Estate planning is always complex but incredibly complicated in blended families. This is mainly due to the number of people involved.
Conversations about asset distribution in a blended family can become emotionally charged. This is why open communication is crucial. Financial planners can help facilitate these conversations by using visual aids like a genogram to illustrate relationships.
Have a Conversation
In blended families, financial professionals recommend frank discussions about estate planning to avoid misunderstandings and conflicts. These conversations can be difficult but are necessary to ensure that the wishes of all parties are respected. Often, these conversations will involve the distribution of assets and how to ensure that children from prior relationships are kept from being disinherited.
Everyone must have an estate plan, regardless of family structure or net worth; that is one of the tips and advice on estate planning for blended families. However, it is particularly crucial for those with blended families because of the additional complexities involved. A common mistake is not updating their plan after a change in circumstances, such as divorce, remarriage, or childbirth. This can result in heirs receiving the wrong assets or going through a lengthy probate process.
Similarly, updating individual documents such as the beneficiaries on an RRSP, insurance policies, and workplace pension is essential. A knowledgeable estate lawyer can assist in ensuring that all assets are distributed according to the client’s wishes while also considering tax considerations.
Update Your Will
Any complete estate plan should include a living will, health care power of attorney, and durable power of attorney. These documents outline your wishes for your medical and financial affairs if you become incapacitated. In blended families, these issues can be even more challenging to navigate.
A common problem occurs when a person dies without updating their will or will contain provisions that conflict with the current family situation. This can lead to assets being left to people the deceased did not want or their children from previous relationships.
Additionally, federal estate tax laws have changed dramatically over the years, and it is essential to review your plans regularly, especially if you drafted them before 2001. The use of trusts is a great tool to help individuals avoid estate tax and pass on assets to their loved ones with a reduced tax burden. However, the trust structure must be carefully considered and customized to the needs of the individual. This is why it is crucial to have open conversations and engage in family planning early and often.
Establish a Trust
Using trusts is an essential tool in blended families. It can be used to ensure that the wishes of both spouses are fulfilled and to avoid disinheriting children from previous relationships.
For example, in some cases, a couple will establish a joint trust, and upon the first spouse’s death, that trust “pours over” into a separate trust, with income for the surviving spouse during their lifetime. Then, assets are distributed to their biological children upon the surviving spouse’s death.
A trust can also protect assets from creditors and other claims that could arise from family members prone to spending or selling assets for their benefit. In addition, a trust can save estate taxes by removing assets from the taxable estate.
Moving assets into a trust is relatively simple but requires re-titling certain assets, such as real estate. A skilled estate planning lawyer can assist in this process.
Consider Prenuptial Agreements
In blended families, assets are often split between spouses and children from previous relationships. This makes it especially important to have open communication and a clear estate planning strategy.
A prenuptial agreement may get a bad rap from TV dramas and Kanye West songs, but it can be a valuable tool for estate planning in blended families. It can protect each spouse’s separate assets from claims of their ex-spouses and ensure that all children are treated equitably when it comes time to distribute their estates.
Other estate planning tools can also be helpful in blended families. For example, trusts can give clients greater control over managing and distributing their assets. For instance, a trust can allow a surviving spouse to receive income from it and leave the rest of the assets to their children or grandchildren. Other beliefs, such as a qualified terminal interest property trust or generation-skipping trust, can help to keep wealth within the family and avoid unintentional disinheritance. A skilled attorney can help to identify the best tools for a client’s situation.
Review Your Assets
In addition to the financial components of an estate plan, it’s essential to consider sentimental items that carry a lot of meaning and can cause conflict. These include jewelry, cars, and other possessions that have a significant emotional impact on the family.
People who enter into blended families often have existing estate plans from previous marriages and need to update them. They also make assumptions, assuming that their new spouse will pass on all their assets to their children from their previous relationships reasonably and equitably when they die. This type of assumption can create significant problems for a family.
For this reason, it is crucial for couples to review their estate planning documents and have open communication with one another about their goals for the future. Your CunninghamLegal advisor can help determine which strategies work best for your family. The more you talk about this with your loved ones and your planner, the more likely your wishes will be met in the future. We can also suggest professional fiduciaries that can be trusted to handle your financial affairs when you are incapacitated or deceased.