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Tips for Estate Planning With Blended Families

Tips for Estate Planning With Blended Families

Posted on October 16, 2018

Originally published in October 2018

Importance of Asset Titling and Beneficiary Designations

When an individual dies, the assets of such decedent are typically passed on to heirs by way of a Will or other similar document designed to act as a Will substitute (e.g., a revocable trust agreement).

However, a Will (or revocable trust) generally only governs those assets that are titled solely in the decedent’s name (or in the name of the decedent’s revocable trust) and which do not otherwise pass by way of beneficiary designations. Assets that are titled both in the name of the decedent and in the names of others will pass outside of the decedent’s probate estate to the surviving co‑owner(s).

Similarly, certain assets do not pass according the decedent’s Will but instead pass automatically to those persons who are designated as recipients on the beneficiary designation forms.

Asset Titling

Spouses should be very careful about how they each title their assets, especially in a blended family circumstance; and they should only title assets jointly after carefully considering all of the surrounding circumstances and their overall planning objectives. More often, spouses entering into a second (or possibly even third or fourth) marriage will want to keep those assets which they bring into the new marriage separate and apart from their spouse’s assets, so that the assets can be earmarked for eventual distribution to their children and/or protected in the event of divorce. Asset titling strategies could take many different forms, including titling certain assets in the names of one or both of the spouses, their children, and/or trusts or other entities established by the spouses.

Beneficiary Designations

Beneficiary designations are important in planning for blended families, depending largely on the particular types of assets each spouse brings into the marriage. If either or both of them have retirement accounts, life insurance, annuities and/or other accounts/assets that are typically subject to beneficiary designations in the first place, this is something that needs to be considered. The specific strategies to be employed will be a function of the couple’s individual concerns and objectives.

For example, if one spouse wishes to make provisions for children from a previous marriage discreetly, such a spouse may designate their children as beneficiaries of life insurance or an IRA.

Prenuptial and Postnuptial Agreements

In Pennsylvania, these agreements are generally enforceable unless a particular factor renders the enforceability more or less likely, including:

Whether either spouse signed the agreement under duress;
The extent of the parties’ financial disclosure and overall transparency to one another;
The extent to which the terms of the agreement are one-sided; and
Whether the signatories were represented by counsel at or prior to the execution of the agreement.

A number of different issues can be addressed in marital agreements. Among the most common are the following.

Defining “Marital Property.” An important part of any marital agreement is defining those assets that will be subject to equitable division in the event the marriage dissolves at some future point. For example, appreciation accrued on separate assets during the course of the marriage is generally considered part of the marital estate. However, that can easily be (and often is) modified by agreement. To that end, a prenuptial agreement could specify that any assets titled in the spouses’ individual names (including any appreciation on such assets that occurs during the course of the marriage) shall be considered separate assets and therefore excluded from the definition of “marital property” in the event of the parties’ divorce.
Defining Alimony/Support Rights. Similarly, the parties can by agreement define or limit their respective rights and obligations to spousal support (alimony) in the event of divorce. For example, an agreement might delineate how much is owed, for what period of time shall such obligation continue, etc. By way of contrast, child support obligations cannot be contractually waived or limited.
Defining Spousal Intestacy/Elective Share Rights. If a deceased individual is survived by a spouse, then the surviving spouse has certain rights to the decedent’s assets at death. If the decedent dies without a Will, then the spouse is entitled to a share of the decedent’s intestate estate. Similarly, even if the decedent executed a Will that makes no provision for the new spouse, the surviving spouse is nevertheless entitled, by statute, to a share of the decedent’s assets. However, such rights can also be altered, limited or waived by agreement. So, if an individual in a second marriage wants to leave assets to children from the previous marriage, then they will also often want to limit their spouse’s intestate and/or elective share rights to those assets by so providing in a written agreement prior to entering into the marriage.

Considerations When Drafting Wills and Trusts

Specific Disposition Provisions

In a blended family context, perhaps the most difficult decision a testator must make is to determine who will get what assets and in what manner. Often, a testator will want to make some provision for their new spouse but will at the same time also want to provide for the children from their prior marriage.

Percentage Bequests to Spouse and Children. One way to balance the spouse’s needs with those of children from a prior marriage is to simply make bequests (gifts) of a stated percentage to each of them. One advantage of such an approach is that it is (at least potentially) simple. Another advantage is that the surviving spouse’s consumption of their respective share of the estate does not adversely affect the share bequeathed to the children. However, because of a child’s age or perhaps for other reasons, it may not be appropriate to make an outright bequest of estate assets to the child.

Marital Trusts. When a testator has a spouse and children, the type of trust most often utilized is a “marital trust”. In the broadest sense, a marital trust is any trust created primarily to benefit the spouse during the spouse’s lifetime. However, the term “marital trust” is ordinarily used to refer to a trust that is required, by its terms, to distribute all of the net income earned on the trust’s assets to the spouse each year throughout the spouse’s lifetime. The spouse may or may not be given rights to the underlying trust assets (principal), but during the time the trust is in force, the trust assets cannot be distributed to persons other than the spouse. Usually, the testator’s intent is to benefit their children after the spouse’s death and so typically the ultimate beneficiaries of the underlying trust assets (principal) are the testator’s children.

Designating Fiduciaries

After the testator has determined who gets what, when and how, then perhaps the next most important question is who will see to it that the testator’s wishes are carried out as stated. Specifically, who will be designated executor of the testator’s estate and/or trustee of any trusts? Such questions are especially consequential in a remarriage context because of the naturally conflicting interests of the spouse and the children from the previous marriage.

"In Terrorem" (No Contest) Clauses

The risk that a beneficiary may be dissatisfied with various aspects of the Will (e.g., provisions that the testator made for them) is all the more pronounced in a blended family situation. A disgruntled beneficiary can greatly complicate an estate administration, exacerbate tensions among the affected parties and possibly even thwart the testator’s overall testamentary design. For that reason, where dissatisfaction is anticipated, testators will sometimes see fit to include an “in terrorem” clause (also sometimes called a “no contest” clause) in their Wills. The gist of such a clause is that a beneficiary who unsuccessfully contests a provision in the Will thereby forfeits the share of the estate to which they would otherwise be entitled.

Joint Revocable Trusts

Joint revocable trusts are not that common, but they can be very helpful in blended family estate planning. Assets conveyed with the consent or joinder of the surviving spouse are not subject to the spousal election. Because the trust is a joint trust, both spouses have, by definition, joined and consented to the conveyance upon the first spouse’s death.

Joint revocable trusts can also help to prevent improper titling of assets. As discussed above, assets that are titled jointly (with rights of survivorship) as between the spouses pass to the surviving joint owner, which may or may not be what the clients intend. By contrast, assets titled in a joint revocable trust will pass according to the terms of the trust. Joint revocable trusts can therefore be used to focus clients’ attention on (and ultimately to better control) how assets will pass at death.

Trust Terms. The terms of the trust can create a marital trust, pass assets outright to children or carry out any other objectives the couple wants.

Business Interests

Various entity structures can be helpful in blended family planning when one of the primary objectives is to protect a business.

The Buy-Sell Agreement governing the ownership of shares should include prohibitions against certain transfers in the event of death or divorce or require sales to other owners in the event ownership interests are to be transferred to parties restricted by the agreement. In the case of a spousal election, the electing spouse is only entitled to the value represented by subject assets (not to the specific assets themselves). If the deceased spouse’s only asset is a business, then the governing agreement can provide the liquidity for deceased spouse’s estate.

For example, a provision in the agreement providing for the purchase of a deceased owner’s interest in the business (upon that owner’s death) may provide the estate with the cash needed to satisfy bequests to the surviving spouse and/or children. That may in turn make it possible to avoid a forced sale or liquidation of the business.

Business entities are also useful when protecting a business from child’s divorce or early death utilizing the same governing documents.

Author: Frances A. McCormick

Originally published in October 2018