More than 26 years ago, George and Linda
Stevenson, of Evanston, Illinois, created a new life
together, each marrying for the second time and each
bringing two daughters from a previous marriage to
their newly formed family. While George and Linda's
immediate plan was to create a happy and harmonious
new household, as their life together grew both in
terms of family (they now have nine grandchildren)
and financial assets, they focused on creating an
estate plan that was fair and equitable to both sets
of children.
"Remarriage can be difficult for everyone,
and Linda and I worked hard to ensure that our
daughters understood that we were committed to
building a life together," says George
Stevenson. "That meant everyone would be
treated equally. All these years later, we have
truly built a blended family that's based on
harmony, respect, trust, and fairness. My daughters'
children now play with Linda's daughters' children.
We vacation together and spend many holidays
together. The estate planning just seems a natural
extension of this positive family environment we
have created."
While most blended families may share similar
goals, achieving them can be another story. As
estate planning attorney Martin Shenkman, of
Paramus, New Jersey, puts it, "The Brady Bunch
is not a reality show. There are always issues, even
if they are hidden below the surface. When one
spouse dies, that's when there's a possibility all
the problems will come crawling out."
The Stevensons are not alone in facing these
challenges. The Stepfamily FoundationSM,
a private company that specializes in counseling
stepfamilies, estimates that more than half of U.S.
families are remarried or "re-coupled." If
you and your spouse want to help ensure harmony
among your blended family members after you are
gone, you need to take the appropriate estate
planning steps now. These generally include a
prenuptial or postnuptial agreement, properly drawn
trusts, life insurance, and durable powers of
attorney.
Till death do us
part
Before saying "I do," people who are on
their second or third marriages may first want to
draft a prenuptial agreement that clearly states
each partner's financial plans in the event of death
or divorce. "A prenuptial agreement can
minimize dissension," says Steven J. Fromm, an
estate planning attorney in Philadelphia,
Pennsylvania.
If it's too late for a "prenup," you
might consider a postnuptial agreement. These
arrangements seek to accomplish similar goals by
spelling out how assets brought to the marriage and
assets accumulated during the marriage will be
treated. There are, however, some limitations. In
most states, a surviving spouse has a statutory
right to a portion of the estate.
When entering into either a prenuptial or a
postnuptial agreement, each partner should have an
independent attorney, Fromm says. Each should be
completely open and disclose both financial and
family details. "The attorney needs to know if
there were three kids from a first marriage,"
Fromm notes.
Like many remarried couples, the Stevensons kept
the property that each spouse brought to the
marriage in their own names. George's property is
held in a trust, to go to his children upon his
death. Everything accumulated during the marriage
will go to the surviving spouse and then, at the
survivor's death, assets will be divided equally
among the four children.
Linda initially brought a larger income to the
marriage but fewer assets. If Linda, who is 65,
finds that she needs more money -- she hails from a
long-lived family, with a grandfather who lived to
103 -- she can sell the family vacation home and
invest the proceeds.
Trusting in trusts
One of the most common estate planning vehicles
for blended families -- a qualified terminable
interest property trust (known as a "QTIP")
-- protects both the surviving spouse and the
children of the first marriage.
With a QTIP, the surviving spouse receives the
income generated by the trust assets during life,
but has no say in who gets the remaining balance at
death. That decision is made by the trust's grantor,
who typically leaves the balance to his or her own
children from an earlier marriage. Classic QTIPs,
however, contain an inherent conflict: In the
interests of the surviving spouse, trust assets are
usually invested to produce income.
This may be at odds with the long-term interests
of the children, who may be looking to invest for
growth, according to Shenkman.
Shenkman's solution to this conflict is a "unitrust,"
which allows assets to be invested for total return,
with a percentage of the total trust assets paid out
each year to the surviving spouse. Because the
payout rises as the value of the assets in the trust
increases, "the survivor will have an inflation
hedge on income and the kids will get a meaningful
sum of money at the end," Shenkman says.
Structuring it this way "takes the judgment out
of who gets what," and is fair to both the
surviving spouse and the children. Drawn properly,
the unitrust can also qualify as a QTIP.
When a spouse is
significantly younger
In some blended families, a large age gap can
exist between the partners. In some instances, a
second spouse may be decades younger than the first
one -- not much older, if at all, than the adult
children from the first marriage. This age gap poses
potential issues when it comes to estate planning.
"It sets up a terrible dynamic in families
when the children of the first marriage are waiting
for the stepparent to die to get any benefit,"
says Mary H. Schmidt, an estate and family law
attorney with Packenham, Schmidt & Federico in
Boston.
Life insurance may provide a solution, Schmidt
says. The older spouse can buy life insurance for
the children and leave other assets to the new
spouse. This strategy can be particularly effective
in resolving problems involving ownership of real
estate. For example, consider a couple that
purchases a house together during a second marriage.
Dividing that property and putting it into a trust
might be impractical, especially when the surviving
spouse wants to continue living in the home. One
solution is to leave the house to the surviving
spouse and an equivalent amount to the children in
the form of life insurance. The policy can be owned
outright by the children or by an irrevocable life
insurance trust. This enables the surviving spouse
and the children to inherit roughly the same amount
of assets.
Clarity is key
One way to reduce potential estate planning
problems for blended families is to be clear about
your intentions. Schmidt suggests making a videotape
in which you speak to members of your blended
family, telling them that you tried to balance
everyone's interests, and how you went about doing
so. A signed letter of explanation can serve the
same purpose.
George and Linda Stevenson, who will celebrate 30
years of marriage in a few years, want their
children to know that they have done their best to
treat all of them as fairly as possible. They have
tried to be transparent by sharing information with
their daughters. When they helped one daughter with
a down payment on a house last year, they told the
others that a similar amount would be available to
them if they needed it.
"If it isn't evened out during our lives, we
would rely on the kids to even it out in our
estate," says George, who is 68. "There's
a lot of trust and faith in all of this." While
"trust and faith" are essential, attorneys
also suggest that a carefully crafted estate plan is
necessary to meet your objectives and keep family
harmony.
