Estate Planning for Blended Families

I wrote a while ago about the changing composition of the American family, using characters and family relations in the TV network series Modern Family to illustrate how complex a family can be for estate planning. Today I’d like to follow up and talk more in-depth about the estate planning challenges of blended families.

Of course, right off the bat, we get into complications. Are we talking about married blended families or cohabitating blended families? The rules are different for each situation, as you will see.

The Married Blended Family

The archetypal married blended family is that of the Brady Bunch, the 1970s sitcom involving a lovely lady, who was bringing up three very lovely girls, who got re-married to a man named Brady, busy with three sons of his own.

The first step is to determine if there is a prenuptial agreement, because that stipulates what the spouse is entitled to, which will inform what is left to the children.

The second step is to determine family legacy goals for the children. If Mike and Carol’s assets are simply going to be combined together and divided by six, then they must make sure the document specifies that the definition of children includes Carol’s three and Mike’s three kids. That’s something that must be dealt with from a legal perspective.

The third step is the division of assets. Are there great differences in age between the children? In the Brady Bunch, for example, the children were all around the same age, but it’s easy to imagine a blended family with both younger children and adult children. If the distribution doesn’t trigger until the two-year-old turns 25, then the 27-year-old is going to wait until age 50 for the money. A common-pot trust where all the children are combined together might not work in such a circumstance, so it might be better to divide into separate shares so that each child receives their inheritance when it is appropriate for them.

Comingling of assets in a married blended family brings up a whole raft of potential issues. To the extent that Mike and Carol Brady own assets jointly, when one joint tenant dies, the other owns that property, 100 percent, by operation of law. It’s like a game of survival. If the intent is to divide the joint assets by six at the second death, and Mike dies first, there’s nothing stopping Carol from taking those jointly titled assets and moving them to just her three lovely girls or to husband number three.

If the assets are to be divided all equally, then there should be precautions in place in the documentation or a trust established for the benefit of the children that’s funded at the first death to ensure that the surviving spouse doesn’t have a change of heart. Even absent a change of heart, the assets are potentially under threat from creditors of the surviving spouse, Medicaid or nursing home expenses. There are quite a few moving parts that need to be addressed.

There’s a lot of conversation that has to take place on what’s fair. If both spouses have fairly equal assets coming into the marriage, and there is a large age discrepancy, it might make sense to keep the assets separate, in which case you want to have that addressed in a prenuptial because all spouses have a right, a statutory share, against the estate. While it varies by state, you can’t leave your spouse destitute in favor of your children absent a legally binding prenuptial or postnuptial contract. So, there are those factors from that perspective.

Unmarried Blended Families

What if you’re not married? What if you cohabitate, which is becoming more and more common. Maybe one partner is receiving alimony and marriage would negate that. Then you would really need to make sure you have a partnership agreement or some type of asset property agreement that delineates which assets are whose, how the real estate taxes and the mortgage are to be paid, how the expenses will be split, and how the deductions for income tax purposes on the shared will be split. You need to make sure the economics are dealt with fairly, that one isn’t getting all of the deductions while the other is making all the payments.

Most importantly, what happens if you break up, or if one of you dies? What happens to the home you own together and that you are raising your family in? Unmarried couples have to be careful of jointly titled assets because, for joint assets owned by parties that are not spouses, 100 percent is deemed to be included in the deceased’s estate unless the executor or personal representative can prove that the surviving tenant contributed to the asset. It’s much more complicated, from an estate tax perspective, when you co-own assets with someone who is not legally your spouse. And just as with the married family, when you own assets jointly, the survivor wins.

Next Steps

I’ve talked about a lot of the complications that can arise in blended families, but here are my recommendations for action:

First, have an open, honest conversation with your significant other, spouse, or partner, and take the time to review the assets and decide the best course of action. Now, that course of action might change over time, but, for now, can you come up with what you’d like to see in the next two years?

Next, go see a competent estate planning attorney or accountant and figure out the best strategy. Are we exposed to Federal estate taxes? Are we exposed to state estate taxes? Does it make sense for me to put my life insurance in irrevocable trust for the benefit of my spouse, partner and my kids, just my kids, or all the kids? The answers are going to depend on your own preferences and circumstances, but it’s best to make educated decisions.

Then, develop the plan. Decide whether it’s appropriate to have a partnership, property settlement or prenuptial agreement up front. Create your documents, and then communicate what’s in the documents to your older children. You don’t have to give all the numbers, but be open and honest with the family, because it goes much more smoothly if the family’s all on the same page. Many people find it useful to write a letter of intent to their children, explaining why they did something. A letter of intent has no real basis in law, but it’s difficult to argue with something in mom or dad’s handwriting. Such letters are also the way many people dispose of personal property, a cherished family ring, for example. A memorandum of personal property will become part of your Will when you probate, so that is well worth doing. And, with everyone having a smart phone these days, a video recording can work just as well, as long as it’s accessible to people after you are gone.

The key to all of this is, blended or not blended, open and honest communication. Take the time to sit down and decide what is the best way. Every family is unique, and every estate plan should be similarly unique. It shouldn’t be cookie cutter.

This post is for informational purposes only and should not be considered as specific financial, legal or tax advice. Depending on your individual circumstances, the strategies discussed in this presentation may not be appropriate for your situation. The information in this material is not intended as tax or legal advice. Always consult your legal or tax professionals for specific information regarding your individual situation.
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