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Blended Family Estate Planning
In 1960, nearly three-quarters of children lived with two parents who were in their first marriage. The children in the household were all full siblings. Now, only 46 percent of children live as full siblings with both first-marriage parents.
Blended Family Reality
“Blended families” are now the norm and not the exception. Whether formed after the death of a spouse or following a divorce, blended families themselves are not limited to any particular age demographic. With increased life expectancies, many more seniors tie the knot even into their 90s. While the divorce rate in America is declining slightly, so-called “gray” divorce is on the rise for those age 50 and older.
Unique Estate Planning Challenges
Just as the American family has changed over the last 60 years, so has the need for careful attention to estate planning. For the traditional nuclear family, inheritance planning can be straightforward. Typically, after one spouse dies, all assets pass to the surviving spouse. Thereafter, when the surviving spouse dies, everything passes to the children. However, what if that surviving parent remarries? That is when things can get interesting.
For starters, before that widowed parent in this illustration remarries, a valid and binding prenuptial agreement should be signed by both future spouses. In the absence of a prenuptial agreement, the new spouses have rights under state law to one another’s assets, if the marriage does not work out. In addition, if the marriage does last and one spouse predeceases the other, then the surviving spouse has rights under state law to the assets of the deceased spouse. Note: even with a prenuptial agreement, the assets of both spouses are considered for purposes of Medicaid qualification should one spouse need long-term care.
Title and Beneficiary Designation Traps
It is not uncommon in a blended family for children to be unintentionally disinherited, when their parent is the first spouse to die. How does that happen? It is due to a failure to understand and appreciate the deadly traps set by how assets are titled and how beneficiary designations work. Here is how it works: even if the first deceased spouse has a last will that leaves everything to his own children, everything owned jointly with the surviving spouse with “rights of survivorship” (or as “tenants by the entirety” in some states) will pass automatically to the surviving spouse. By “operation of law” title can “trump” a last will. This also applies to any asset that is designated to pass at death to the surviving spouse. For example, if a surviving spouse did not formally “waive” her interest in his 401(k)retirement plan after the marriage was official, then she inherits the retirement plan. This is the case, even if his children are the designated beneficiaries.
If you want to provide for your new spouse and your own children, then it takes open communication and careful estate planning. For example, assuming that you enter into a valid and binding prenuptial agreement, you may set aside certain assets in trust to provide for your new spouse, with the balance of the assets passing to your own children. Later, following the death of your new spouse, those assets set aside in trust can pass to your own children. In the end, you want to create clear-eyed legal plans, so you can enjoy your new marriage and avoid unintended consequences.
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