Estate Planning for Blended Families
What is a Blended Family?
A blended family is when two people that have children from prior marriages marry.
Blended Family Problems
After her father passed away, Mary remained close to her step-mom, Helen, over the years. Helen choose a few years before her death to move closer to her own biological children and left the area. After Helen passed away, Mary discovered her step-mom had changed the terms of her estate plan to leave everything to her own biological children.
Everything that Helen did was legal. Helen’s husband, Mary’s father, signed an estate plan that left Helen in 100% control of the estate. As the survivor, Helen had full control to amend and modify the plan.
Spouses can Separate Assets and Have Individual Trusts
Upon the passing of the first spouse, a Trust can establish a sub-Trust to provide income to the spouse but protect the assets from their children.
Choose the Trustee carefully. The surviving spouse should not be the Trustee. The Trustee will have the power to withdraw all the assets from the sub-Trust.
Consider giving children a gift on the first to pass. That way the surviving spouse can use all the assets remaining if they need them.
Make a Joint Trust Irrevocable
When the first spouse passes, have a clause in the Trust that it becomes irrevocable. In sense, locking the assets in the Trust.
Consider Keeping Assets Separate
Think about keeping your separate assets in a separate account. Name your children as the beneficiaries of those assets and accounts.
Consider Your Attorney-in-Fact
Think about naming your spouse and children as co-attorney-in-fact for your power of attorney.
Double Check Beneficiary Designations
Beneficiary designations occur outside a Will or Trust, but are important pieces of an overall estate plan. Regardless of what your Will or Trust says, beneficiary designations go directly to the beneficiaries. If your Trust is not the beneficiary, then the assets don’t go to the Trust.
For example, if mom’s brokerage account has a beneficiary designation of her children, then her children take all regardless of what her Will or Trust says.
Another issue is when somebody names their spouse as 100%primary beneficiary and their children as the secondary. If they pass while their spouse is living,then their spouse gets 100% of the money and 100% of the control over that money or asset. You can avoid this by naming your spouse and children all as primary beneficiaries and designating percentages.
Also, make sure to double check your beneficiary designations on all your accounts at least every 2 years, preferably every year. If you make a change to your beneficiaries,then check them about 6 months later to make sure everything was entered correctly.
Avoid Problems with a Living Trust
A Trust can avoid step-parents from changing the disposition of your parent’s property.
You give ownership of your property to your Living Trust. You don’t own the property in your own name, but you still have full control and dominion over your property. Your Living Trust owns your property. You own your Living Trust.
Many people are scared because they think they are giving up control and dominion over their property. That just isn’t the case. You make the trust, put property into the trust, and have the benefit of the trust property. You and you alone control the trust, and therefore the property in the trust. You can buy, sell, trade, mortgage, lend, borrow just as before you created your Living Trust.
In short: the fact your Trust owns the property makes no or little difference on the way you live and conduct your affairs.
The big difference happens later, when you pass on. Because of the way a Trust is structured,your successor Trustee steps in and follows the directions you left in the Trust. Because you didn’t own the property in your name, there is no probate to be done. There’s no publicity, and compared to a Probate, little expense, or convenience, or time spent for your loved ones.
Your parent and step-parent can agree now how the assets are to be distributed and when they are to be distributed. Once your parent passes, their part of the Trust becomes irrevocable (can’t be changed).
The Living Trust also helps if you are incapacitated. It helps you avoid the indignity of a Guardianship. A Living Trust names somebody to manage the assets in Trust if you lose the ability to manage your own affairs, perhaps due to dementia.
Not Just for the Wealthy
Trusts aren’t just for the wealthy.
If you have just a $100,000 estate, they financial cost would be $6,000 (in today’s dollars).
Let’s say that is a house that should appreciate at 5% per year. In 10 years, it’s worth about$163,000. The cost of probate is now$9,780. That’s 50% more in just 10 years.
If you created a trust and put the house in it, you spend$2,000 today. Your family saves $7,780 or more later… Not to mention the time and anguish of Probate.
Just imagine the cost of Probate in 20 years. (Its actually about $16,000 for that $100,000 house.)