By Patricia Annino, Esquire - Special guest author
Blended families have a unique advantage when it comes to estate planning. In a blended family, one or both parents may have experienced a life changing event, such as divorce or the death of a spouse. The experience of having gone through such an event brings a hard dose of reality to everyday life, and makes it easier to have discussions about planning because experience has shown that it is better to be prepared.
There are, however, obstacles when it comes to planning in this type of family. Children in a blended family may be yours, mine and ours. Psychologically, the parents (and ghosts of deceased or divorced parents) are always in the room. Unresolved emotional issues are also often present and they are an undercurrent for any ongoing discussions, sometimes making planning a bit tricky.
One of the most significant lightning rods is the house the family lives in. There are important decisions one must make, such as who will live there, who can sell it, who will pay the continuing expenses, and what happens if one spouse dies and the survivor remarries.
These are often very difficult choices but in my experience, the longer the marriage, the more comfortable family members become with the decisions. The choices are trickier if it is the same house the children of one spouse grew up in. When that happens, the children have a natural claim to the memories in that house and there is a psychology of ownership. A child may feel that the other family members are intruders in his or her space. For this reason, many couples sell their respective homes and buy a new one together that neither family previously lived in, while other couples decide that if one dies, the survivor can only stay for a limited time.
Of all the issues a blended family may face, this is one of the most important for the underlying family dynamic. A lot of care and thought should go into making these decisions.
In the early stages of planning, it is very easy to fall into the trap of focusing on what happens when both spouses die. However, it is very important to back up and first think about what happens when one spouse becomes disabled or dies. If one becomes disabled, who has the legal authority to make medical care decisions? If they lose the ability to handle their financial affairs, pay bills, make deposits, withdrawals, investment decisions, file tax returns, who will have that responsibility? Is it the other spouse or the adult children? A combination? A neutral party? These are very important issues to resolve.
Although we would all prefer to be Scarlett O'Hara and say, "Why worry about this today — tomorrow is another day," we must understand that the time to make these decisions is when there is no crisis.
In many states, there is no automatic preference for a spouse to have legal authority, which can lead to conflict between a spouse and an adult child in the emergency room or the bank.
It is also vital, from a psychological point of view, that the decision is not left in default for others to resolve during a crisis.
When thinking this through, you also need to think about any inherent conflict in the selection. This can happen, for example, if you name one person as your health care agent, responsible for your medical decisions, but you give someone else the authority to access or make the financial decisions. This leads to one person trying to make decisions about medical care and its cost without coordination with the financial side.
Perhaps another thing to consider would be how the spouse, with a fixed inheritance, may make medical care decisions regardless of the financial consequences, whereas children, who will be receiving the bulk of the assets, may want to manage care differently.
Moreover, before addressing how the children will receive assets, one must think about what happens at the death of the first spouse. When the first spouse dies, does the other spouse automatically receive his or her life insurance, retirement plan, or joint account? What does he or she receive in trust and who is the trustee? What are the debts, income sources and assets? What are you free to leave to whomever you want, and what are you restricted on?
Consider the ages of the spouses and the children from each marriage. For instance, if the age gap between the second spouse and the children from the first marriage is not significant, it may not be a good idea to leave the assets in trust for the second spouse's lifetime and then have them pass to the children. If the spouse lives to life expectancy, this could mean the children may be in effect disinherited.
Sometimes, it is better to "conquer and divide" at the death of the first spouse. This means figuring out what the surviving spouse should receive and what the children should receive, and giving it to them instead of keeping the blended family financially entangled.
This is also a case where life insurance can help as it can, if structured properly, provide liquidity tax free to the children of the deceased spouse while leaving other assets intact.
Once those questions are all answered, the conversation can turn to what happens when something happens to both parents.
Who do your assets pass on to, and who do your spouse's assets pass on to? In what proportions? What are the estate taxes and who is paying them? This is also where life insurance may be helpful in allocating and covering any estate tax burden due. Planning for the blended family is complex because it involves both technical and sometimes emotionally charged issues — whether above the surface or not. This is something you should take the time to think through and remember to revise your plans as life evolves.
|Patricia Annino, Esquire, is a nationally recognized authority on estate planning and taxation, with more than 30 years of experience serving the estate planning needs of families, individuals, and owners of closely held and family owned businesses. She has written five books and also writes a monthly column for AICPA's CPA Insider, a newsletter sent to more than 320,000 CPAs. Patricia is a graduate of Smith College (A.B.), Suffolk University School of Law (J.D.) and Boston University School of Law (L.L.M. in Taxation). She is a Fellow of the American College of Trust and Estates Council, and a member of the Board of Directors of Family Firm Institute, the Board of Directors of Business Families Foundation, and the Advisory Board of the Indiana University Women's Philanthropy Institute.|
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