Five questions to ask yourself when transferring wealth in families with multiple spouses, stepchildren and more:
A blended family is defined as “a family that includes children of a previous marriage of one spouse or both.” If only creating an estate plan to benefit such a family were so simple.
Back when couples married for life and had a brood of kids, estate planning usually took far less effort. But with the rise of divorce rates over the past 60 years, the American family has become more complicated, with multiple marriages creating stepchildren along with biological and adopted ones.
That means matriarchs and patriarchs often have to wrestle with thorny estate-planning issues, like how to balance the needs of second or third spouses with the needs of children from previous marriages.
“All families have feelings, concerns and issues, but it is natural for blended families to have additional – and sometimes unique – planning needs and layers,” says Wendy Martin, a senior trust officer and financial paraplanner qualified professional with First Horizon Bank. Martin encourages clients to ask themselves five key questions when developing an estate plan:
1. When are you going to start the conversation?
Many families have a habit of putting off dealing with estate-planning concerns. Even an event like COVID-19 didn’t induce many people to take this process as seriously as one might expect, Martin says. “We often struggle to get clients to see the urgency in such plans.” But estate planning is an endeavor best addressed as soon as possible.
2. Who do you plan to rely on for estate planning and healthcare decision-making?
It’s always important to pick the right people to act as executors and trustees in the event of a patriarch or matriarch’s death. The same applies to the person or persons given medical power of attorney to make healthcare decisions. In a blended family, this can come with added challenges. For example, a surviving second spouse might be the natural person to turn to, but they may also want to maximize the interests of their own children from a prior marriage, potentially to the detriment of the patriarch or matriarch’s heirs. Furthermore, even the most well-intentioned surviving spouse might have a difficult time fighting the perception that he or she is the evil stepparent. In such a situation, it might be advisable to turn to a bank trust department or other third party to make estate-related decisions.
“Particularly in blended families, it is important to understand how assets transfer at the death of the first spouse. That transfer has a significant impact on the next generation of heirs, and it is where trusts can offer both security for a surviving spouse and a legacy for their children, blended or otherwise.”
– Wendy Martin, Senior Trust Officer and Financial Paraplanner Qualified Professional, First Horizon Bank
3. How do you plan to leave money and other assets to heirs?
Great care must be given in the estate-planning process to answering this question. All too often, assumptions are made about how assets will transfer to heirs. Some may rely on promises or account titling, others on their will or beneficiary designations – but in general, reviewing an overall wealth transfer plan is very important for certainty in how assets will be distributed. “Particularly in blended families, it is important to understand how assets transfer at the death of the first spouse,” Martin says. “That transfer has a significant impact on the next generation of heirs, and it is where trusts can offer both security for a surviving spouse and a legacy for their children, blended or otherwise.” The use of trusts can be extremely useful in the case of leaving assets to blended families so that children from prior marriages are taken care of. For example, a marital trust might allow a surviving spouse to live off of the interest and dividend payments generated by an investment account, with the rest going to the children upon the spouse’s death. Or some money can be left outright to children from previous marriages.
There’s also the issue of how much should be left to stepchildren – and there are no hard and fast rules to guide a family here. Matthew Erskine, a fourth-generation estate attorney based in Worcester, Massachusetts, says families should be guided by a simple admonition: “Do no harm.” Stepchildren should be treated with respect and generosity if they have a positive and loving relationship with the giver.
Though an estate plan needs only to honor the wishes of the person leaving the assets, Erskine sees lasting benefits in plans that embrace goals held by the entire family, including the beneficiaries. One classic goal, he says, is to provide for a surviving spouse while making sure the kids are taken care of.
4. Who is going to prepare the estate plan?
People with simple family structures and limited financial resources may want to prepare their will and trust documents with the help of online services. But wealthy families are wise to seek the counsel of a respected estate attorney and financial institution with estate-planning experience. “A professional estate planner can guide the discussion,” Martin says.
5. When should you review and update an estate plan?
According to Martin, you should review and even update a will every three to five years, or sooner if life events such as a marriage, divorce or birth occur.
Ultimately, when preparing an estate plan for a blended family, there is no one-size-fits-all approach to simplify the process. Martin notes, “Often clients ask, ‘What do other people do?’ I tell them it doesn’t matter. The key question is ‘What do you want to do?’”
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