Estate Planning for Mixed Families and Second Marriages
By Attorney Isaiah M. Richie, Schloemer Law Firm, S.C.
It’s no surprise to learn that more and more marriages and relationships today consist of one or more spouse who has either been married before or has one or more children from a prior relationship. In some cases, couples are even foregoing marriage entirely and living together as a couple without assuming the “married” title.
Having a blended family adds a level of complexity to each party’s estate planning and long-term care considerations. This article will examine some of the things you may want to consider when crafting your estate plan if you have a blended family.
One of the first decisions to make in crafting an estate plan is where you would like your assets to go after you have passed. In a traditional plan where husband and wife have two kids each from that marriage, the beneficiaries would usually be designated as follows:
- All to surviving spouse;
- If there is no surviving spouse, all to children equally.
Of course, there may be some complexities. For example, the surviving spouse may be able to disclaim a portion of their inheritance to avoid estate taxes, or one child might receive a smaller share due to a gift during the parents’ lifetimes. But most often the assets go to the spouse first followed by the children equally.
But let’s examine a blended family, the “Doe Family”. John Doe was previously married and had no children, but he entered into a marital settlement agreement with his now ex-wife Sour Doe agreeing to maintain a life insurance policy in the amount of $100,000 with her named as the beneficiary. John remarries Jane, and Jane has two children from a prior relationship. John and Jane then have one child together.
When crafting their estate plan, John and Jane will have to keep in mind the following:
- John is obligated to pay Sour $100,000 upon his death from the life insurance policy.
- Jane’s children from a prior relationship may be entitled to death benefits from their biological father, giving them a windfall if they receive equal treatment from John and Jane’s plan.
- If Jane predeceases Jane, John may be able to show favoritism to the biological children by striking out or reducing the inheritance of Jane’s children from the prior relationship.
Much of this estate plan will come down to personal objectives, relationships, and trust. Do John and Jane intend to treat all their children equally, and does each spouse completely agree with that plan? Which spouse brought more assets into the marriage, and do either of them care that his or her children receive some of that share? Also, if John can no longer qualify for life insurance, does he need to set aside $100,000 to pay Sour upon his death, or should he negotiate with her to settle this out for a smaller sum today? All of these questions and more need to be considered.
Agents, Trustees, and Personal Representatives
The second big question usually addressed in estate planning is who you would want to act on your behalf if you are no longer able. This can include financial or healthcare decisions made during your lifetime — powers of attorney — or the administration of your trust or estate. Again, let’s compare the traditional family with the blended family. The traditional family might have an estate plan that names the following:
- Power of attorney for healthcare: Spouse first, followed by child A, followed by child B.
- Power of attorney for finances: Spouse first, followed by Child B, followed by Child A.
- Personal representative or successor trustee: Spouse first, followed by Child B, followed by Child A.
Again, this plan if fairly simple and assumes the children are old enough and mature enough to make the required decisions. But what about John and Jane Doe? John may not want Jane’s children to act as his agent for healthcare decisions. Jane may want her children to act as trustee once she and John are gone since they are older, but again this may lead to discrimination against John and Jane’s child by the two half-siblings. Although it is always our hope that all of our children will get along and be fair, that’s not always the case, even in traditional families.
Accordingly, the Doe family may have the following agents:
- John’s healthcare power of attorney: Spouse first, followed by John and Jane’s child, followed by John’s brother.
- Jane’s healthcare power of attorney: Spouse first, followed by Jane’s first child from prior relationship, followed by Jane’s second child from a prior relationship, followed by John and Jane’s child.
- John’s financial power of attorney: Spouse first, followed by John and Jane’s child.
- Jane’s financial power of attorney: Spouse first, followed by Jane’s first child from prior relationship AND John and Jane’s child acting concurrently as co-agents.
- Personal representative/successor trustee: Spouse first, followed by Jane’s first child from prior relationship AND John and Jane’s child acting concurrently as co-agents.
As is obvious, there are quite a few combinations that may make sense, depending on John’s and Jane’s preferences. It may be that John has a very good relationship with Jane’s other children, and he wants them to act as his agent until his biological child is old enough. Or perhaps Jane recognizes that her children don’t like that she married John and had another child, so she wants to make sure they don’t have the ability to act for her.
Finally, what if all three children are still under the age of 18? If John and Jane are in an accident together, who would be responsible for caring for the children? Here we have a situation where the guardian for Jane’s prior children could likely be their biological father, but it probably would be inappropriate for that individual to assume responsibility for John and Jane’s child. Accordingly, John and Jane will need to be sure they designate appropriate guardians for each child. If a trust is to be set up for the children, there will also be a question of who should be the trustee, tasked with making distributions fairly and equally to each child. Oftentimes this is where we would utilize an institutional trustee such as a bank or trust company.
What Happens if you do Nothing?
Many people assume that if they are married, all their assets will go to the other spouse when they pass away. But in a blended family, that may not be the case. Under Wisconsin law, if an individual passes away without an estate plan and there are children from a prior marriage, the individuals children will receive half of the individuals non-marital property and half of their combined marital property. Let’s put this into perspective:
Jane has $100,000 in a separate bank account from before the marriage (individual property), John and Jane saved $300,000 together while married (marital property), and lets also assume that prior to getting married, John and Jane bought a condo together as tenants in common and it is worth $500,000. Jane dies before John, and they have no estate plan. Because Jane has children from a prior marriage, then all three of Jane’s children (including her child with John) are entitled to the following:
- One half of Jane’s individual property: $50,000.
- One half of all of the marital property (that is property acquired during the course of the marriage): $150,000.
- All of Jane’s interest in any property held with John as tenants in common: $250,000.
So now Jane’s estate owes Janes three children $450,000. If John wants to keep their condo, he will now be required to pay the estate $250,000 for Jane’s share. If Jane’s children are already getting half of John and Jane’s savings, John may be left with only $150,000 and could be forced to move out of the condo to pay off the estate.
This may be an extreme example, but to some extent it happens quite frequently.
Estate Planning for Blended Families
All or most of these issues can be resolved through effective estate planning. Starting with a simple will, or planning with a comprehensive trust, couples can set up a system that will work for them and meet their goals. They can each name separate agents for healthcare decisions while appointing a neutral party or multiple individuals together to make financial decisions for them. Individuals can also set aside a certain amount for children from a prior marriage or protect the children from being written out of the estate plan by the surviving spouse.
Through pre-nuptial and trust planning, blended families can also prevent the new spouse’s assets from going to the ex-spouse, if some obligations still exist.
As blended families become more common, so too does the need for effective estate planning.
Originally published: September 15, 2019.
More Important Reading
- Your Family Business Succession Plan
- Why Have Estate Plan? An Investment in Your Family in Case of the Unexpected
- Time Marches On: Do I need to Update My Estate Plan?
Disclaimer: The information contained in this post is for general informational purposes only and is not legal advice. Due to the rapidly changing nature of law, Schloemer Law Firm makes no warranty or guarantee concerning the accuracy or completeness of this content. You should consult with an attorney to review the current status of the law and how it applies to your unique circumstances before deciding to take—or refrain from taking—any action. If you need legal guidance, please contact us at 262-334-3471 or [email protected].