This article was first published on bankrate.com by author, Jay McDonald.
“I once had to tell a family member on his death bed that because of the way he arranged his assets, the farm that had been in his family for a couple generations is headed to his wife and her family,” he says.
To prevent the situation that Krull encountered takes meticulous financial planning. The goal is to nurture your new blended family now and ensure they are taken care of after you’re gone.
According to Krull, an effective financial plan for a blended family should:
1. Disinherit your ex-spouse
2. Protect your own children
3. Provide for your new spouse, and
4. Minimize estate taxes
Disinherit your ex-spouse? Yes. Not only is this a little-known step, it is vitally important to avoid the kinds of legal shocks that continue to fuel TV soap operas.
Simply put, unless you actively remove an ex-spouse as the named beneficiary or joint owner with right of survivorship, he or she could legally inherit your house, your Employee Retirement Income Security Act (ERISA) retirement plan, your life insurance payout, even your bank account balances. This could occur even if you specified otherwise in your will and even if the laws of your state automatically extinguish the ex-spouse’s interest in the assets of your estate. How can this be?
“All of those things trump a will. They are non-probate transfers,” Krull explains. “The only transfers that a will covers are those that go through probate. Joint ownership with right of survivorship, pay-on-death, transfer-on-death and beneficiary designations all trump probate.”
What’s more, unless you take the proper legal steps, your former wife or husband would likely be named by a probate court to manage the inheritance you leave your children. If one of your children should predecease him or her, your ex-spouse, and not siblings, would inherit that share of your estate as next-of-kin.
“You have to change all your beneficiaries,” says Williams. “I’ve seen clients who have been married two or three years and they still have their parents as their beneficiaries. And that includes life insurance, IRAs and retirement plans.”
Protecting your children and providing for your spouse might seem simple, but in blended families, few things ever are. If you leave everything to your spouse with instructions to provide for your children, you run the risk of disinheriting your own kids because your spouse’s estate could fall to his or her offspring, not yours.
Then there’s the havoc that can result in May-December romances where the children are as old, or older than, their stepmother. Your children may not live to receive the inheritance you intended, or your spouse may simply choose to leave it all to her children or to her new spouse.
Fortunately, financial planners have a ready set of legal tools to make sure you don’t accidentally disinherit your own children. Here’s what they are and how they can work together:
Long-Term Discretionary Trust (LTD trust)
This trust administers your children’s inheritance through a trustee appointed by you. Should a child predecease your ex-spouse, their inheritance would go to their children (your grandchildren) or your surviving children, not your ex. LTD trusts also can protect your children’s inheritance from divorce, bankruptcies, lawsuits and irresponsible spending.
Qualified Terminable Interest Property Trust (QTIP trust)
A QTIP trust provides income and even principle to your new spouse for life, after which the trust assets often pass to an LTD trust for your own children. Protects your new spouse while providing for your children.
Life insurance
A policy on your life will provide a known amount to your beneficiaries upon your death. The payouts also can be used to fuel a QTIP trust to benefit your spouse and children or an LTD trust to protect your children. QTIPs are particularly useful to “cash out” children who are of similar age to a younger surviving spouse.
Second-to-die insurance
For May-December couples who have young children, the attractive payout of a second-to-die policy can enable them to amass a financial war chest for their heirs. The policy may be owned by an Irrevocable Life Insurance Trust (ILIT trust) to minimize taxes.
Premarital agreement
By clearly listing those assets you intend to keep separate after marriage, you may have greater control over them after you’re gone, at least in states that recognize prenups.
A typical blended family financial plan might include a prenup which stakes your legal claim to your individual assets, a life insurance policy which provides a known amount of money to each beneficiary, and a QTIP trust to provide a lifetime income stream for your spouse and then funds an LTD trust for your children.
Krull says he also likes to include what he calls a “Rodney King clause,” as in “can’t we all just get along?” “That clause says that if anyone whines or complains about what my clients have set up, then they are presumed to have died before my client according to the trust instrument and are thereby legally disinherited by being declared dead.”
The first step to attaining any sense of self-confidence, strength, or sanity is by taking responsibility for each and everything in your life and this boils down to choice. When we choose good for ourselves, we create good for ourselves. Everything in life is a choice!
I obtained a passport in less than 3 days by using Fastport Passport!
