Americans are romantically optimistic. People keep getting married, even though almost 50% of marriages end in divorce. Estate planning for second, third, fourth marriages can be delicate, especially if there are children from prior relationships. The “blended family” estate plan has a number of special challenges. Among scenarios to consider:
Stepchildren: Just Like My Own
Although a spouse’s children may be viewed as “real” children, they are not under the law in Arizona. Intestacy statutes do not include stepchildren in the definition of “children.” This means that when stepmoms and stepdads die without a will or trust, their stepchildren are not included in distributions. So if it’s truly a “blended family” – like the Bradys – an estate plan is required to deviate from the default rules under state law to explicitly include stepchildren as “children.”
Stepchildren: Not Like My Own
So, maybe the stepchildren are OK but not quite the same as biological kids. Or maybe they’re difficult or distant or have been on their own and never forged a close relationship. A stepparent can choose to not leave a stepchild any part of his or her estate or can leave them a smaller portion than biological children. Each individual has the ability to choose. Spouses don’t have to agree. If there’s disagreement with a spouse on who gets what, it can be difficult to work through. That’s one good reason spouses might choose to keep assets separate and/or seek separate attorneys for their plans.
Don’t Totally Trust Your Spouse
Wills often provide that, at death, everything is to be distributed to the surviving spouse, and only if the spouse fails to survive, then to the children. Each spouse has the same will or trust or a joint trust. Many with a blended family don’t consider that if they are the first to die, their own kids could end up with nothing. Consider: Husband dies, leaving everything to his new wife based on the understanding that she will leave her entire estate to the children — both his and hers — equally.
Unless there is plan that becomes irrevocable or an explicit, binding contract, the wife can create a new plan leaving everything to her own children (or a new boyfriend or the church) and disinherit her deceased spouse’s children. A contract or irrevocable trust can help avoid this. Still, enforcing the original plan would require that the children take action to seeking return of the assets. Consider whether children have the tenacity and means to do so.
Do Totally Trust Your Trustee
A trust is an option that can provide for both spouse and children. It can provide for a spouse during his or her lifetime and then distribute to the children on the spouse’s death. Or, it could allow for distributions to children during the spouse’s lifetime. Regardless of the instrument, it’s important to make your priorities clear. Is it spouse’s welfare first? Spouse and children equally? For specific purposes or broad wants and needs? Note that selection of trustee is crucial. A stepchild and stepparent acting as co-trustees is almost always an ineffective way to administer a trust. Often, the spouse wants/needs funds, and the child would rather not share. If majority rules, the impasse might be overcome only with a lawsuit. Instead, consider a neutral, third-party trustee who can weigh the competing interests and make distributions fairly.
Making Yours, Mine, Ours
Clarity in estate planning is always the goal. With blended families, assets easily become comingled and history forgotten. In Arizona, property of married people is presumed to be community, meaning each spouse has an equal interest. But property brought into the marriage (and any gain thereof) remains separate. IF it can be identified. Untangling what belongs to each spouse or to them jointly can be difficult, sometimes impossible. A property agreement, either prior to or after marriage, can spell out what belongs to whom, and what is shared. Trusts – one for you, one for me, and one for us – can be a way to clarify titling and distribution at each death.
Blended Family, More Gifts
Often, children of the deceased spouse are close in age to the surviving spouse. If the spouse is the only beneficiary for his or her lifetime, the stepchildren can’t enjoy an inheritance until their stepparent dies. Consider leaving at least a little something to children at the first spouse’s death.
Consider the Exes
Last but probably not least, if are exes, don’t overlook them. Although any former spouse is probably not part of the blended family, the planning should address the split. Specifically, the plan should 1) honor any property settlement agreement, and 2) exclude (or include) the former spouse as appropriate. If the estate plan with the new spouse violates a property settlement agreement, that could cause serious problems for the deceased spouse’s estate. The ex-spouse could have a claim against the estate for breach of contract, bring a lawsuit, and cause turmoil and unnecessary litigation fees.
In addition, review and update each beneficiary designation. On divorce, Arizona law revokes disposition of property to the former spouse. An ex-spouse is treated as having predeceased the other spouse. That applies to wills, trusts, life insurance, etc. — the former spouse gets nothing. There is, however, one important exception: accounts provided by an employer governed by ERISA (The Employee Retirement Income Security Act). The federal law trumps the state “default” of disinheritance, and the former spouse can inherit. It is best to re-establish beneficiary designations on ALL accounts, whether to remove the ex or to affirm that he or she should stay.
Estate planning for the blended family presents special challenges. But it’s better to confront and overcome them than wind up with unintended consequences.