When it comes to a blended family and estate planning, there are no guarantees, and things can get particularly tricky when it comes to estate planning. However, there are some classic mistakes to avoid, reports this recent article from AARP titled “Remarried With Children? 5 Estate Planning Mistakes to Avoid.”
Most people mean well. They want to protect their spouses and hope that their heirs will share in any proceeds when the second spouse dies. They want all the children to be happy. They also hope that the step siblings will still regard each other as “siblings” after the parents are passed. However, there are situations where children get shut out of their inheritance or an ex-spouse inherits it all, even if that wasn’t the plan.
Here are five mistakes to avoid:
#1: Not changing named beneficiaries. People neglect to update their wills and beneficiary designations. This is something to do immediately, before or after the wedding. By changing the name of the beneficiary on your 401(k), for instance, it passes directly to the surviving spouse without probate. All financial accounts should be checked, as should life insurance beneficiaries. You can designate children as secondary beneficiaries, so they receive assets, in the event that both parents die.
While you’re doing that, update legal directives: including the medical power of attorney and the power of attorney. That is, unless you’d like your ex to make medical and financial decisions for you!
#2 Not updating your will. Most assets pass through the will, unless you have planned otherwise. In many second marriages, estate planning is done hoping the spouse inherits all the assets and upon their death, the remaining assets are divided among all of the children. There is nothing stopping a surviving spouse from re-writing their will and for the late spouses’ children to be left without anything from their biological parent. An estate planning attorney can explore different options to avoid this from occurring.
#3 Treating all heirs equally. Yes, this is a mistake. If one person came to the marriage with significantly more assets than another, care must be taken if the goal is to have those assets remain in the bloodline. If one person owned the house, for instance, and a second spouse and children moved into the house, the wish might be to have only the original homeowner’s children inherit the proceeds of the sale of the house. The same goes for pension and retirement accounts.
Equal distributions may also not be truly equal if one spouse’s children have access to resources the other spouse’s children do not. For example, children may expect to receive support and/or inheritance from their other parent while the other spouse’s children may not have a second parent or that parent’s wealth to rely on. In this situation, special consideration for the disadvantaged children may be a more equitable solution.
#4 Waiting to give until you’ve passed. If you are able to, it may be worth gifting to your heirs while you are still living, rather than gifting through a will. You may give up to $15,000 per person or $30,000 to a couple without having to pay a federal gift tax. Recipients don’t pay tax on most gifts. Let’s say you and your spouse have four children and they are all married. You may give each child and their spouse $30,000, without triggering any taxes for you or for them. It gets better: your spouse can also make the same size gift. Therefore, you and your spouse can give $60,000 to each couple, a total of $240,000 per year for all eight people and no taxes need be paid by anyone. This takes assets out of your estate and is not considered income to the recipients.
#5 Doing it yourself. If you’re older with a second marriage, ex-spouses, blended families and co-mingled assets, your estate planning will be complicated. Add a child with special needs or an aging parent and it becomes even more complex. Trying to create your own estate plan without a current and thorough knowledge of the law (including tax law) is looking for trouble, which is what you will leave to your children. The services of an estate planning attorney are a worthwhile investment, especially for blended families.