For many families, estate planning is a straightforward matter; each spouse leaves everything to the other and then it all goes to the children at the survivor’s death. For some families, however, it isn’t quite so simple, especially when one or both of the spouses have children from a prior relationship.
In blended families, there are three main approaches to developing an estate plan. The first is to treat the families as separate, and each spouse provides only for his or her own children at death. The second is to disregard the blended aspect and treat everyone as one big family. The third is to take a hybrid approach between the first two, providing benefits for the surviving spouse while preserving the estate for the deceased spouse’s children.
Keeping the spouses’ estates separate, or the “what’s mine is mine, and what’s yours is yours” approach, works well when both spouses have children and the wealth levels are relatively equal. When there aren’t children on both sides, or if one spouse has most of the money, then this approach may lead to resentment down the road. Any plan that takes this path, however, must have a properly prepared and signed pre- or postnuptial agreement in which each spouse waives all rights to the other spouse’s estate. Without that document there is no means to enforce the separation of the estates, and yes, that means getting lawyers involved. A verbal agreement will not suffice.
Treating everyone as part of the same family has its benefits. It keeps the plan simple and no one feels like they were treated unfairly. However, it also has its risks. While the stepparent may get along well with the spouse’s children while both spouses are alive, that can change when the children’s parent dies. If everything goes outright to the surviving spouse, the stepparent, there’s a very real risk that the children may be left out of the estate if the stepparent decides to change the estate plan. This happens sometimes when there is an argument between the stepparent and the stepchildren, or sometimes just when the stepparent feels unappreciated because the stepchildren don’t visit enough.
The hybrid approach has the advantage of leaving the estate largely to the surviving spouse but ensuring that the deceased spouse’s children will ultimately inherit the estate. The typical structure to achieve this result is to leave everything to the spouse in trust. The trust can pay income to the surviving spouse and it can use principal as necessary for the spouse’s health, maintenance and support. The spouse can be the trustee alone or co-trustee with one or more of the stepchildren, or a neutral third party can be the trustee. At the surviving spouse’s death, the trust distributes the remaining trust property to the children.
Of course, there may be additional factors that make the above hybrid approach undesirable, such as the children and stepparent being around the same age. Leaving everything in trust for the spouse’s life could feel like disinheriting the children who may not live long enough to see any benefit. In that case, it may make more sense to give the children a share of the estate at the parent spouse’s death.
Every family is different, and no one approach to an estate plan is going to work for everyone. No matter the situation, an experienced estate planning attorney can help you create an estate plan that meets your and your family’s needs.