Keeping the Peace: Estate Planning in the Blended Family
The death of a spouse in a second or later marriage can result in great trauma and unintended consequences from his or her inadequately designed estate plan. The article "The Right Steps" from the April 12, 2009 issue of The Wall Street Journal, written by Michaela Cavallaro, describes techniques that should help lessen the damage, both financial and emotional. These techniques all have their advantages, but even the best approach, through the use of some of the estate planning vehicles, will likely not accomplish what the spouses in a blended family intend without their undertaking of the often difficult task of informing the children of that approach and why it was settled upon.
The spouses should carefully consider what they each want to happen and take steps to see that their goals have a reasonable chance of being met. We have helped our clients (but sometimes just the spouse whom we have represented prior to remarriage) decide what they would like to happen and how it may be achieved. This may start with a prenuptial agreement, or, if after the marriage, a postnuptial agreement. Often, life insurance might be available to ensure that the children from the prior marriage benefit.
The tax law, recognizing the increasing frequency of remarriage, whether due to death or because of divorce, has for some years allowed the deceased spouse to keep the surviving spouse's inheritance in trust, controlling what happens on the survivor's death while still avoiding any death tax on the decedent's death. This type of trust, a "QTIP" trust, is discussed in the article. One important point emphasized is the need to seriously consider who is to be the trustee of such a trust.
As is pointed out in the article, keeping beneficiary designations updated is essential but often neglected. Proper planning and actions can eliminate any surprises that thwart a deceased insured's or retirement plan participant's wishes (in addition, of course, to those of the intended recipients).
We believe it is critically important for the couple to take steps to have all children understand what and how they are being provided for, as well as why the choices have been made. Although this can be a difficult task for most parents, failing to accomplish it almost insures a more troublesome result than dealing with it while both spouses are living. We covered a related subject, involving the same emotionally charged procedure, in our September 18, 2008 update accompanying an article dealing with the avoidance of disputes among brothers and sisters.
In summary, proper planning has the dual advantage of (a) treating family members conscientiously rather than leading to unintended results and (b) providing the best opportunity for achieving some degree of harmony among the respective families' members. Nothing can guarantee that the latter advantage will result, but not planning and communicating appropriately almost certainly leads to some degree of animosity or distress.
If you would like to discuss any of the issues raised in the article, or any other estate planning concerns, please contact your Farella Braun + Martel Family Wealth attorney at 415-954-4400 or 707-967-4000