Estate planning is difficult for everyone but particularly complex in blended families. Helping clients navigate the complexities is critical to ensuring they provide for their families fairly.
Many people entering into second marriages have estate plans from previous relationships that they need to update. They also often need to remember to change the beneficiaries on their RRSPs, life insurance, and work pension.
Trusts
Blended families are becoming more common and present a unique estate planning challenge. Many clients are concerned that their children or new spouses won’t get a fair part of the estate. One approach to make sure this doesn’t happen is to establish trust. These are complex legal documents, but they can be effective for protecting a client’s wishes and minimizing family conflict after their death.
Traditional estate plans give assets to the survivor upon their death, but this can often disinherit the children of the deceased. Moreover, the surviving spouse can amend these documents at any time. This means the surviving spouse can redirect the estate to charities or a new spouse.
One option is to use separate trusts. These trusts hold community property and each spouse’s property, if any. The surviving spouse can access trust income and the trust principal, but the remaining trust assets pass to the deceased spouse’s children.
Regardless of how you plan your estate, reviewing your documents and beneficiary designations is essential. The best tip and advice on estate planning for blended families is to check your documents every three to five years. This will help ensure that your estate is up-to-date and reflects your family’s current state. It will also help prevent documentation errors or beneficiary designations that could lead to litigation.
Beneficiary designations
Many people need to keep their beneficiary designations current. This can result in the wrong person receiving their assets or insurance policy proceeds. In addition, this may cause a conflict of interest in the family. For example, suppose your client named their spouse as beneficiary of an account, and the surviving spouse has children from a previous relationship. In that case, it’s important to remember to update those beneficiary designations.
Traditional estate plans often leave everything to the surviving spouse, who may subsequently decide to change their will to omit the first spouse’s biological children. To support the surviving spouse and their children, this is frequently done. Additionally, it might be done to benefit from estate tax exemption
However, there might be better solutions for blended families. This is because the surviving spouse might spend all of the assets during their lifetime. They can run out of money as a result, leaving the kids without anything. This is why it’s crucial to think about alternative IRA choices. For instance, some people use trusts that, following the death of the first spouse, transmit the money to the surviving spouse’s children. This could help ensure the family has sufficient money after the surviving spouse’s death.
Pre or post-nuptial agreements
A pre or post-nuptial agreement can resolve any disagreements that may exist between the couple regarding money and make sure that the elective share of the surviving spouse is not exceeded. You can decide if this is a wise choice for your family with the assistance of an experienced estate planner.
Early on in the relationship, it’s crucial to talk about asset distribution plans when a new partner has significant assets to bring into the marriage. Even though having this talk could be awkward, it is necessary to head off any future conflict. Your estate planning paperwork is now being reviewed and updated to reflect the current family situation.
One way to address this issue is to use trusts to distribute assets to spouses and children. This allows the surviving spouse to access the trust income while retaining some control of the trust’s principal. In addition, a trustee who is not a relative and could be a professional fiduciary can be chosen.
Revocable and irrevocable trusts set up separately for a spouse and children is another alternative for dividing the estate. With the remainder passing to the children after death, this enables the spouse to receive a portion of the inheritance during their lifetime. However, this tactic can be complicated, so it’s crucial to have a knowledgeable estate planning advisor help you out.
Taxes
In a conventional estate plan, the surviving spouse receives the assets of the deceased spouse. A married person, though, can have kids from prior relationships and want to leave an inheritance as well. If this occurs, provincial rules may allow a testator’s spouse to “claim” a piece of the estate, usually between one-third and fifty percent of the decedent’s assets.
This can be problematic for blended families, as it could disinherit the deceased spouse’s biological children. Fortunately, some estate planning strategies can address this issue. These include trusts, beneficiary designations, and pre or post-nuptial agreements.
A life insurance trust is a blended family’s most important estate planning tool. This type of trust is tied to a life insurance policy, and the insured/grantor can designate their children from previous marriages as beneficiaries. The trustee of the life insurance trust manages the death benefits, and when the insured/grantor dies, the proceeds are distributed to the designated beneficiaries.
Many people have a will and revocable trust from their first marriage but often do not change their old estate plan when they remarry. Unfortunately, this can result in the surviving spouse consuming all the assets and leaving nothing to their descendants from the first marriage. To avoid this problem, reviewing and updating your estate planning documents regularly is critical.
