Blended
Family Basics
 Here are two trivia questions for you movie and
television buffs. First, what big name Hollywood stars played on-screen
spouses in the 1968 film Yours, Mine & Ours? The basic
storyline of the movie paired a widow and her eight children with a
widower and his ten children. Second, a year later Sherwood Schwartz
(creator of Gilligan's Island) took the same basic storyline and
rolled out a hit television series that ran for 117 episodes. Can you name
that show? [The answers are at the end of this article.]
One reason commonly given for the popularity of
these two classics is that they gave traditional nuclear families a
lighthearted glimpse into the lives of blended families. Times have
changed. In the new millennium, blended families now outnumber traditional
nuclear families. And the number is likely to grow, based on current
statistics and trends.
The Challenges
But unlike the movies or
30-minute sitcoms, real life is not always so lighthearted for blended
families, whether due to widowhood or divorce. Many face unique social,
psychological and economic challenges. As a result, over 60% of second
marriages end in divorce. Fortunately, there are numerous organizations
and support groups dedicated to helping blended families with these
challenges. Unfortunately, little attention has been paid to the
critical estate planning challenges confronting blended families. These
challenges include disinheriting your ex-spouse, protecting
your own children, providing for your new spouse and minimizing
your estate taxes
Your Ex-Spouse
Without proper legal planning, your ex-spouse (as surviving
parent/guardian) would likely be appointed by the probate court to manage
the inheritance you leave to your children. To make matters worse, what if
your children later predecease your ex-spouse, and are single and
childless at that time? Who would inherit your assets then? That is
right…your ex-spouse, as the next-of-kin of your children.
Your New Spouse
Chances are you made a few
solemn promises to your new spouse on your wedding day. Among them were
promises to be there through thick and thin, personally and financially.
In the absence of a Pre-Marital Agreement to maintain separate
assets, most spouses in blended families tend to blend their wealth. For
example, they title their respective assets in the names of both spouses
and also designate one another as the primary beneficiary of their
respective retirement plans and life insurance policies. Warning: If you
predecease your new spouse, then you may forever disinherit your own
children from your share of such blended wealth! Thereafter, upon the
death of your new spouse, your assets may be inherited by your
stepchildren, or even by your new spouse's next spouse and their
children.
Your Own Children
Regardless of whether
children are reared in a traditional nuclear family or in a blended
family, great care should be given to protect any inheritance both for
them and from them. For starters, wealth representing a lifetime of your
hard work and thrift can be squandered in very short order. Dollars earned
just spend differently than dollars inherited. In addition to good,
old-fashioned squandering, an inheritance can quickly vanish through
divorces, lawsuits and bankruptcies.
Your Estate Taxes
Aside from disinheriting
your own children, blending your wealth with your new spouse may
unnecessarily enrich the IRS. How? The Internal Revenue Code provides an
exemption to each taxpayer for purposes of sheltering a certain dollar
value from estate taxes (with marginal rates reaching nearly 50%).
However, this is a use it or lose it exemption and you lose it when
title to your blended assets vests in your new spouse upon your death. In
addition to disinheriting your own children, this mistake alone can
trigger hundreds of thousands of dollars in unnecessary estate taxes.
Final Thoughts
This has been a very
cursory examination of a very complex subject. Be sure to contact
qualified legal counsel before you pursue any financial or legal strategy
to overcome the blended family challenges described in this article.
First answer: Henry Fonda played Frank Beardsley and Lucille
Ball played Helen North Beardsley.
Second answer: The Brady Bunch, of course!
Keeping
Commitments
Quick. If
your family is a blended family, would you rather disinherit your
new spouse or your own children? Without proper planning it likely will be
one or the other. Either way it is a lose-lose proposition.
Alternatively, what if you could create a plan that actually may increase
your overall estate value, without increasing your estate value for death
tax purposes, and may allow you to equalize the inheritance left to your
new spouse and to your own children?
First Things First
Before continuing, however, you should know that your insurability for
life insurance is the financial planning key to making this win-win
inheritance arrangement work. It is an age-old financial planning maxim
that your health actually buys your life insurance and your wealth
merely pays the premiums. Assuming you are insurable, we now turn to
the legal planning.
Your New Spouse
To provide financial
security for your new spouse and to minimize your estate tax exposure,
arrange for an Estate Tax Exemption Trust (ETE Trust) and a Qualified
Terminable Interest Property Trust (QTIP Trust) to be created under
either your Last Will and Testament or your Revocable Living Trust.
Through this arrangement you may maximize your estate tax savings as you
provide income and even principal to your new spouse for life. Thereafter,
upon the death of your new spouse, the assets of both Trusts may pass to
your own children. Having taken care of your new spouse, we now shift our
focus to providing a concurrent inheritance for your own children.
Your Own Children
First, you create an Irrevocable Life Insurance Trust (ILIT) with your own
children as the beneficiaries. Select the amount of life insurance that
will represent their inheritance upon your death, according to your estate
equalization goals. Note: While you may not serve as a Trustee, you may
select the current and successor Trustees.
Second, you make gifts to the Trustee on behalf
of your beneficiaries in an amount roughly equal to the insurance
premiums. The Trustee then provides written notice of the completed gift
to each ILIT beneficiary, giving each a designated period of time (not
less than 30 days is typical) to request distribution of their respective
share of the gift. After the designated period has lapsed, the Trustee
applies for the appropriate amount of Life Insurance and pays the initial
premium. [Note: This annual gifting ritual continues until your death.]
Third, assuming all of the ILIT steps have been
followed, the death benefit will be estate tax free when paid to the ILIT
for your own children. Properly structured, this inheritance will be
protected both for and from your own children, as well. Later, upon the
death of your new spouse, the assets of the ILIT may be merged with the
assets of the ETE Trust and the QTIP Trust for more economical and
efficient administration for your own children (and even grandchildren).
Conclusion
Some form of estate equalization planning should
be considered by every blended family to avoid disinheriting either the
new spouse or the children of a prior marriage. Insurance premiums and
legal fees are cheap compared to the financial and emotional costs of
blended family fights over an inheritance (or disinheritance).
Copyright © 2005 Integrity Marketing Solutions. All rights
reserved. Some artwork provided under license agreement. This
publication does not constitute legal, accounting or other professional
advice. Although it is intended to be accurate, neither the publisher
nor any other party assumes liability for loss or damage due to reliance
on this material.
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