In a previous post, I discussed the top three reasons you may need a will or trust to protect you, your assets, and your family (See: http://www.toburenlaw.blogspot.com/2013/08/estate-planning-basics-top-3-reasons.html). One of those top three reasons is because you want to decide, instead of allowing a court to decide, how to distribute your assets upon your death. This topic is especially important, and challenging, for a blended family, which is a family in which one or both parents has children from a previous relationship.
Perhaps the best way to illustrate the estate planning challenge for blended families is with an example. Let's say that Bob and Jill were recently married. Bob has two adult children from a previous marriage, and Jill has one adult child from a previous marriage. Bob and Jill live in a house that Bob owns. Because they were both married previously, all of their other assets - bank accounts, investment accounts, vehicles, etc. - are also owned individually.
When Bob and Jill decide to create their estate plan, they agree that their primary goal is to provide for the surviving spouse for the remainder of his or her life, with the remainder of Bob's assets, including the house, passing to his children, and the remainder of Jill's assets passing to her child. In other words, if Bob dies first, he wants Jill to have use of his house for the rest of her life. Upon Jill's death, Bob wants the house sold and the proceeds split between his own children.
Under this scenario, Bob and Jill cannot accomplish their goals with a will. If Bob left the house and his other assets to Jill through his will, Jill would become the sole owner of those assets upon Bob's death. At that time, she would no longer have any obligation to leave Bob's assets to Bob's children upon her own death. If she chose, for whatever reason, not to follow Bob's wishes, she could create a new will, leaving everything to her own children. Under this scenario, Bob's children would inherit nothing from their father.
Even without factoring in the house, it would be extremely difficult for Bob and Jill to accomplish their goals with a will. Let's assume that Bob's other assets (not including the house) have a value of $500,000, made up of a checking account, a savings account, a retirement account, and mutual funds. Bob would still like to provide for Jill for the remainder of her life if Bob was to die first. Upon Jill's death, he again wants the remainder of his assets to pass to his own children.
Similar to the scenario above with the house, if Bob left his other assets to Jill, she would inherit those assets outright, and she would be able to change her own will so that Bob's children would inherit nothing from her. Although a will can be written in a number of different ways, there is just not a good option when planning for blended families. Let's say Bob creates a will that says, "Upon my death, I leave half my estate to my wife, with the other half being divided among my children." What if, due to a drop in the stock market, at the time of Bob's death, the estate is only worth $300,000, instead of $500,000? Now, Jill may not inherit as much as Bob thought she would, and she may not have enough money to live comfortably for the remainder of her life.
Let's change the scenario above and say that Bob writes his will as follows: "Upon my death, I leave my wife $400,000, with the remainder divided evenly between my two children." Here, Bob plans to leave his wife $400,000, and each of his two kids $50,000. But, if Bob lives several more years, and at the time of his death, the estate is worth $1.2 million, Jill would still inherit $400,000, but each of Bob's children would inherit $400,000. Again, Bob's true intentions have not been carried out.
Since a will is not the best option for Bob and Jill (and their blended family) to accomplish their estate planning goals, Bob and Jill should each create a revocable living trust (RLT). A RLT will allow Bob and Jill to provide for the surviving spouse while also passing the remainder to each spouse's own children. Going back to the original example where Bob owns the house, Bob could set up a trust that would allow Jill to remain in the house for the remainder of her life. In this scenario, the trust would own the house, and when Jill eventually dies, the trust could sell the house and split the proceeds between Bob's children. Since Jill would not become the owner of the house upon Bob's death, she also could not use her own will to pass the house to her children.
Similarly, Bob's other assets, which currently total $500,000, could be put into a trust and could be used for Jill's benefit for the remainder of her life, with the remainder passing to Bob's children upon her death. To ensure that the money was spent properly, a trustee would oversee how the money is spent. The trust could also have specific provisions that outline how the money could be spent.
Blended families are becoming more common, and they prevent unique estate planning challenges. To learn more about this topic, or to schedule an appointment to discuss your estate planning goals, please visit my website at www.toburenlaw.com.
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