Although the divorce rate in the United States has declined since its peak in the 1980s, between 40%-60% of marriages still end in divorce, and half of all children in the U.S. will witness their parents' marriage end. Because more than 80% of people who divorce will go on to remarry, 1 out of 3 Americans is a stepparent, stepchild or is in some way part of a blended family.
Along with the changing demographics of the American family come more complex estate planning needs. A simple estate plan with either “sweetheart” wills or a joint revocable living trust in which both spouses leave all assets to the surviving spouse, is usually not an optimal plan for blended families.
After the death of the first spouse, sometimes the relationship between the surviving spouse and the children of the deceased spouse begins to deteriorate, whether because of existing animosity or jealousy, or for a more benign reason such as a change of circumstances, geographical distance, or remarriage. The surviving spouse might decide to update their estate plan, which may mean that no inheritance is ever passed on to the children of the first spouse to die. This can be especially true if the surviving spouse is close in age to the children of the deceased spouse.
What options does a parent have to protect their children's future inheritance when they remarry?
For spouses who would like to use a revocable living trust as the basis of their estate plan, there are some options that can be written directly into that living trust that will help preserve the assets for the children. One very simple strategy is to create a limitation on the power of the surviving spouse to amend the trust after the death of the first spouse. This may help prevent the surviving spouse from disinheriting the children of the first spouse to die. It could, however, create other challenges such as requiring the children to wait a long time until the death of the second spouse before they are entitled to anything at all.
If you have planning goals for your blended family that cannot be met by the standard terms of a simple revocable living trust, there are many other options to help you meet your goals and preserve your children's inheritance. Below is a chart summarizing just some of the choices a parent might want to consider, followed by a more detailed explanation of each option. Keep in mind that these planning choices are not mutually exclusive; they can be, and often are, used together to achieve multiple goals in an estate plan.
| Protects your children's interests in inheriting your assets | Provides a specific assets for your children | Protects assets from the creditors or ex-spouses of your children | Allows surviving spouse use of the asset for their lifetime | Defers estate taxes until death of second spouse | |
|---|---|---|---|---|---|
| Pre-nuptial Agreements | ✓ | ||||
| Bloodline Trusts | ✓ | ✓ | |||
| Life Insurance | ✓ | ✓ | |||
| Life Estate | ✓ | ✓ | ✓ | ||
| QTIP Trust | ✓ | ✓ | ✓ |
- Prenuptial agreements
- EXAMPLE: Carla and Jason are engaged to be married. They've both been married before, both have children from previous marriages, and both bring a large and roughly equal amount of assets and income to the marriage. Before tying the knot, Carla and Jason execute a prenuptial agreement in which they agree to keep their assets separate and they waive their rights to inherit from each other's estates so that the children will only inherit the assets of their own parent.
- Bloodline trusts
- EXAMPLE: Marty and Diane are married and have one son, Mason, age 35. Mason is married to Ruth and the couple has two children, Jacob and Jerad. Marty and Diane create a bloodline trust that takes effect upon the death of the second of them to die. Marty dies first, and Diane dies a few years later. After Diane's death, all of Marty and Diane's remaining assets go into a bloodline trust for the benefit of Mason. Mason is the trustee of the trust and is permitted to use trust assets for certain specified needs for himself, Jacob or Jerad only. Five years later, Mason discovers that Ruth has been unfaithful and he files for divorce. In the divorce proceedings, Ruth asks for one-half of the marital assets, including the assets in the bloodline trust. However, because the trust contains certain provisions that prevent it from being considered marital property, Ruth is not entitled to any of the assets in the trust, which is preserved for Mason, Jacob and Jerad.
- Life insurance
- EXAMPLE: Ronald and Renee are married and Ronald has three children from his previous marriage. Renee has not been married before and has no children. Ronald is 15 years older than Renee and is concerned that if he dies first and Renee inherits all of their joint assets, that his three children might be cut out, especially if Renee remarries. Ronald takes out a $1 million life insurance policy on himself, naming his three children as equal beneficiaries. When Ronald passes away, each of his children receives $333,000 from the life insurance and Renee inherits all of their joint property.
- Life estate
- EXAMPLE: Ben and Stacey both have children from previous marriages. When they marry, Stacey and her young children move into Ben's home. Ben's children are grown and no longer live at home, but they grew up in that home and Ben wants them to have the home after he's gone. He also wants to make sure that Stacey and her children will not be forced to leave the home if he dies. Ben gives Stacey a life estate in his home, which allows her to remain in the home in the event of Ben's death. The life estate specifies that Stacey is required to pay the property taxes, insurance and maintenance expenses on the home, and says that Stacey's life estate terminates if she moves out of the home or remarries. When Ben dies, Stacey lives in Ben's home according to the terms of the life estate for the rest of her life. When Stacey dies, the property passes automatically to Ben's children.
- Qualified Terminable Interest Property Trust (QTIP)
- EXAMPLE: Fred and Ginger both have children from previous marriages, and are both high net worth individuals. As part of Fred and Ginger's overall estate planning, a QTIP Trust is established to provide flexibility to their executor in making decisions about deferring tax payments until the death of the second spouse, while also providing an income stream to the surviving spouse. When Fred dies, a portion of his assets go to the QTIP Trust and the income from those assets is payable to Ginger for her lifetime. At the end of Ginger's life, the assets in the QTIP Trust are distributed to Fred's children and any estate taxes due on these assets from Fred's estate are paid at that time.
Updates to your estate plan can begin with a prenuptial agreement with your future spouse, which can address such items as the spouses' rights and responsibilities during the marriage to pay for expenses, obligations if they divorce and the rights of the surviving spouse to the estate of the first spouse to pass away.
If your goal is to keep your money in your family, a bloodline trust can help you achieve that by preventing your spouse or your children's spouses from inheriting the trust's assets. As the name of this type of trust suggests, it is designed to keep your assets in your line of direct descendants (children, grandchildren, great-grandchildren, etc.). It can also protect the assets from your child's creditors or former spouses. Rather than leaving your assets to your child directly, you would leave your assets to the bloodline trust, which can be written into your will or revocable living trust. The terms of the bloodline trust allow your child (or someone else you name) to serve as the trustee and to use trust assets for the benefit of your child or grandchildren. When the trust terminates at the death of your child, the remaining assets are distributable to your lineal descendants (grandchildren or great-grandchildren), and would not be distributable to your child's surviving spouse.
Rather than dividing your existing assets between your children and your spouse, another solution is to purchase a new life insurance policy and name your children as the sole beneficiaries of that policy (you can also change the beneficiary designation on an existing policy rather than purchasing a new policy). An experienced attorney can help you consider the gift or inheritance tax consequences of this strategy.
Sometimes one spouse moves into the existing home of the other when they marry, rather than purchasing a new home jointly. If the goal is to preserve the home as the eventual inheritance of the children of the spouse who originally owned the home, a life estate could be a solution. Rather than retitling the home jointly when the new spouse moves in, the deed can be amended to give the new spouse the right to live in the home for their lifetime, after the death of the spouse who owns the home. At the end of the second spouse's life, the home can then pass to the first spouse's children. A gift of a life estate can be written directly into a will or revocable living trust.
If tax deferral is also a goal, a QTIP Trust can be used to give the surviving spouse an income interest in the assets of the first spouse to die. The assets are held in trust, and the income generated by those assets is given to the surviving spouse for the remainder of their life. A third-party trustee oversees the assets and the surviving spouse has no right to direct payments from the QTIP Trust. When the surviving spouse dies, the assets in the QTIP Trust are distributed to the children of the first spouse. Although a QTIP Trust is a more complex estate planning technique, it can be an important component of an estate plan for a blended family where there may be estate tax liability. A QTIP Trust can be written into a will or revocable living trust or can be its own stand-alone document.