There is little question that few things can divide a family more quickly than disputes over money. As the proverb states, “Money is a sharp sword that cuts both ways.” In fact, there are probably few families that don’t have at least one story about how a disagreement over an inheritance or some other financial matter created strife that lasted for lifetimes or even multiple generations.
Perhaps the best way to avoid or at least ease such difficulties is by doing some careful, properly designed estate planning. For modern families, which may include not only blended families but also families organized along non-traditional lines, families with estranged members, or those with other complex family dynamics, the design of the estate plan should consider the specifics of relationships, family history, and the nature of the estate in order to maximize clarity and legal protection while minimizing the potential for miscommunication and conflict.
Estate Planning for Blended Families
As we’ve noted in a previous article, blended families are increasingly common. Whether formed by bereavement, divorce, or some combination of both, blended families involving children require specific consideration of several issues, including stepchildrens’ inheritance, whether preference should be given to biological children of either spouse, legal obligations (such as child support) stemming from a previous marriage, and others. Additionally, the emotional ramifications of the estate plan are often as significant as the legal and financial considerations, making clear, thoughtful communication planning even more essential.
Typically, estate planning for a blended family will need to incorporate the management and disposition of separate (non-marital) property brought to the marriage by one or both spouses. They may wish to designate their biological children as the sole inheritors or beneficiaries of such property, or they may decide to simply commingle all assets and allow all children in the marriage to benefit and inherit equally. Whatever the decision, these matters should be carefully codified and documented in the spouses’ wills and any other estate planning documents, such as trusts.
Sometimes, spouses in a blended family may elect to leave all their assets to the surviving spouse and secure life insurance policies stipulating their respective biological children as beneficiaries, allowing the proceeds of the policies to replace the value of the estate transmitted to the spouse.
And speaking of insurance: in all cases involving insurance, annuities, or retirement plans (IRAs, 401(k)s, 403(b)s, etc.) owned by a spouse in a blended family, the beneficiary designations should be checked carefully, since beneficiary designations supersede the terms of wills and trusts. (In other words, a life insurance policy naming an ex-spouse as beneficiary will provide the death benefit to that ex-spouse, regardless of the terms of the deceased person’s will.)
Estate Planning when a Family Member Is Estranged
Unfortunately, sometimes family relationships are disrupted beyond repair or reconciliation. This, in turn, can lead to a will or the terms of a testamentary trust being contested. If such is anticipated, the family’s estate plan will need to incorporate specific legal safeguards to insulate the estate from legal assault.
Revocable trusts can be applicable when a grantor (the person who creates the trust) wishes to exert more control over the disposition of assets contained in the trust. A revocable trust, which can be changed during the grantor’s lifetime, is a private document that provides for the distribution of assets outside the probate process. A properly designed revocable trust can give the grantor control over the assets during their lifetime and are also more difficult to contest than a simple will.
Some estate plans may include a no-contest clause that imposes penalties on any beneficiary or family member who unsuccessfully contests the will or trust. The penalty is often loss of all inheritance privileges and rights.
Complete disinheritance is also an option, but this carries additional risks. Many courts are inclined to find in favor of a disinherited family member if the reasons for the disinheritance lack substance, seem overly arbitrary, or appear to have been inconsistently applied.
Other Situations
Estate planning for modern families may also include non-traditional family relationships or structures, such as when one of the spouses has a child out of wedlock but still wishes to provide financial resources for them, or when a common-law marriage or cohabitation exists. While such considerations may have been a rarity in previous decades, they are more common now. In fact, some 20 million persons in the US are currently cohabiting with a nonmarital partner, and the percentage of those doing so has tripled over the last 20 years.
While such situations are capable of being managed within the terms of a will, a trust may be a better solution in many cases. This is because trust structures can be designed in a wide variety of ways to accommodate the grantor’s wishes for how their assets are to be distributed. Trusts can also be written so that they require certain conditions to be met before assets are distributed, such as completion of education, evidence of consistent gainful employment, and other attributes or circumstances that the grantor may find desirable.
The most important thing to keep in mind with respect to such non-traditional or complex family situations is that state probate laws almost always default in favor of biological or other legally recognized relatives. To ensure that the desired persons benefit from the estate, careful design and wording is essential.
At Mathis Wealth Management, we know our clients place immense importance on ensuring that their estates benefit the people who are most important to them. We work to help clients find the resources they need for their most meaningful goals. Do you have questions about estate planning, retirement, or some other future planning matter?
