Stepfamilies and Estate Planning

Stepfamilies and Estate Planning – Is estate planning in second marriages a potential minefield? This can be a loaded question because it’s already complex enough to blend families.

It can be hard to decide on both an emotional and a legal level. After all, you’ll want to make sure your assets are working in everyone’s favor, and you have to think about the members of two families, not just one.

Three types of property to consider

If you want to ensure that everyone in your life is taken care of in accordance with your wishes, you must consider three types of property: community property, separate property and commingled assets.

Community property

This type of property refers to any personal property or debt that was acquired during the marriage.

Separate property

This is property that was acquired prior to the marriage. It also includes property that was received via an inheritance or as a gift, no matter if it was awarded after the official date of separation or during the marriage. Essentially, when the property was received does not matter.

Commingled assets

These refer to matters that you share with people in your family. For instance, some people share or combine their personal funds with their spouse’s or other blended family members’ funds. While every family is different, this can be a cause for concern, so keep that in mind.

Problems and solutions

When you remarry, remind yourself to update your estate plan as soon as possible. One difficult task is deciding who will act as a guardian. You may wish to set up a trust to guarantee each child gets an inheritance, preventing future unfair treatment or arguments. And what about stepchildren?

There are certain areas of contention that you should keep in mind. You’ll need to think about stepchildren, life insurance, specific assets, a gift off the top, retirement funds and individual retirement accounts. Let’s take a closer look at solutions for each of these potential issues.

Stepchildren

You can declare your stepchildren the executors of your will. Consider leaving them each a set sum of money. You can also state that each of them will receive a percentage of your estate’s value after you die. Essentially, you can name them as beneficiaries of a trust.

Life insurance

To ensure your older children receive your life insurance benefits when you die, you can designate them as the beneficiaries. Simultaneously, you can leave other assets, such as those in your trust, to someone else, such as your ex-spouse or current spouse.

Specific assets

If you inherited land individually, you have the option to structure your estate in a way that allows your present spouse to receive income from the land during their lifetime. After they die, the land can be transferred to your children from your first marriage.

A gift off the top

To provide your older children with immediate cash upon your death, consider adding a pay-on-death designation to specific bank accounts held separately from your living trust. This allows the funds to be distributed directly to your children, bypassing jointly owned assets with your current spouse.

Retirement funds

By federal law, spouses are the automatic beneficiaries of 401(k) accounts. To ensure your older children receive other assets, such as a house, immediately, you can allow your current spouse to inherit your 401(k) while designating the kids as beneficiaries for alternative assets.

IRAs

Under the Secure Act of 2020, beneficiaries are required to withdraw the full balance from an IRA within a 10-year period following your death. Alternatively, they have the option to withdraw the entire amount in a single year if they choose to do so. This can potentially result in a substantial tax liability for your children, which will likely push them into a higher tax bracket.

An alternative scenario

Consider establishing an IRA legacy trust. This can ensure that your minor-aged beneficiaries do not withdraw their entire IRA inheritance prior to their 26th birthday. Another example of a situation in which an IRA legacy trust can help is if you have grandchildren with special needs.

If you don’t want your special needs grandchildren to receive so much money from an inheritance that they may no longer be eligible for public aid, this option can help; the IRA will continue to accrue more interest. Alternatively, you can leave a predetermined percentage of your IRA to your spouse and make a stipulation stating that the money will be allocated to your children when your spouse dies.

Choosing your trustee

Trustees play a crucial role that extends beyond managing your affairs after your death. They also assume responsibility in the event you are incapacitated.

Depending on the scope of your power of attorney, the trustee is entrusted with making decisions regarding not just your finances but also your health care and overall well-being. While a spouse often assumes the role of trustee, in blended families, opting for a professional fiduciary can be an excellent approach to prevent conflicts and ensure smooth decision-making processes.

Long-term care insurance

If what you have invested isn’t used, it will be returned to you with interest attached. In a blended family, this is beneficial, as those funds can prevent conflicts.

An attorney can help you meet your goals and assist you as you strive to leave the legacy that’s right for your family. Call a lawyer to structure your trust in a way that specific assets go to the family members of your choosing.

And if need be, you can express your intentions by writing a letter to each family member that they will read once you’re gone. Alternatively, if you feel comfortable, consider speaking with each member of your family and explaining your intentions in person before you die.

Copyright, 2023

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William Hayes

As an attorney in private practice in Los Angeles County, California William Hayes provides extensive estate and tax planning services to individuals and businesses in Los Angeles, Pasadena, Glendale, Burbank and surrounding communities. Attorney Hayes’ primary focus is to help clients avoid probate, protect their assets, and provide for the security of their loved ones with a well-crafted estate plan. He believes in giving each client the time needed to explain his or her needs and wishes and then dedicates his efforts toward making the client’s desires clear in their final estate plan.

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