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The Wealth Counselor
How to Overcome the Challenges of Legacy Planning that Plague Blended Families
As you’ve probably already noticed, estate planning can be challenging – not only for the “traditional” nuclear family but, also for the millions of “non-traditional” families. The blended family scenarios are virtually endless – a spouse with independent wealth that marries a younger new spouse, children from a previous marriage but no children from this marriage, children from a previous marriage plus children from this new marriage, and more. Sometimes, an estate “plan” of a blended family seems less like a plan and more of a grab bag of joint and solely owned assets with no clear plan about who gets what and why.

Although the increased complexity and variety of family structures makes effective planning more challenging, the need is greater now than ever before. Of course, no single newsletter could ever cover all the potential issues, so always feel free to contact us whenever we can offer assistance to you or your clients.

A Few Common Estate Planning Challenges That Blended Families Face

  • One spouse wants to leave all assets to their children and wants the other spouse to do the same. A lopsided situation can occur. If the couple has been married for some time, and if they have acquired joint assets, someone might get the short end of the stick. Don’t be afraid to address this potential problem with your clients. Relying on joint accounts and “plain” beneficiary designations is a recipe for disaster in these situations.
  • One spouse wants to leave the entire estate (or a substantial part of it) to the surviving spouse but also wants to be “fair” to his her or children. If you notice outright gifts in existing trust documents or wills, joint accounts, or no estate plan at all, there is a potential problem on the horizon. In a blended family situation, any plan that leaves full decision-making authority for the full estate to the surviving spouse can (and often does) result in a messy situation with the children of the first-to-die spouse. Luckily, there are trusts that provide benefits to the surviving spouse while still protecting the deceased spouse’s children.
  • Infighting among children and step-children, while the spouses are still living, is a definite warning sign that comprehensive planning is necessary. Sadly, sibling rivalry often gets heightened when parents pass on and when emotions in the family run high. Step-sibling rivalry can be much worse and lead to complicated, troubling fights if left unchecked. Your clients need a plan that prevents an intra-family civil war in the future, especially if the children and step-children already aren’t getting along already.
  • Spouses may disagree about how to divide assets fairly. Being a referee isn’t easy, but you can be a hero if you develop solutions and recommend resources (like a qualified estate planning attorney or the addition of specific, targeted financial products) that achieve both spouses’ goals.
  • Designations of beneficiaries and trustees might leave the impression that parents are playing favorites. Tee the family up for success and harmony. Work with your blended family clients to uncover potential rivalries within the family and develop a strategy to ensure equitability as well as the perception of equitability.

Communication and proper planning overcome all of these challenges. As a financial advisor to the family, you are well-positioned to help your client solve these complex planning issues equitably and ethically.

What Planning Options are Available for Blended Families?

The new couple should be ready to discuss their existing finances, their financial goals, and how they expect their assets to be distributed should one of them become incapacitated or die. Your role as financial advisor is to point out pitfalls and set the stage for an equitable, calm process that minimizes losses due to creditors, predators, and possible family infighting. Potential scenarios include:

  • Two individual estate plans. Under this scenario, the couple should plan to keep all of their individual assets separate. If you are advising newlyweds or couples who have yet to tie the knot, be sure you point out this simple solution.
  • A single joint estate plan. The couple can keep certain assets separate. Bear in mind that a significant amount of work and thinking may need to be done to ensure that the plan works as intended in a variety of situations.
  • A combination of the two. The couple creates a legal framework to designate some assets as separate and some as joint assets. In these cases, a prenuptial or a postnuptial agreement might be a useful piece of the puzzle.

Investment and Insurance Considerations

Previous marriages can present awkward and complicated investment and insurance situations. As a financial advisor, you want to ensure that investment and insurance plans are shaped appropriately for the blended family.

For example, if the goal is ongoing income transfers now rather than later, then income-oriented investments (dividend paying stocks or ETFs, specific-duration immediate annuities, or high-yield bonds and alternative investments) might be worthwhile. On the other hand, if the goal is to leave some form of inheritance—possibly to one or both spouses, or to the children from one or both marriages—then life insurance in an irrevocable life insurance trust (ILIT) might be used to augment existing assets. One planning option may include awarding the surviving spouse in the second marriage all the income from an irrevocable trust or marital trust while the children from the first and second marriages split the insurance now and the rest of the estate later. Key takeaway – there’s probably a solution to your client’s problems.

How Can You Benefit From Helping Blended Families

Helping a couple in a second or third marriage plan their estates can lead to additional business opportunities for you and earn you trust and gratitude from your clients. Here’s how:

  • As the family’s primary financial advisor, you can build long-lasting relationships with all family members – your pool of prospects expands without your having to market in the “retail” space.
  • You can be introduced to and may also become a trusted advisor to the children and grandchildren.
  • When appropriate, you can set up new life insurance policies, annuities, or other financial products that meet a client’s needs and further their goals.
  • You can pick up new asset management business from a new spouse or network with his or her current advisor.
  • Effective planning for many blended families uses long-term trusts for the benefit of the new spouse, children, or grandchildren. When you’re involved in helping create the plan, you are well-positioned to manage those assets held in the long-term trusts.

We are here to help you tidy up the legal side of estate planning for blended families. When you have a question or need solutions for your clients, give us a call.

Law Offices of J.R. Hastings • 1003 Third Street, San Rafael, California 94901 • 415-450-6692

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