Senior Wealth Planner
Wealth Planner

In this Wealth Planning Update:

  • Today's families come in all shapes and sizes, presenting unique planning challenges
  • Addressing issues and sharing information can have a positive impact on family harmony and may prevent larger problems in future years
  • When it comes to distributing an estate, fair doesn't always mean equal with blended families
  • Awareness of support obligations, the impact of age differences, wealth disparity, family harmony and estate tax apportionment are all items to address

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According to a 2013 Pew Research Center analysis, almost 42 million adults in the United States have been married more than once. Second marriages and blended families create unique situations that require careful planning in order for family harmony to continue during the lifetime and to ensure wishes for assets are respected after death.

Discussing wishes for how best to care for your family and how to handle distribution of assets after death are not scenarios that are easy to face. If you have been married more than once, and especially if you have children from previous relationships, proper planning is vital. In this Wealth Planning Update, we will lay out the common issues that blended families face and what action you can take to avoid missteps in the process.

6 Common Issues:
1. Children from previous relationships
2. Support obligations
3. Significant age differences in spouses
4. Spouse wealth disparities
5. Apportionment of estate tax liability
6. Family dynamics

Children from previous relationships (blended families)

Families don't turn in to the Brady Bunch as soon as the wedding ceremony is complete. When couples remarry they may think of the children as “yours, mine and ours”. Understanding what resources each child has now and after a death can help to guide planning steps. For example, you may want to give consideration to whether one child is set to inherit a large sum of wealth from their other parent (or already has a trust for their benefit created by a family member), has special needs, or has amassed their own sizable wealth.

Fair doesn't always mean equal; all children may not receive the same asset value or asset type as each other. An understanding of how much wealth may be available at each spouse's death, what types of assets are owned and what needs may be involved in the beneficiary pool can help to clarify how the estate plan can be designed. For instance, you may want to consider setting up trusts for certain children using liquid or business assets, while other children may receive life insurance proceeds due to their needs or your wishes. A Qualified Terminable Interest Property (QTIP) Trust can be used at the first spouse's death to provide income for the surviving spouse (and in some cases also principal) while preserving the underlying assets and allowing the deceased spouse to direct who ultimately receives the trust assets, such as children from a previous marriage.

Chances are that a family isn't going to know and agree with every decision made by another family member, but communication can help prevent disharmony. First, spouses should be open about what they wish to accomplish with their estate plans. If each spouse understands the goal of the other, each can be confident in leaving their own legacy and carrying out the wishes of the first to pass. Second, explaining the general distribution of an estate plan to children can mitigate disagreements and hurt feelings. Discussing your decisions in advance can help children to understand their parents' intentions and how they arrived at their decisions. It is not easy to please everyone, however being deliberate in how an estate is structured can allow the burden of the unknown to diminish.

Support obligations to a previous spouse or children

When entering into a second marriage, one or both spouses may have obligations to support a former spouse. These payments are classified as alimony or child support. In the case of alimony, one spouse is obligated to make periodic payments to their former spouse for the purpose of supporting his or her lifestyle and living expenses. The other form of support obligation comes in the form of child support. In this case, the spouse that gains primary custody of the child (ren) may receive support payments from the other spouse to help provide ongoing care for their children.

If you are getting remarried, it is crucial to discuss and be aware of any support obligations to which a spouse is entitled. It is important to understand the impact that a spouse's support obligations from a previous marriage will have on the cash flow of the second marriage. The support obligation may require the delay of retirement goals or major purchases. If a spouse is currently receiving support, whether alimony or child support, he or she should determine what affect a remarriage will have on those benefits. A spouse that remarries may no longer qualify for alimony payments. The key with support obligations is to ensure that both spouses are aware of the amounts and conditions associated with them to determine how they will impact their finances as a family.

Significant age differences in spouses

A substantial age difference between spouses may result in issues between the spouses and adult children. When younger spouses are close in age to their stepchildren, the inheritance received by the children may be significantly delayed or assets may even be exhausted due to the length of time the younger spouse has access to them. A trustee may be placed in an uncomfortable situation when determining if or how distributions should be made to beneficiaries.

Structuring your estate with all beneficiaries in mind may mean making sufficient assets available to your surviving spouse, but also building in enough flexibility for children to receive distributions if and when needed from other assets. If the size of your estate permits, you may want to consider funding a trust solely for the children, with the remaining assets passing to the surviving spouse. With two distinct pools of funds, the needs for both sets of beneficiaries can be clearly defined and accomplished.

Wealth disparity between spouses

As with any marriage, wealth disparities between spouses can lead to a host of issues and disharmony, both financial and emotional. From a financial perspective, unequal estates could cost a family valuable estate tax savings if the less-wealthy spouse were the first to die. For example, upon the less-wealthy spouse's death, if he or she does not have assets equal to the Generation Skipping Transfer Tax (GSTT) exemption amount, $5,450,000 in 2016, the surviving spouse will lose the ability to allocate such exemption to a trust. The effective use of GSTT exemption can keep assets in trust for multiple generations, generating estate tax savings at each generational level by protecting those assets from estate taxes.

Unequal estates also may result in additional estate taxes at the state level. When a spouse dies in a state that imposes a state estate tax (currently in place in 18 states) if he or she does not have assets equal to that state's exemption amount, then such exemption will go unused and be lost at the first spouse's death. The GSTT exemption and most state estate tax exemptions are not portable, unlike the Estate Tax Exclusion Amount, and failure to utilize such exemptions could result in a loss of valuable estate tax savings. If you find yourself in this position, it may be wise to consider transferring assets from the wealthier spouse to better equalize estates.

From an emotional perspective, if both spouses have children from a previous marriage, wealth disparities can lead to tensions not only between spouses but also the children. The spouse with greater assets may support his or her children in a more generous manner, leading to resentment between children and disharmony within the family. To improve and promote better family harmony, communicating such issues and formulating a plan to address how assets and support from the wealthier spouse will be shared amongst family members may alleviate negativity.

Apportionment of estate tax liability

Typically estates are structured so that the majority, if not all, of the assets can pass to the surviving spouse. Children or other beneficiaries will eventually receive assets from the estate after all estate expenses and taxes are paid. In second marriages, however, the ultimate beneficiaries of each spouse may differ. The beneficiaries of the first spouse to die may receive more or unequal financial assets due to taxes being paid from the estate of the second spouse potentially resulting in unhappy beneficiaries and unintended consequences.

It is important to understand how assets pass to beneficiaries and how and when estate taxes are due when structuring an estate plan. It is critical to address the characteristics of each asset, including ownership or titling. Because estate plans can often consist of various revocable trusts, irrevocable trusts, beneficiary-designated assets and bequests, it is imperative all financial documents are coordinated and reflect your current wishes.

Family dynamics

Family dynamics are critical to the success of a second marriage. As with any relationship it is important for spouses to communicate with each other about financial goals, plans to provide for each other and the family, and expectations regarding leaving assets to family members. Some financial topics to consider:

  • Managing on-going cash flow: Address expectations of how on-going expenses will be paid for, as well as those related to children. Don't assume that you are on the same page as your spouse without discussing it.
  • Investment accounts: Think about risk tolerance and attitudes towards savings when addressing investments for retirement, major purchases, and your desire to leave assets to loved ones at death.
  • Account beneficiaries: Accounts such as retirement accounts and life insurance policies are distributed to named beneficiaries upon the owner's/insured's death. You should review beneficiary designations regularly so the choices are consistent with your overall estate goals.
  • Charitable giving: Some consider charitable giving to be a necessary part of life, while others feel it is unimportant or a luxury. It is helpful to agree on organizations to which the family would like to donate and the size of those donations.
  • Debt management: Prior to marriage, spouses may want to discuss any debts they currently have, if ownership of the debts will become a joint liability, attitudes about credit and how existing debts will be paid.

With family structures evolving, we recommend spending time and energy to ensure that your intentions for a legacy are properly executed. Delaying a discussion of potential issues because they are uncomfortable is not a solution and may create larger problems down the road. Many families find it helpful to involve a trusted advisor or wealth planner who can help facilitate these types of conversations. Involving a third party can help to remove the emotions behind certain topics. Implementation and communication early can avoid future heartache and financial pain for years to come.