Estate planning used to be pretty easy when every family was a husband, wife, and two and a half kids surrounded by a picket fence. That’s often not how it works anymore, and we now do many estate plans for blended families.
Like a lot of issues involving blended families, there are good solutions available, but it can take a little more time and thought to get there. This post explains how we work through estate plans for blended families.
The Problem
Planning for blended families requires spouses to balance two goals. They both want to take care of each other if one dies, and one or both want to take care of children from a prior relationship.
Generally speaking, a surviving spouse can always change their estate plan (potentially to exclude a stepchild) after one spouse dies. This means that when spouses name each other as primary beneficiary, they are trusting each other to retain their respective children in the plan after the death of the first spouse.
How to Think About This
The way we talk to most clients about this is to talk about three pots—the “his”, “hers”, and “ours” pots. The “his” pot is all assets that would go to someone other than the wife if the husband died first. The “hers” pot is everything that would go to someone other than the husband if the wife died first. The “ours” pot is everything that would go between the spouses if one spouse died. If you draw this up, it looks like this:
To work out the distribution, the clients must decide (1) what will be in each pot; and (2) the ultimate beneficiaries of each pot.
What will be in each pot will vary depending on the circumstances. On one extreme, you might have a couple who each had a practice marriage early in life, had a couple of kids, got divorced, and then married their current spouse. They raised all the kids together, earned their retirement savings during the marriage, and by the time they come to us to do the plan they’ve been married 35 years. In that case, they might not have a his or hers pot at all—they just give everything to each other and trust that the survivor will include all of the kids in their plan. This plan would look like this:
On the opposite side of the spectrum, you can have a blended family in which both spouses were married to their first spouse for 40 years, had their first spouses die, and met and married their current spouse late in life. Their kids don’t know each other, and both have their own retirement savings and are not dependent on the other for their retirement. In that case, perhaps they would own a house together that would go between them, but everything else would end up in the “his” and “hers” pots, like this:
Other blended families will fit somewhere in between. Typically, there is some discussion and reciprocity here. So if one spouse says they would like to do something for their kids if they die first, the other will probably do something equivalent. Or, both spouses can decide to give everything to the other and trust that the survivor will honor their joint intentions.
Sometimes, using life insurance can allow for a cleaner plan that gives something to the kids from the prior relationship without dividing up existing assets, like this:
There are as many ways to do this as there are families. Our job is to help the spouses find the balance that works for them.
The Alternative
Planning in blended families can involve difficult tradeoffs, and it can be easy to put these off. However, the alternative is not appealing. Wisconsin’s intestacy statute says that if no planning is in place, assets subject to administration (i.e. assets that are not jointly titled and do not have beneficiaries) are to be divided equally between the surviving spouse and the children of the deceased spouse. Certain retirement accounts, however, are governed by federal law, and state that the surviving spouse is the beneficiary unless the spouse has consented to a different designation in writing. The interaction of state and federal law with a couple’s asset mix—and the fact that the statutes treat all blended families the same way—can often create results that are very different from what the spouses would have drawn up themselves.
Ready to get started? Contact our office today to schedule a no-obligation initial consultation. We look forward to meeting with you.