be accurate, but is general in nature, is not complete, and may not apply to your specific situation. You should consult with your legal advisors to determine how the information contained in this communication may apply to your own situation. Any opinions stated herein are current only as of the date of original publication and are subject to change without notice. Neither WealthSource Partners, LLC nor its affiliates have any obligation to provide revised opinions in the event of changed circumstances. WealthSource makes no warranties and is not responsible for your use of the information described herein or for any error, cost, loss, or penalty resulting from your use.
