By Alan G. Orlowsky, J.D., C.P.A.
Because of today´s relaxed attitude toward divorce and remarriage, the blended family has become one of the fastest-growing demographic categories in American society. The blending of two families, often involving unrelated sets of children from previous marriages, can create complex challenges in estate planning. Yet for every challenge, there is a smart solution, one that may not satisfy everyone but at least accomplishes the most important objectives of the owner of the estate.
The term “blended family” is not a legal term, but rather a general way to describe a family resulting from the marriage of two people, one or both of whom has children from a previous marriage. The newly remarried spouses may also have children of their own. Sometimes one of the spouses has more than one former spouse, with children from each former marriage. Blended families can also include grandchildren, step-grandchildren, and ex-inlaws.
Sometimes the various sets of children live together under one roof, but not necessarily. In most cases, there are strained relations among ex-spouses and ex-in-laws, which make it difficult to decide who to name as heirs, executors, trustees, and beneficiaries. Sometimes the desire to exclude particular ex-family members from an inheritance is just as important as the wish to include certain others.
I´ll describe a few of the most common scenarios (using fictitious names) that we professionals encounter when planning estates for members of blended families, and how we resolve them. The solution often involves setting up a separate trust for each spouse. Keep in mind that every family´s situation is different, and what works for one family may not be the best solution for another. So be sure to consult with your legal and financial advisers before taking action.
John and Mary were recently married, and each has children from a previous marriage. Mary dies suddenly in an accident, and because she had no estate plan as an individual, her entire estate passes automatically, tax-free, to John. After several years, during which John´s relationship with his step-children sours, John writes a new will in which he leaves his estate only to his biological children, so that not a penny from Mary´s original estate passes to her biological children. (John has no legal obligation to support his step-children.)
Upon entering into her marriage with John, Mary should have divided her estate into two distinct shares, and allocated one share to a trust for her biological children, and the other share for John. When she died, a new irrevocable trust would automatically be created to administer her children´s share of the assets. The balance of her estate would pass tax-free to John.
George and Carla come into my office and ask me to plan their estate so that George´s minor children from his previous marriage, who live with their mother (George´s ex-wife) Imogene, will inherit half his estate.; and his children with Carla get the other half. But George says emphatically, “I don´t want my ex-wife Imogene to get her hands on the kids´ money!”
In fact, without proper planning, if George dies before his and Imogene´s children become adults, Imogene would control whatever money George left to that segment of his family. But setting up a testamentary trust with a designated outside trustee would prevent Imogene from using the money for any purpose besides the health, education, and welfare of the children.
Sophia marries Bernardo, a much older man. In fact, Bernardo´s grown children are older than Sophia. Bernardo and Sophia have children of their own. If Bernardo´s entire estate passes to Sophia upon his death, his children from his previous marriage might never see any part of the inheritance, because Sophia would probably outlive them.
This is not so uncommon. When Bernardo marries Sophia, he should set up a trust for his grown children, so that some of his assets would be set aside from them, while the remainder would go to Sophia (or preferably to a marital trust) so she can support the children they had together.
Another issue that often arises in estate planning for blending families is the problem of having limited resources to allocate among the competing family members. The solution will vary depending on the resources that each spouse brings to the marriage, their lifestyles, and the ages of the parents and children. Such clients may feel that they have insufficient assets to sprinkle among family members.
One simple and inexpensive solution to the problem of limited resources is to fund the estate with life insurance in order to create the “missing” dollars. Ideally, the policy would be owned by an irrevocable life insurance trust established for the benefit of the family, children, or spouse. This is a win-win situation because not only are the family members provided for, but the proceeds will pass to the beneficiaries free of estate tax.
In planning for the blended family, the “end game” is to ensure an orderly, equitable, and compassionate distribution of estate assets to beneficiaries with minimal jealousy and animosity among the competing parties. An experienced and competent adviser – either a lawyer, financial planner or both – should have an understanding of human nature as well as knowledge of the laws and techniques for estate planning.
Alan G. Orlowsky, President of Orlowsky & Wilson, Ltd. in Lincolnshire, Illinois, has been counseling people on estate planning for 28 years. He previously worked for the IRS in its Estate and Gift Tax Division. He also worked for the Deloitte & Touche accounting firm, and he has taught taxation and accounting at Loyola University of Chicago, School of Business.
Al is a contributing author of the book 21st Century Wealth (Esperti Peterson Institute, Denver, 2000), and has written numerous articles on the subject of estate planning. Contact Alan Orlowsky by email or call 847-325-5559.
Updated November 2019