Inheritance issues are common in blended families. The children of previous relationships might expect to inherit all or a large portion of the estate left by their new spouse, but the surviving spouse could have other wishes.
Shared assets, such as life insurance policies, can complicate planning. One common strategy for planning is to designate the surviving spouse from each family and one child as co-executors.
Talk to an Attorney
One of the most important things a family can do is talk to an attorney about their estate plan. This is true of any family, but it’s especially important in blended families.
If a married person dies without a will, state law determines who gets their assets, usually their surviving spouse and descendants. This can result in children from a prior relationship being disinherited, creating resentment and conflict in the family. A well-thought-out estate plan can prevent this from happening. This is what blended families should know about estate planning.
Financial planners must understand that blended family issues are complex and require special consideration. They must be willing to take the time to discuss these issues with their clients and listen to their concerns.
Reviewing your estate planning documents after a life change, such as a divorce or remarriage, is also important. Updated documents could prevent assets from going to the wrong people or resulting in conflict in your family. Your attorney will help you avoid this. In addition, you may want to consider using a professional fiduciary to manage your finances in the event of an incapacity or death. These individuals are licensed, have undergone a background check and can be interviewed, so you feel comfortable trusting them with your financial affairs.
Update Your Will
It’s important to update your will, even if you think everything is the same. It would help if you considered making a will amendment (formally known as a codicil) whenever your family situation changes, or you have acquired new assets. In addition, federal estate laws have changed over the past 12 years, and it’s important to be sure your estate plan reflects those changes.
It is also important to consider how your spouse and children from previous relationships will share your estate. Conforming with everyone involved, including the new spouse, may be helpful to ensure proper documents are in place. A financial planner can help you develop an estate plan that considers all of your loved ones.
For instance, you might want to set up trusts to avoid leaving your spouse nothing after death. You could also include a professional fiduciary in your estate plan, someone responsible for managing and distributing your assets to beneficiaries. This person goes through background checks and can be trusted to follow your wishes after being incapacitated or dying.
Consider a Prenuptial Agreement
Everybody needs an estate planning strategy regardless of family dynamics or net worth. A plan can minimize conflict between family members and help avoid the costs and inconvenience of probate court. This is particularly important for blended family situations.
After someone dies, their assets must be distributed according to their trust or will.
This can cause problems for a blended family if the estate’s assets are not properly titled and allocated. This could lead to disputes and resentment between biological children and stepchildren.
Many blended families create a Marital Trust to avoid this problem. This allows a surviving spouse to enjoy the benefit of the assets during their lifetime while also earmarking any remaining assets for the stepchildren. This can avoid potential disputes between a surviving spouse and their biological or stepchildren in case of death or disability. Financial planners can assist their clients with understanding the steps of the stepfamily cycle and how this might affect estate planning decisions by incorporating tools like the genogram, which is a graphical depiction of relationships within a family system.
Review Your Assets
Many people need to review their assets more regularly. It may help you stay in touch with your financial goals and stay on track to meet them. It also helps prevent surprises for your family after you’re gone.
One of the biggest mistakes you can make is leaving your estate plan undone or not creating one. If you do nothing, state law will determine how to divide your money and property – typically between your surviving spouse and your descendants.
Reviewing your assets is especially important in blended families. Issues can include preserving assets like heirlooms or the family home, naming beneficiaries on financial accounts such as checking and savings accounts or retirement plans, keeping current with insurance policies, addressing special needs such as long-term care or managing debt.
For example, many of our clients have IRAs, often their largest asset after a lifetime of saving and investing. Until recently, inheritors could draw the funds over a lifetime, which could have helped protect their wealth from being depleted by young or irresponsible family members.
Consider a Professional Fiduciary
As a financial advisor, you must help your clients address blended families’ unique estate planning challenges. For instance, if your client has children from previous relationships and doesn’t have an estate plan in place, New York law determines how their assets are disposed of upon death, leaving one-half of the estate to the spouse and the other half to the direct descendants—disinheriting any children from the first marriage.
Depending on the complexity of your client’s situation, you may suggest they hire a professional fiduciary. These licensed professionals can be employed to manage assets on behalf of a client in the event of incapacity or death and undergo rigorous background checks.
When interviewing potential professional fiduciaries, it’s important to ask for references from other clients or family members they’ve worked with in the past who can testify to their competency. Also, schedule an appointment with the professional fiduciary to discuss their approach and how they would handle different scenarios that may arise in your client’s unique situation.