Estate Planning for Blended Families: Key Tips and Strategies

Estate planning for blended families comes with its share of complications. One of the more challenging aspects, in addition to the new family dynamics, has to do with 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 as they prepare to tie the knot? Not enough!

Merging household finances — especially when there are children from prior relationships involved — can be tricky. It requires thoughtful planning to create an estate plan that works best for each member of the married couple, as well as children from either or both sides.

Here are a few tips to help you avoid common mistakes with your estate plan after you discover love for the next time around. These points are best thought about, discussed and decided upon BEFORE the marriage if possible.

Have the Tough Conversation

When money, a new couple, ex-spouses, and children’s needs come together, tension may run high. That can get uncomfortable, and it’s hard to blame people for wanting to avoid the tough conversation.

As we all know, ignoring the conversation does not make it go away. So, it’s 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, dig into the details and talk about your desires for taking care of yourself, any 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 or attorney to help facilitate, clarify, and provide technical guidance as the conversation evolves. You may find that having a professional in the room helps keep the discussion focused and on track.

A Much-Needed Review

One commonly overlooked aspect of blending new families is updating your existing estate planning documents. Your existing will or trust stays in effect until a new one is drawn to replace the original. What about beneficiary designations? Does your 401(k) or IRA beneficiary designation list your former spouse? How about life insurance policies? Are there existing accounts held jointly with an ex?

Many people don’t realize that beneficiary designations or jointly held assets can override your will. The person who is the named beneficiary on your retirement accounts and life insurance policies receive the proceeds — regardless of what your will says. So, make sure that all accounts and estate documents list the intended beneficiaries. In some cases, the beneficiary will need to be a trust, which requires special care and guidance from an advisor.

Reconsider Your Simple Will

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 doesn’t work well.

For example, consider a will that leaves everything to your spouse. That could have unintended consequences for your biological children. If you were to pass away first, your surviving spouse could unintentionally (or intentionally) 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 would 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 locks those wishes in place. That typically requires a trust of some type.

The Laws of Your State Matter

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 states 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.

The Most Common Plan

The most common request advisors see with blended families starts with the desire for the financial wellbeing of the surviving spouse — with the secondary desire to preserve a portion of the estate for the children. Trusts are the only way this can be accomplished. A trust is created that is intended to spring into action following the death of the first spouse. At that first death, assets are placed and held in trust and an income generated to take care of the needs of the surviving spouse for the remainder of their life. At the second death, the remaining assets are split as previously arranged for the children. This approach helps ensure assets are allocated in accordance with your wishes.

Planning can be challenging enough for singles 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 you create a plan that suits your needs.

Interested in learning more about how to make sure you’re financial picture is set up in your best interest? Check out this recent article about The Art of Tax Planning: Optimizing Your Investments for Lower Taxes.
 
Connect with OneDigital’s Wealth Management team to learn more.

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