It is no longer unusual to have a spouse, children and grandchildren from a second or third marriage encompass a “blended family.” But these additions to the clan can complicate estate planning. Keeping that in mind, the following techniques may be beneficial for blended families:
- Will: Your will is the centerpiece of your estate plan and should be coordinated with other devices such as trusts. It can be amended through a codicil for minor changes or be completely rewritten to reflect major changes. For example, you might rework a will to include your spouse and your children from a second marriage or even your current spouse’s children from a prior marriage.
- Living trust: Often viewed as a supplement to a will, a living trust enables you to maintain control over disposition of assets. If the trust is revocable, you retain the ability to change the beneficiaries or allocations or otherwise amend it during your lifetime. However, assets in an irrevocable trust are removed from your taxable estate. Because a living trust avoids probate, this can be valuable to someone who wants to avoid public scrutiny.
- Prenuptial agreement: This is no longer the exclusive domain of the rich-and-famous. A “prenup” is often designed to protect assets before entering a second marriage and preserve wealth for the children of your first marriage. It may also be coordinated with other rights and responsibilities (e.g., conditions for a second spouse to act as executor of your estate).
- Power of attorney: A power of attorney is a legal document authorizing the “attorney-in-fact” to act on your behalf. With a durable power of attorney, the power continues if you become incapacitated. The decision as to whom to designate as the attorney-in-fact can be a critical one for blended families.
- Retirement plans and IRAs: It is likely that much of your wealth is socked away in qualified retirement plans, such as a 401(k) and traditional and Roth IRAs. Prior beneficiary designations should be updated due to certain life events like a divorce, marriage or remarriage or birth. These plan and IRA designations supersede any declarations in your will or other documents.
- Life insurance: As with retirement plans and IRAs, you may be encouraged to amend your beneficiary designations. Alternatively, you might revise the percentages of proceeds going to the respective parties. Once again, these beneficiary choices supersede other designations.
- Q-Tip trust: A Qualified Terminable Interest Property (Q-Tip) trust is comparable to a regular marital trust. However, if the surviving spouse is entitled to a portion of your assets upon your death, he or she receives regular income payments, but not any principal. When the surviving spouse dies, the remainder passes to the designated beneficiaries, thus providing estate tax benefits.
These are just several techniques that are often utilized in planning for a blended family. Other options may be available for your situation. With assistance from your JMF professional advisors, create an overall plan that meets your objectives and hopefully provides family harmony.