​ESTATE PLANNING FOR SECOND AND BLENDED FAMILIES 

      
            Whether due to death or divorce, second marriages and new family structures are commonplace in today’s society.  Second families create critical issues in estate planning and inheritance.  These new family units are usually mergers of children from both spouses’ prior marriages and possibly children of the new marriage.
            In a typical first marriage situation the parties are committed to maintaining the couple’s standard of living for the surviving spouse with the remainder of the estate left to their children until the death of the second spouse.
            The situations in a second marriage are so diverse that nothing is “typical.” However, there is still the desire to maintain the standard of living for the second spouse, while simultaneously providing for the deceased spouse’s children from the previous marriage. How that person’s estate is structured is crucial to the successful implementation of the estate plan.
            It is rare that the parties’ estate plan is to put everything into one pot and divide it equally among the all the parties’ children after the second spouse dies. Even if that were the case, it is difficult to insure the ultimate success of that plan. 
            Take the example of Bob and Carol, who both have children from their first marriage and each have significant assets. They have decided not to enter into a pre-nuptial agreement and have co-mingled their assets. They own real estate in joint names and maintain joint bank and investment accounts. Upon death, the surviving spouse owns all the property. They execute simple wills leaving their property to each other and then to all the children in equal shares.
            Unfortunately, Carol dies an untimely death. Several years later Bob not only remarries, but has no relationship with Carol’s children. In his new will he leaves his property to his new wife and his children. Carol’s children will have inherited nothing when Bob dies.
            Then there is Ted and Alice. Ted is significantly older than Alice. In fact, Ted’s children are about Alice’s age and are not thrilled with their father’s choice. Ted has significant assets and wants to provide for both his new wife and children upon his death. Ted establishes a qualified terminable interest property trust (QTIP). A QTIP trust provides a way for Ted to defer estate taxes by taking advantage of the unlimited Federal estate marital deduction even though he can direct who will receive the property upon Alice’s death. Under a QTIP Trust, all trust income must be paid at least annually to the surviving spouse.  However, the surviving spouse is given only limited powers to invade the principal.  In this case two things could happen which would defeat Ted’s intent. Since Alice and his children are approximately the same age, it is possible that Alice will outlive his children and they will not have received any inheritance or Alice may have received a significant distribution of principal during her life, thereby diminishing the children’s inheritance.
            Second family scenarios are endless and sensitivity and expertise must be used in creating a viable estate plan. Prenuptial agreements are an attempt to resolve estate issues prior to a subsequent marriage. These can be effective in deciding what a spouse’s interest in premarital property would be upon death or divorce, but these agreements are not always enforceable. Premarital agreements are subject to litigation and in some states their validity is conditioned on them being “fair and reasonable” both at the time of execution and at the time of enforcement.
            Long term care and Medicaid issues may not be exempted by prenuptial agreements. Well-drafted estate plans can often go awry due to the ever-increasing cost of nursing home and medical care. Out of pocket expenses for new medications can often run into the tens of thousands of dollars diminishing or depleting even substantial estates.
            Life insurance can help solve these problems. Creating an irrevocable life insurance trust (ILIT) can allow one spouse from a former marriage, to provide for both a new spouse and the children. In Bob and Carol’s case, had Carol created an ILIT for the benefit of her children, then her children would have been guaranteed an inheritance regardless of what happened during or after the marriage. Similarly, Bob should also have funded an ILIT for his children to insure their legacy.
            In Ted and Alice’s case, an ILIT would permit Ted’s children to receive their legacy when their father died and not upon their stepmother’s death.
            An ILIT, if properly drafted, would be exempt from creditors or estate taxes. More importantly, a properly drafted ILIT would not be subject to a spouse’s “right of election” or “elective share” of the deceased spouse’s estate (the ability of a spouse to not accept the terms of the decedent’s will and request an outright distribution of a percentage of the estate according to state law. Depending on the state, that share is usually one-third to one-half of the estate).
            An ILIT might also be useful in providing care and maintenance for the second spouse after death. Assume that in Ted and Alice’s situation, the major asset of Ted’s estate was a business in which his children were involved. A properly funded and drafted ILIT could provide the necessary funds to maintain Alice’s lifestyle without involving her in the business, allowing Ted to leave the business to his children.
            Given the recent changes in Medicaid planning, an ILIT, subject to applicable statutes, would be valuable in ensuring one’s heirs a legacy.
            As subsequent marriages become more prevalent, estate planning issues become more complex. Life insurance is an integral part of a plan which can enable one spouse to take care of the needs of the new spouse and the children simultaneously and should be considered in any estate planning situations involving second families.