Merging two families into one presents unique legal and financial challenges that can cause significant conflict and distress unless effective estate planning has been put into place early on. Here are a few of the most common issues that blended families should keep in mind when it comes to estate planning.
Keeping assets separate
If you get remarried and have children from your previous marriage(s), you need to think about how you want to balance providing for your new spouse and ensuring the children from your previous marriage are taken care of in the event you become incapacitated or when you die.
If you intend to keep your assets separate, so each spouse can pass an inheritance to his or her own children, you’ll need to create and maintain separate accounts. One account contains the assets you want to pass on to your children, and the other can be either a separate or joint account that contains the assets you want to share with your spouse.
If you and your spouse commingle your income and assets, then the new spouse will have claim and control of those assets when you die, which can leave your kids with nothing. Moreover, joint accounts can be subject to claims from a former spouse and/or creditors, so unless you want your new spouse to share that risk, keep at least some assets separate.
And, if you’re keeping assets separate, be sure to talk with us about how to do that properly, as it can get tricky, particularly when you start sharing some assets and buying new assets together.
If you have children for whom you want to leave an inheritance, you should think about how and when you want those assets passed on. For example, what if you die prematurely or your spouse is significantly younger than you? Do you want your kids to wait until the new spouse dies to claim their inheritance, or do you want them to receive it immediately following your death?
Establishing a trust can protect assets for each spouse’s children and stipulate when the kids receive their inheritance. You may want to provide your children with some of their inheritance, such as proceeds from a life insurance policy, upon your death and then release the rest at some point in the future. Or if your kids are very young, you may decide to leave that decision up to your spouse or a third-party successor trustee.
A common scenario for blended families is for one spouse to set up a living trust that names themselves as the trustee during his or her lifetime, with the surviving spouse named as successor trustee once they die. This is done to ensure the surviving spouse will be provided for for life and the children will receive the remaining assets once the new spouse passes.
But the new spouse and your children may have conflicting interests, especially if the spouse is older. For example, the new spouse may choose to invest the assets conservatively, ensuring he or she has enough money to live comfortably for a few more decades. However, the children—particularly if they are younger—might be better off having the assets placed into higher-risk investments, which can offer better returns in the long run, but leave less income for the surviving spouse.
In this case, it’s best to name a neutral third-party as successor trustee, so both the children and surviving spouse’s interests can be balanced fairly.
Beyond finances, the issues of power of attorney and health-care directives must also be discussed. If one spouse becomes incapacitated, you must decide who you would want to make legal and medical decisions for you. If the children are young, it’s probably best to leave those decisions up to your surviving spouse. However, if your children are older, you may want them included in the discussion of how your health-care decisions will be made.
Comprehensive and effective estate planning is especially important for blended families. Indeed, it’s crucial that these families work with a professional who is trained in counseling blended families on how to properly protect their assets in a manner that’s best for both the spouses and any children involved.
One of the main goals of our law practice is to help families like yours plan for the safe, successful transfer of wealth to the next generation. Call our office today to schedule a time for us to sit down and talk about your estate plan, where we can identify the best strategies for you and your family to ensure your legacy of love and financial security. Our office is located in Santa Ana, CA but we serve all of California including Irvine, Orange, Tustin, Newport Beach, and Anaheim.