By FPA Members Elaine King, CFP®, CDFA™ and Philip Herzberg, CFP®, MSF
Last Updated: May 2, 2011
Keeping in perspective that 65 percent of remarriages will involve kids from a past marriage,1 you should devise and implement an estate plan during the divorcing process to manage the distribution of your assets and ensure you financially provide for your children from previous marriage(s). Foremost, as your divorce and a possible subsequent remarriage can create unforeseen planning challenges, review your state laws relating to blended family issues with the collaborative guidance of an estate attorney and divorce financial planner to address concerns.
To assure yourself peace of mind and facilitate the planning during your divorce, peruse these following significant estate planning insights when considering your future blended family’s specific needs and aspirations.
Design your estate plan to ascertain your children and stepchildren are covered according to your wishes
- Do not depend on your former spouse or future surviving spouse in a blended family to include your biological children in the disbursement of assets. As a caveat, if you predecease your new spouse without developing an estate plan for your blended family, then you may forever disinherit your own children. Responsibly and sensibly cover all bases in your estate plan, including your children’s college education expenses and custody provisions.
- Account for the evolving circumstances facing your blended family members when drawing up and/or updating a living will, durable power of attorney, and healthcare directives for medical decisions. Discuss these relevant estate planning objectives and considerations with the collective help of a qualified legal professional and financial planner.
Further, assess in your estate plan if you have to support your parents during their retirement. Are there particular assets, such as the vacation home and family jewelry, you would like your children to have upon your death? Strategize the appropriate blended family estate plan for these personal assets to be distributed to your intended children.
Decide on designating a competent professional trustee to carry out your estate plan and avoid family conflicts of interests
- In the context of your family’s dynamics, review the suggestions and factors in Financial Family Matters: When Should You Select a Professional Trustee? when thinking of appointing an independent trustee or professional fiduciary. Prudently identify a suitable and capable trustee, who has intimate knowledge of your blended family’s well-being and can handle the legal, investment, and tax ramifications that arise with complex estate planning issues.
Create a Long-Discretionary Trust (LTD Trust) and choose a professional trustee of your own selection to administer the inheritance for your children, grandchildren, and stepchildren, and to fulfill their rights as beneficiaries. For instance, you can control distributions and maintain the inheritance, according to your wishes in the trust for and from your children and future blended family members through drafting spendthrift provisions in your LTD Trust. Adeptly manage blended family investment, tax, and interpersonal trust intentions by utilizing these Spendthrift clauses for your children and protecting them from ill-conceived choices, including risky investments or reckless spending.
Optimally plan to preserve your future blended family members’ monetary needs and interests by considering flexible and comprehensive estate planning strategies
- Weigh the benefits of constructing a Bloodline trust to maintain maximal control for each child and to keep funds in his or her bloodline. In the event of a child’s future divorce, lawsuits and bankruptcies, you can arrange for a Bloodline trust to protect your child’s inheritance from potential creditors and claimants (i.e. plaintiffs in lawsuits and your child’s divorcing spouse in-laws).
- Appropriately consider purchasing your own irrevocable life insurance trust (ILIT) and name your children as sole beneficiaries of this life insurance policy to protect your children’s inheritances. Alternatively, you can ensure that your kids from a previous marriage receive their inheritances promptly, by having them own the ILIT policy, while you pay the premiums utilizing your annual exclusion gifts. Consult with qualified estate and financial planning professionals to discuss the tax ramifications of these techniques.
- Think about using a Family Limited Partnership (FLP) or Limited Liability Company (LLC) comprised of family members to transfer and distribute assets (i.e. real estate and business interests) to your children and their bloodline descendents. If a FLP or LLC is properly structured, you can protect your future blended family’s assets from the claims of your future spouses and former spouses, as well as your children’s spouses, their former spouses, and potential creditors.
Ultimately, with these suggestions and clearly-delineated intentions for your children and their well-being, you can comfortably prepare and establish a proper and customized estate plan during the divorce process to take care of your future blended family members’ diverse needs.
1 National Stepfamily Resource Center; also, cited in Matt Krantz’s February 18, 2011, USA Today feature, “Blended Families Require Financial Planning.”
FPA member Elaine King, CFP®, CDFA™, is the founder of Family & Money Matters Institute in Miami, Fla. FPA member Philip Herzberg, CFP®, MSF, is Director of Media Relations & Public Awareness for FPA of Miami-Dade.