Estate Planning for Blended Families: Avoiding Future Conflicts

1. What Is a Blended Family?

A blended family is a type of family in which the spouses have children from previous marriages. This is a very common scenario in estate planning. Think of “The Brady Bunch” Scenario, where mom has children from a prior relationship and so does dad. 

2. Challenges Faced by Blended Families:

Guardianship Decisions

Granting your spouse the power of attorney for both health and financial-related decisions is the most common choice and is usually the best choice in a non-blended family. The situation is more complicated in blended families. Conflicts arise when beneficiaries believe their stepparent is unfairly making financial decisions to their disadvantage. This could be medical-related decisions as well. A situation where this could occur is when a child believes the stepparent is making decisions that are contrary to what the child believes their parent would have wanted. Discussing this issue in advance with your family can help mitigate future problems.

Asset Division

The obvious and most common challenge for asset division is distributing assets fairly among the stepchildren of the spouses. Often, each spouse will have a bias to their natural children. While planning is essential, there are still challenges. Among the most common challenge begins after the first spouse dies. At that time, the surviving spouse often will favor their natural children over the stepchildren.

Inheritance Rights

Without an estate plan, the distribution of the estate follows the state laws of intestacy. This may be to the advantage or disadvantage of the heirs. Particularly in a blended family, since in California the stepchildren generally have no statutory right to inheritance from the property of the stepparent. An estate plan is crucial to tailor how you want your estate to be distributed. 

3. Strategies to Consider:

Comprehensive Estate Plan

As mentioned above, an estate plan needs to be created otherwise the law of the estate decides how assets are to be divided.

Trust with Complete Control by the Surviving Spouse

A revocable trust is a staple tool to avoid probate and tailor how your estate is to be distributed. Generally, upon the death of the first spouse, the surviving spouse is granted total control of the estate. This can be a great strategy as it is the least complex trust and offers the surviving spouse the most flexibility. However, this comes with the risk of the surviving spouse altering the trust and potentially disinheriting the stepkids. Each situation is unique, and some will favor having their spouse have complete control. Others may not want the risk that the plan will be changed after they’re gone and opt for a different kind of solution.

Gifts Outside the Trust

A strategy to consider is making gifts during your lifetime. This could include cash or anything else of value. However, there could be negative tax implications, such as capital gain taxes, depending on the gift. 

Assets could also be passed on through other accounts or insurance policies. Life insurance could be set up with the kids as the beneficiaries. Separate accounts, like a bank account could hold specified assets for children that can only be accessed after the parents' death, also known as a Pay on Death Account. 

An IRA can also be used to gift outside the trust by appointing beneficiaries. Normally, the default would be the spouse. However, appointing beneficiaries requires careful consideration because of the complexity of the Secure Act, along with tax implications and withdraw requirements.

The A/B Trust

Unlike the trust strategy mentioned above, the A/B trust prevents the surviving spouse from altering the deceased spouse’s estate plans. This is because there are two trusts, the A and B trust. The decedent’s trust (B Trust) becomes irrevocable at their death. Therefore, the B trust cannot be changed by the surviving spouse. However, the surviving spouse will have complete control of their trust, the A trust. 

The downside is there is less flexibility for the surviving spouse, and it is more complicated to manage. For example, the B trust could allow income generated from the trust to the surviving spouse for their lifetime. However, this could be limiting and time-consuming to manage. It may also be limiting depending on the assets in the B trust. To mitigate this issue, the trust could be set up to allow for distribution of assets to the surviving spouse for their health, maintenance, and support during their lifetime. The downside to this approach is the trust assets have an increased chance that the assets will be depleted during the surviving spouse's lifetime. There are other tax potential benefits and implications for this type of trust. These should be carefully evaluated.

Communication

Communication is essential to help alleviate future family conflicts. Every family is different, with different personalities and characteristics. Openly communicating and discussing your plans with your family may help guide what type of plan is best for you. It will allow your heirs to voice their opinions. This may help you strategize a plan as well. It is also less likely your heirs will fight when you pass.

4. Conclusion:

As you can see, there are many challenges and strategies in estate planning for blended families. This article is not meant to incorporate every strategy available. Instead, it is meant to discuss some common strategies and help you to consider the issue. Every family is different and there is no one size fits all. It’s recommended that you discuss your situation with an estate planning attorney.