More than half of all marriages end in divorce; of these, 75% will marry again. Of these, 65% of the remarriages will involve children. These facts can present some unique questions in estate planning. Either or both spouses could have been married, gotten divorced, and have children from a previous marriage.
Before we get into talking about all the "what ifs," lets revisit America's first glimpse of what it meant to be a "blended family."
Blended Family TV Trivia
Most of us remember The Brady Bunch as the first TV blended family in 1969. It featured a widow and a widower merging their families after marrying each other. We loved seeing all the family members vie for attention. It was quite the hit. Yet, early Baby Boomers will remember 1957 Danny Thomas Show (AKA Make Room For Daddy Show) as the very first blended family. Danny's first wife left the show, so they had to change the story line to have her die and a new wife with a daughter come into the picture.
New Age of Blended Family Estate Planning
Estate planning in the new age of the blended family is challenging and extremely important. Without a solid estate plan, you have no way of knowing what exactly will happen to your assets unless everything is set out in writing. Without it, a child could be inadvertently disinherited. Or there could be a significant delay in children receiving their inheritance (because the assets were left to the spouse, and the children will not receive them until the spouse passes). If you're not diligent, even a former spouse may lay claim to the estate or there could be disputes over the division of personal property.
The ultimate goal of remarried couples is usually to ensure that, in the event of one of them passing, the other spouse will be taken care of and when the surviving spouse passes, their assets will go to their children. The challenge here is creating an estate plan where the couple's wishes are communicated between themselves and with their family, so everyone has a firm understanding of their intentions.
Designating a Beneficiary
Care should be taken regarding the designation of a beneficiary for investment and retirement accounts. One mistake that is often seen is where account paperwork has not been updated after a divorce and an unintended beneficiary is still on the paperwork. This causes a major problem because a beneficiary designation trumps a will or trust. So, if an ex-wife is still on a life insurance policy, but the remarried couple's will says the new wife should receive the assets, the ex-wife will still receive the life insurance proceeds.
It's also important to be mindful of who is designated as the primary beneficiary and who is designated as a contingent beneficiary. Some people are under the mistaken impression that the funds in an account will be split between the primary and contingent beneficiaries. This isn't the case. A husband, for instance, may name his new spouse as the primary beneficiary and his two children as contingent beneficiaries. When the husband dies, the new wife will receive the entire amount and the children will receive nothing. To correct this, it's best to name all three people as primary beneficiaries, with a percentage of proceeds going to each party.
Many people use a trust to distribute estate assets. It's important to note, however, that the existence of a trust does not preclude the need for a will. The will serves to carry out the wishes of the deceased and will take care of any items that were not specifically put into the trust.
A common scenario seen with trusts is where the newly remarried couple creates a trust and the husband is named as the trustee. When he passes, the wife becomes the trustee. The end result of this is that now the wife and the children have conflicting interests. The wife may make investment decisions, for instance, that produce a more solid monthly income for her to draw upon, minimizing long-term growth of the investment. The children, on the other hand, want an investment that provides for long-term growth, which will provide the wife with little monthly income to live off of. For these reasons, it is advisable to appoint an impartial third party to serve as the trustee and avoid the possible conflict.
A prenuptial agreement is a good idea in many circumstances. Most important, it causes the newly remarried couple to sit down and discuss their financial situation and their respective expectations. Getting their ideas down on paper is an excellent start to establishing a clear understanding and open communication from the get-go.
What To Do Next
Estate planning and asset protection can be deceptively complex. Not only do state and federal laws change, but every family situation is different. Seemingly small choices in how planning is done can have profound tax and family implications, and not having a plan in place can be worst of all.
At Hatley Law Group, we offer clients a No Hassle Estate Planning Strategy Meeting, where they get experienced guidance on how to achieve total asset protection, long-term security, and peace of mind for themselves and loved ones.