In this day and age, it is not unusual for a spouse, children and grandchildren from a second or even third marriage to form a so-called blended family. But these additions to the clan can complicate estate planning. Keeping that in mind, the following tools may be useful 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 the 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 the disposition of assets. Typically, the trust is revocable, so you still have the ability to change the beneficiaries or allocations, or otherwise amend it during your lifetime. Because assets contained in a living trust avoid probate, this can be valuable to someone who wants to avoid public scrutiny.
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 stocked away in qualified retirement plans, such as a 401(k) and traditional or Roth IRAs. Prior beneficiary designations should be updated when certain life events occur, such as a divorce, a marriage or remarriage, or a birth. The retirement plan and IRA designations supersede any declarations in your will or other documents.
Life insurance: As with retirement plans and IRAs, you may be inclined to amend your life insurance beneficiary designations. Alternatively, you might revise the percentages of proceeds going to the respective parties. Once again, these beneficiary choices supersede other designations.
QTIP trust: A Qualified Terminable Interest Property (QTIP) 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 the principal. When the surviving spouse dies, the remainder passes to the designated beneficiaries, potentially providing estate-tax benefits.
These are just some ideas to consider in estate planning for a blended family. Other options may be available for your situation. For help creating a plan that is right for your family, contact Scott Swain, CPA, CFA, CFP®, at 440-449-6800 or firstname.lastname@example.org.