Financial Planning Tips for Blended Families: Put Your Trust in Trusts

Blended families, those in which one or both adults have children from a previous relationship, now outnumber traditional nuclear families in the United States. Any remarriage can complicate estate planning, but this is especially true when it involves children from a prior marriage—and even more so when couples have additional children together.

In an unblended family, assets are usually left to the surviving spouse, who eventually leaves them to the couple’s children. But this simple plan isn’t always the best approach for blended families.

An Uncertain Outcome

A surviving spouse is free to do whatever he or she wishes with inherited assets. In blended families, this can lead to decisions that create conflict and confusion—and that aren’t always consistent with the deceased spouse’s wishes.

It’s possible that, after inheriting the estate, the surviving spouse could draw up a new will that doesn’t favor the stepchildren. Things can become even more complicated if a new spouse is younger than the children from a previous marriage—and is likely to outlive them.

Steps Toward Certainty

There are specific steps that can help create financial certainty in a blended family.

Update wills. As with any major life change, it is essential that wills be updated to reflect how assets should be divided under the new family circumstances.

Update beneficiaries. However, updating a will is not enough. Directives in a will cover probate property. Non-probate property, including retirement accounts, homes and even bank accounts, could go to an ex-spouse (despite the will) unless he or she is actively removed as the beneficiary. Updating beneficiaries on all accounts is necessary as well.

Prepare a prenup. Upon remarriage, a prenuptial agreement can specify certain assets that will remain separate from joint assets of the new marriage.

Create trusts. In blended families it is essential that children from a previous marriage be provided for separately from the new spouse. Trusts can help create specific plans for how and when assets are divided.

A Protected Inheritance

One way to protect both a new spouse and children is a qualified terminable interest property (QTIP) trust. A QTIP trust is often used to make sure that:

• A surviving spouse receives a lifetime income.
• Children from a previous marriage receive the trust’s assets after the spouse’s death.
• The trust assets are professionally managed.

While a QTIP trust provides the surviving spouse with a lifetime income, he or she cannot change the trust beneficiaries. When the spouse dies, the trust assets go to the beneficiaries named by the trust’s creator.

With any trust, the trustee’s effectiveness is a critical success factor. One must consider a potential trustee’s investment skills, reliability, stability and availability. Having an institution serve as trustee can provide the investment skills, experience and longevity to manage trust assets and serve beneficiaries over the long term. New trust services offered by Charles Schwab now allow independent investment advisors such as me to manage trust assets.

Other Options

QTIP trusts alone may not be an adequate solution. An approach that combines a QTIP trust with other trusts and financial planning tools can provide a more comprehensive plan.

Long-Term Discretionary (LTD) Trust – An LTD trust delivers a way to provide for children separately from a spouse. Should a child predecease an ex-spouse, their inheritance would go to their children (the grandchildren) or surviving siblings instead of the ex-spouse. LTD trusts can also protect a child’s inheritance from divorce, bankruptcies, lawsuits and irresponsible spending.

Estate Tax Exemption (ETE) Trust – An ETE can help minimize estate taxes.

Life Insurance – A life insurance policy can be used to pay a designated amount to children or a spouse or to fund a trust.

A blended family raises some additional financial planning issues, but utilizing available tools and establishing trusts can create certainty and order in even the most complicated family circumstances. These items should be discussed thoroughly with an estate planning attorney.