Blended families face some interesting challenges when it comes to estate planning. Often, the parents have a hard time deciding to how to provide for their “new” family while still providing for their own children. This week, I want to show some common scenarios that blended families often face.

All Assets to Surviving Spouse

Some choose to leave everything to their spouse under the assumption that the surviving spouse will treat all of the children equally, or at least care for all of the children. However, the surviving spouse may or may not treat all of the children equally and could potentially leave all of the assets to their own children while the children of the deceased spouse get nothing. So, leaving all of the assets to a spouse may not be the best idea.

There is however, a special trust called a QTIP Trust, that can provide for the surviving spouse during their lifetime and have the deceased spouse’s assets go to their own children upon the death of the surviving spouse.

Suppose Robert and Cindy Client get married and each of them have children from prior marriages. Both want to provide for the other during their lifetimes, but ultimately want their assets to pass to their own children. So, in their estate plan they create a QTIP trust that comes into existence upon the death of the first of them. Let’s assume that Robert passes away first; the QTIP trust then provides for Cindy during her lifetime. By law, Cindy is the only person who can be the beneficiary of the QTIP trust and the assets left at her death will pass to whomever Robert has named. So, during Cindy’s lifetime, she can use the assets as needed, and upon her death the remainder of the trust’s assets pass to Robert’s children.

All Assets to Children

Some choose to leave all of their assets to their children and not to their spouse. This is certainly a possibility but if one spouse is the primary bread winner or has a greater net worth than the other, then the surviving spouse may not have enough to continue their usual standard of living.

To solve this problem, the spouses can rearrange some of their assets to provide for the surviving spouse. For example, if Robert Client has a large estate and Cindy’s is relatively small, he may choose to name her as the beneficiary of a life insurance policy or an IRA account. This way, upon his passing that account will pass to Cindy while the remainder of his assets will pass to his children under his Will or Trust.

Assets to Minor Children

If the spouses choose to leave all of their assets to their children and not to each other, they need to be careful of any children who are considered minors (in TX this is any child under the age of 18). A minor child cannot own property and therefore cannot inherit without someone serving as the child’s legal guardian.

For example, if Robert Client has named his youngest daughter (age 13) as the beneficiary of his life insurance policy the life insurance company will likely require a guardianship be established for her before they will pay the death benefit. A guardianship is an expensive legal proceeding where someone is appointed as the guardian for that child. The guardian manages the assets for the benefit of the minor child.

A better plan would be for Robert to establish a trust for his children and leave assets to the trust. The trustee will then manage the assets for the children and there is no longer a need for a guardianship.

Whatever method the clients choose it is very important that it be in line with their goals. While it is important for every client to establish their goals for estate planning it is absolutely vital when it comes to a blended family because we want to make sure that the two families are considered when it comes to transferring the legacy of each.