When it comes to estate planning, your clients have a huge number of considerations to make. These difficult questions are compounded when blended families are introduced into the picture.
According to the Pew Research Center, more than 40% of American adults have at least one step-relative, so this is likely an extremely common concern among your clients. While your client may feel comfortable dividing up their estate equally among their children, adding ex-spouses or step kids into the mix can result in some difficult decisions.
The potential problems that your clients can run into when estate planning with an extended family are many, which is why it’s important to work with any client who has a major change in their family status right away.
Here are some potential estate planning pitfalls that are not uncommon in blended families: If your client passes away and the assets go to his or her new spouse, when that spouse passes, the assets may then go to his or her own children. Your client’s children may be inadvertently left out of the picture. Similarly, one child could inherit a family property when it was intended for another. And last but not least, an ex-spouse could inherit a former spouse’s assets despite the fact that they may have been intended for their biological children.
If your client has no intention of leaving anything to their ex-spouse, be sure the paperwork concerning inheritance is changed as soon as the divorce is finalized.
Find out what assets – property, wealth or businesses – are still willed to their ex-spouse and change those immediately. This is absolutely essential, as any assets named to the spouse, regardless of their current marital status, will still go to the named beneficiary.
Similarly, when and if your client gets remarried, it’s important to update their estate plan to reflect any new wishes they have for their belongings and consider a prenuptial agreement if appropriate. Adding the new spouse as a beneficiary for your client’s life insurance policy, annuities, IRAs or 401(k) plans will help smooth over any bumps in the road when it comes to their finances.
Leaving assets to children via ILITs
An Irrevocable Life Insurance Trust, or ILIT, may be the right fit for your client to transfer assets to their children, especially if they are affluent individuals. An ILIT can be used to transfer wealth via the death benefit from a life insurance policy on the owner outside the client’s estate to their beneficiaries. For example, assets in the ILIT can be passed to children, while assets outside the ILIT can be left to a surviving spouse. This is one way a client can ensure wealth is transferred to their children in blended families.
Keep in mind, an ILIT is used to remove the ownership and control of the life insurance policy from the estate. Like other irrevocable trusts, transfers to an ILIT are completed gifts in which the client relinquishes control and ownership of the assets. Moreover, once the assets are transferred to the ILIT, the client does not retain the right to modify, revoke or terminate the ILIT. However, assets owned by an ILIT are removed from the client’s taxable estate.
An ILIT can also provide liquidity to your client and their family to pay taxes on the estate and is particularly helpful if the estate is composed of illiquid assets. If your clients want to remove assets from their estates or provide liquidity for their estates, an ILIT may be an excellent solution.
Estate planning is a difficult enough process on its own, so when second spouses and stepchildren are tossed into the mix, your client may feel overwhelmed. Work with them to craft an estate plan they and their families – whomever it consists of – will be comfortable with.
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- Robert W. Finnegan, J.D., CLU®, AEP®, Published in Trust & Estates - February 1, 2018
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