Estate planning can be a difficult process, even if you have no family at all. You still need to determine where your money will go when you’re gone and the wisest ways of investing your money to ensure that the individuals or organizations to receive your money are granted a good sum.
Considering the inherent complexity of estate planning, it’s no surprise that many special considerations come up when doing estate planning for blended families. While imagining scenarios in which your estate is dealt with contentiously might not be pleasant, it’s important. The clearer you are about how your wealth will be distributed, the fewer chances for conflict.
We will look at how several investments can be handled to ensure they’re properly distributed between members of a blended family. The most important thing to keep in mind is that we’re offering very generalized advice – everyone’s familial situation is different, as is everyone’s financial situation.
You may want your spouse’s children to receive as much as your children will, or you may want your children to receive the bulk of your wealth. Your estate planning strategy will vary based on several considerations, from how you want the money distributed to where your money is invested.
As a general rule, it’s a good idea to have third parties involved as executors of your will or as trustees when you have a blended family. This drastically reduces the chance of conflict between family members. You should also discuss your intentions for your estate with all parties involved so they can air any concerns and clarify any questions. Express your desires clearly, so there are no misunderstandings.
Here is our general guide to estate planning for blended families.
Tips for Common Assets
Your home is likely to be your most valuable asset. In the case of blended families, how the home’s value is to be distributed upon the death of one spouse can be tricky. In a traditional arrangement, ownership of the home passes to the surviving spouse. However, this option can be unsound if you’re worried your spouse won’t distribute money from the home’s eventual sale to your children.
One option is to form a tenancy-in-common arrangement. Described simply, this arrangement partitions the home – in most cases, 50% of the property’s value to each spouse.
Using this arrangement, one can create a trust to hold their interest in the home upon their death. For example, this trust could stipulate that the surviving spouse can continue to use the home or can sell the home for a replacement home. The trust might also allocate some funds from the estate for major renovations; generally, utility and routine payments will be the responsibility of the surviving spouse.
If you choose a tenancy-in-common arrangement, it may be a good idea to contact your broker. It’s unlikely you’ll need to update your home insurance, but it’s a good idea to alert your insurer of any changes to homeownership arrangements.
Should the surviving spouse sell the home to buy a replacement home, the trust could stipulate that any remaining money from the deceased’s interest goes to their children or is held in the trust to be invested. Money from that investment could then go to whatever entity the deceased desired.
Retirement Plans and Accounts
Retirement assets are relatively straightforward – you can designate your spouse, your children, or your estate as a beneficiary (in Quebec, only your estate can be the beneficiary of your RRSP; read more here).
The calculation here is quite simple; evaluate how much money is in your accounts and who would most benefit from that money. For example, you may feel your spouse won’t have the financial means to support themselves in the event of your passing; you can give retirement accounts to them. On the other hand, you may feel they’ll be just fine without this money, in which case you’ll grant it to your children. Simple!
Whatever you decide, it’s simply a quick matter of designating your beneficiary for each plan you have.
Life insurance is one of the more interesting investments you can make to leave behind for others when you’re gone. Generally, life insurance is not taxable in the U.S. or Canada, so it’s an excellent tool if you’ve maximized your other tax-free investments.
Generally, life insurance is a good investment strategy when you’ve already got a number of short and medium-term investments; by its very nature, life insurance won’t payout when you need it.
There’s a lot of room for creativity when structuring who benefits from a life insurance policy. You can, for example, name multiple beneficiaries who will each receive a portion of your life insurance. You can also set a number of conditions for beneficiaries.
For example, so-called contingent beneficiaries only get a payout if a primary beneficiary cannot; in other words, if you name your spouse as a primary beneficiary, and they pre-decease you, your contingent beneficiary (often your children) will get that sum instead. You can also make some beneficiaries revocable (you can remove them from the policy) or irrevocable (you can’t remove them without their consent).
It’s worth noting again that life insurance is a very inflexible investment. So you should generally only consider this strategy if your other investments are well shored up.
Testamentary Spousal Trusts
You may stipulate that some of your investments be put into a testamentary spousal trust when you pass away. Income derived from that trust would be given to your surviving spouse. There would, however, be limits on their ability to access the capital in the trust. In addition, any residual income would be distributed to your children (or another named beneficiary) if the surviving spouse passes away.
Other Types of Trusts
Testamentary spousal trusts aren’t the only kind of trust you might use to ensure your assets are distributed according to your wishes. We couldn’t possibly cover every kind of trust in this article, especially considering an international readership. However, you can find trusts that ensure that money is released to certain people at given intervals of time, provided certain conditions are met, and much more.
You can think of trusts as a pool of assets released under certain conditions and triggers. These conditions and triggers can alter who the assets are given to, how much they receive, and more. Thus, trusts are incredibly flexible – just be sure to get a good team behind you to help figure out how to use trusts to your advantage.
Choosing the right trustee is essential, too. A third party who isn’t a member of your family is usually the best bet in blended family situations.
Other Tips When Estate Planning for Blended Families
It would be impossible to discuss estate planning for blended families without talking about prenuptial agreements or prenups.
They may be the single most useful tool for this type of estate planning.
At some point in time, prenups were seen as little more than a method of protecting the assets of the wealthier party. Today, these agreements (which are actually better defined as prenuptial and postnuptial agreements) do much more than protect assets. They result from active and open communication between two partners, and the goal is to ensure that the parties in the relationship get what is fair.
What is your company worth? Prenuptial agreements may be particularly useful if you own a business, especially if you expect the value of that business to increase significantly. Using a prenuptial agreement to protect that business and ensure that a portion of it – or all of it – goes to your children is something many business owners in blended family situations can benefit from.
Most estate planning advice you’ll find online will advise you to update your will every 5 years – though as you get older, you may want to update more frequently. When estate planning for blended families, it can be a good idea to review your will and agreements more frequently than that.
And the dialogue is of the utmost importance in these situations. If you’re updating your estate, you want to let every affected party know. Those conversations can be difficult, to be sure, but they’re invaluable.
Talk to Financial Planners and Estate Lawyers
Estate planning is incredibly complicated, to begin with, and estate planning for blended families takes those complications to whole new levels.
You may, for example, not know that getting married will generally invalidate any existing will. That means that you need to rewrite your will as soon as you get married – and you should start planning for your new will well before that.
In the same vein, certain domestic contracts can take precedence over the will if there’s a discrepancy between the will and the domestic contract.
The tools that have been detailed here are just that – tools. Estate planning is not just a selection of tools – it is the proper use of those tools in a holistic strategy. You must build a team to help manage your estate, from lawyers to financial planners. Keep in mind that each of these tools comes with its own benefits and its own costs; strategies must be tailor-made with your exact situation in mind.
We hope this article has improved your understanding of the estate planning tools and tactics available to you. While estate planning for blended families isn’t always easy, it can be rewarding and prevent conflicts down the road.
It’s an important task that shouldn’t be put off. While no one likes to think about their demise, planning is the only way to ensure your hard-earned wealth goes exactly where and to whom you want it to.