Estate Planning in Blended Families Considerations for Couples with Children from Previous Relationships

The days of mostly traditional American families are probably gone for good. The modern family of today is often a mix of spouses, exes, kids, and steps who somehow find a way to make it all work. Estate planning for such an intricate blended family may be a little tricky, and there are lots of factors to consider.

It is very common for a person who has children from a previous marriage to be married to or planning to marry someone who also has children from a prior marriage. This couple may also have children born of their own union. In other instances, two people may wish to live together without being married. Whatever the situation, estate planning is essential so that if tragedy occurs, all members of the family are provided for in an appropriate manner.

With blended families, it is important to give significant thought, time, and attention to the many planning issues regarding financial, insurance, and tax-related matters. While traditional estate-planning documents are critical, it is also important to consider a prenuptial or a cohabitation agreement. Either one of these agreements should spell out, in as much detail as possible, what will occur if the relationship dissolves, regardless of whether or not the couple is married.

Home, Health, and Other Matters

One of the major issues that this agreement should address is housing. When a couple purchases or rents a home together, if the relationship falls apart, there is usually significant concern about the distribution of the furniture and accessories that were acquired together, as well as the division of equity if the property was purchased. Both parties may be liable on a mortgage, and it is very important to consider the status of the real estate upon dissolution of the relationship.

There may also be provisions within the agreement relative to the distribution of assets upon death. In cases where there is a significant mortgage, the parties may consider purchasing life insurance to cover the outstanding balance of the mortgage so that the survivor may receive sufficient liquid assets to continue paying the mortgage despite the loss of one income.

Additional life insurance may also be necessary if one of the parties is under an order of the court from a prior divorce decree wherein a percentage of assets is required to be maintained for the benefit of children from the prior marriage.

It is also important to consider each party’s health proxy and durable power of attorney. These vital documents must be reviewed in light of the new partnership to determine who will be in charge of making decisions in the unfortunate event that one individual becomes incapacitated. It is likely that the new relationship changes how the parties feel about who should be empowered to make these significant decisions.

A health proxy determines who will make medical decisions if one party becomes incapacitated, as well as who will make important end-of-life decisions. This document may also contain language regarding burial or cremation desires. Oftentimes, a conflict occurs within a blended family at the time of death, and it is important that all family members understand an individual’s desires, so they know that the person empowered as the health proxy is merely carrying out wishes, as opposed to making decisions to which children of a first marriage or even a prior spouse may object. It is also very important to realize that, if the parties are not married, a significant other does not have any legal authority to make decisions for their partner, and this includes the disposition of the body upon death as well as decision making while a person is alive.

The second document that must be considered is the durable power of attorney. The person empowered within this document will be making financial decisions for another if they become incapacitated. This includes having access to bank and brokerage accounts, being able to transfer real estate, withdraw funds from retirement plans, etc. This is significant control over another’s assets, and the agent under the power of attorney may even have the authority to make gifts and distributions to himself.

Therefore, when considering who should be making those decisions, it is important to understand that this person must be trustworthy and have the ability, time, and expertise to handle the financial affairs of another, especially if a business is included in the assets. It may be preferable to designate two people to serve as powers of attorney, or perhaps two separate powers of attorney may be established, one for personal affairs and one for business issues.

Will and Trust

A will and possibly a trust should also be considered, and provisions within these documents should fairly closely mirror the prenuptial agreement to conform with all of the requirements set forth in that agreement, which may be construed to be a legal contract. In addition, if there are any requirements under an order of the court from a prior divorce decree, those provisions should also be reviewed and included within one’s will. Additionally, the appointment of an executor is an important consideration. Be this an individual or an entity, such as a bank or trust company, the executor will be attending to the settlement of the estate, hopefully without litigation.

Within these documents, there are various options regarding the distribution of assets to the spouse or significant other. When assets of relatively equal value are owned, some couples choose to retain their own assets in the event of a divorce; however, in the event of a death, some additional assets would be left to the survivor.

Other options may include a possible phasing in of assets. For instance, in the event that something happens to the relationship within the first five years, possibly no benefits would be payable to the other. Between five and 10 years of the marriage, in the event of dissolution, perhaps a certain percentage of one’s assets or a specific dollar amount would be paid to the other. After 15 or 20 years of marriage, the document may be automatically terminated and all assets of both parties would be construed to be marital assets in the event of a divorce.

The issue of health insurance should also be considered prior to marriage. Both parties may be receiving health insurance from a former spouse under the condition that these benefits terminate upon remarriage, or possibly upon merely living together with another non-related person. The previous divorce decree, any modifications, and separation agreement should be reviewed carefully ensure that all benefits are maintained or solutions may be implemented.

The issue of life insurance and qualified plans such as 401(k)s, IRAs, 403(b)s, etc. should also be reviewed. It is very important to understand that such assets pass by beneficiary, not by will. Therefore, whoever is named as the beneficiary of these assets will receive them without the need of having those assets pass through probate.

Likewise, if assets are intended to pass to a trust or to individuals listed in a will, it is important to obtain change-of-beneficiary forms and have them signed and forwarded to the plan administrators at insurance companies when the documents are signed. There have been several cases decided by the courts in which the beneficiary designation was never changed, and in most cases, the benefits and funds were paid to the stated beneficiary, not to the heirs designated under the will. In some cases, this included a former spouse, so this could be a very real, however unfortunate, result of not following through on changing these relatively straightforward forms.

The bottom line is that there are many important considerations and decisions to make before remarrying or moving in with another person. In most cases, there probably should be two separate attorneys involved to ensure that both parties have their respective rights protected, but in some cases, a conflict may be waived when both parties agree that the documents are fair and reasonable to all concerned.

Appropriate counsel under these conditions may be an attorney who acts as mediator. He or she may be consulted to work out the details for both parties in order to facilitate mutual comfort with the documents and an amiable start of the relationship. v

Attorney Hyman G. Darling is chairman of Bacon Wilson, P.C.’s Estate Planning and Elder Law departments, and he is recognized as the area’s preeminent estate planner. His areas of expertise include all areas of estate planning, probate, and elder law. He is a frequent lecturer on various estate-planning and elder-law topics at local and national levels, and he hosts a popular estate-planning blog atbwlaw.blogs.com/estate_planning_bits; (413) 781-0560; baconwilson.com