families face special estate planning complications
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"I once had to tell
a family member on his death bed that because of the way he arranged his assets,
the farm that had been in his family for a couple generations is headed to his
wife and her family," he says.
To prevent the situation that
Krull encountered takes meticulous financial planning. The goal is to nurture
your new blended family now and ensure they are taken care of after you're gone.
to Krull, an effective financial plan for a blended family should:
2. Protect your own children
3. Provide for your new spouse,
4. Minimize estate
Disinherit your ex-spouse? Yes. Not only is this
a little-known step, it is vitally important to avoid the kinds of legal shocks
that continue to fuel TV soap operas.
Simply put, unless you
actively remove an ex-spouse as the named beneficiary or joint owner with right
of survivorship, he or she could legally inherit your house, your Employee Retirement
Income Security Act (ERISA) retirement plan, your life insurance payout, even
your bank account balances. This could occur even if you specified otherwise in
your will and even if the laws of your state automatically extinguish the ex-spouse's
interest in the assets of your estate.
How can this be?
of those things trump a will. They are non-probate transfers," Krull explains.
"The only transfers that a will covers are those that go through probate.
Joint ownership with right of survivorship, pay-on-death, transfer-on-death and
beneficiary designations all trump probate."
unless you take the proper legal steps, your former wife or husband would likely
be named by a probate court to manage the inheritance you leave your children.
If one of your children should predecease him or her, your ex-spouse, and not
siblings, would inherit that share of your estate as next-of-kin.
have to change all your beneficiaries," says Williams. "I've seen clients
who have been married two or three years and they still have their parents as
their beneficiaries. And that includes life insurance, IRAs and retirement plans."
your children and providing for your spouse might seem simple, but in blended
families, few things ever are. If you leave everything to your spouse with instructions
to provide for your children, you run the risk of disinheriting your own kids
because your spouse's estate could fall to his or her offspring, not yours.
there's the havoc that can result in May-December romances where the children
are as old, or older than, their stepmother. Your children may not live to receive
the inheritance you intended, or your spouse may simply choose to leave it all
to her children or to her new spouse.
planners have a ready set of legal tools to make sure you don't accidentally disinherit
your own children. Here's what they are and how they can work together:
Discretionary Trust (LTD trust)
This trust administers your children's
inheritance through a trustee appointed by you. Should a child predecease your
ex-spouse, their inheritance would go to their children (your grandchildren) or
your surviving children, not your ex. LTD trusts also can protect your children's
inheritance from divorce, bankruptcies, lawsuits and irresponsible spending.
Terminable Interest Property Trust (QTIP trust)
A QTIP trust provides
income and even principle to your new spouse for life, after which the trust assets
often pass to an LTD trust for your own children. Protects your new spouse while
providing for your children.
A policy on your life will provide a known amount to your beneficiaries
upon your death. The payouts also can be used to fuel a QTIP trust to benefit
your spouse and children or an LTD trust to protect your children. QTIPs are particularly
useful to "cash out" children who are of similar age to a younger surviving
For May-December couples who have young children, the attractive payout
of a second-to-die
policy can enable them to amass a financial war chest for their heirs. The
policy may be owned by an Irrevocable Life Insurance Trust (ILIT trust) to minimize
By clearly listing those assets you intend to keep separate after marriage, you
may have greater control over them after you're gone, at least in states that
A typical blended family financial plan
might include a prenup which stakes your legal claim to your individual assets,
a life insurance policy which provides a known amount of money to each beneficiary,
and a QTIP trust to provide a lifetime income stream for your spouse and then
funds an LTD trust for your children.
Krull says he also likes
to include what he calls a "Rodney King clause," as in "can't we
all just get along?"
"That clause says that if anyone
whines or complains about what my clients have set up, then they are presumed
to have died before my client according to the trust instrument and are thereby
legally disinherited by being declared dead."
MacDonald is a contributing editor based in Mississippi.