Estate planning and dividing assets for a blended family can be an emotional, complex and challenging process. It determines how wealth is passed on to heirs, how an estate that includes stepchildren is divided, how assets are protected from stepchildren, and explores considerations for an unequal inheritance.
“Whether a family is blended through remarriage, adoption, or other circumstances, it is essential to address and evaluate your situation and make a plan,” says Amy R. Lorius, CFP®, Senior Client Service Director & Partner at CM Wealth. “Working with a family office can help ultra-high net worth individuals and couples navigate these complexities. Otherwise, without a plan in place, the government could decide how the wealth is divided.”
Smart Business spoke with Lorius about the challenges and strategies for dividing the assets of blended families.
What planning strategies exist for blended families?
One possible solution is for each spouse to create a revocable trust outlining how assets would be managed while alive. At the death of the first spouse, the trust could become irrevocable and benefit the surviving spouse for their lifetime. At the second spouse’s passing, the assets could then benefit the children and/or stepchildren as the first spouse intended. An independent trust adviser could be named in the trust document to facilitate distributions for the spouse and eventually the children and/or stepchildren. This strategy is sometimes referred to as a qualified terminable interest property (QTIP) trust, which can protect assets in a second marriage.
Rather than waiting until the spouse from the second marriage passes away, parents could make lifetime gifts to their children from a prior marriage while they are alive. Either outright gifts of assets to the children or irrevocable trusts could be created and funded utilizing the gift and lifetime estate tax exemption. Grantor retained annuity trusts (GRATs) could also be used to pass wealth down to the next generation without significantly using one’s gift tax exemption, giving the children meaningful payouts sooner.
Whatever plan is decided, it is crucial assets are retitled, if necessary, according to the estate plan documents created. Without this step, assets may need to go through the probate process before eventually passing to the beneficiaries as intended, which can be a costly and drawn-out process. A family office can help facilitate and monitor this process to make sure assets are property titled.
How can blended families engage in peaceful and productive estate planning?
An early step is to determine what assets need to be divided. Make a list that includes financial assets, real estate, personal property, and sentimental items. Gather and review any prenuptial and postnuptial agreements, as well as other legal documents that dictate how assets should be divided to determine the applicable legal obligations. Then decide how to include children, stepchildren or adopted children in the estate plan. Be sure to consider the needs and interests of all family members when dividing assets.
Explore ways to ensure that the division of assets does not damage the spousal relationship or the relationship with children and stepchildren. That can be done by creating a set of baseline behavioral expectations and have family members pledge to uphold the standard, minimizing potential damage to your relationships. Also, define what’s ‘fair.’ That could mean involving appraisers to determine an asset’s value or a family office to make sense of competing sentimental claims over an asset. In that vein, the family should design a process to resolve disagreements. Think about how to find compromise in tense conversations. A family office can be an unbiased third-party for resolving disagreements.
Families should also make sure they understand the tax implications of dividing assets. A family office can provide illustrations of how the estate plan and assets flow to beneficiaries including the potential effect these choices have on estate and capital gains taxes.
Without a process, conversations about dividing the assets of blended family can go down a contentious path, leading to couples avoiding the conversation altogether. That’s unfortunate because, in the absence of estate planning documents, assets will be distributed by a probate court, a process that’s unlikely to make anyone happy.
INSIGHTS Wealth Advisory is brought to you by CM Wealth Advisors.
