Estate Planning for Blended Families: Women Whose Adult Step-Kids are (roughly) their Same Age
This article will be helpful if you are a married woman whose family controls at least $10M of assets. It will be particularly helpful if you are a married woman whose husband has kids from a previous marriage, and those kids are roughly the same age as you.
I recently sat down with a widow who spent the last 3 years, and over $1M in legal fees, disputing her late husband’s estate with his kids from a prior marriage. While that may seem like an extreme situation, it’s not the first time I’ve come across it and I guarantee it won’t be the last.
Why does this happen? It’s pretty simple; most estate plans, even for high net worth families, are constructed in the following manner:
Part 1: What happens when both spouses are alive?
Part 2: What happens when one spouse dies and one is still alive?
Part 3: What happens when both spouses die?
The first part is easy, and the third is somewhat easy (lifetime trusts vs. outright distribution, etc.).
It’s the middle one that is tricky, especially when your second spouse is roughly the same age as your kids from your first marriage. Why is that?
Let’s assume Dad dies first and leaves his assets in 3 buckets, a common scenario for families with $10M+ in assets. Those buckets would be:
Bucket 1: Survivor’s Trust – Mom has full control
Bucket 2: Family or Bypass Trust – Mom has limited control and may have some access to income, designed to protect the kids
Bucket 3: Marital or QTIP* Trust – Mom has mandatory access to all income
Even though buckets #2 and #3 are designed to protect the kids and ensure something of their inheritance will be left for them (no matter how long stepmom lives or how much she spends), they are still waiting for her to die to inherit any $!
*A QTIP trust, aka Qualified Terminal Interest Trust is an irrevocable trust which pays the trust’s income to the surviving spouse while retaining the principal for the benefit of other named by the deceased spouse.
And if the kids are in their 50s and the stepmom is also in her 50s, you can see how this structure is ripe for contention.
Frankly, even if stepmom is 70 and the kids are in their 40s, I’ve still seen issues because the kids have a vested interest in watching and scrutinizing how their stepmom is living her life, and spending her/their money.
You may be wondering why this structure (A, B, C trusts) is so common, and it’s because it’s used to reduce any estate taxes owed at 1st death. There is something called the “unlimited marital deduction” which says you can leave an unlimited amount of money to your spouse when you die, without the imposition of an estate tax. And the A, B, C trust structure ensures that to be the case.
This structure is a great combination for maximizing the step up in basis on some assets at both 1st and 2nd deaths, deferring/minimizing the estate taxes, and controlling and preserving the assets for the next generation.
But, what it doesn’t necessarily do is preserve harmony for the surviving family members that presumably want to have a relationship long after Dad is gone. And I believe that one of the goals for an estate plan should be to create an environment that is conducive to family harmony after a patriarch and/or matriarch pass away.
That’s why a better approach is to proactively address this dynamic in advance.
Most people think of life insurance as something you need to protect your income when you are young and the kids are little and the mortgage is large, but the situation we are describing here is also well suited for life insurance.
Depending on the size of the estate, this could also be done using liquid securities after they receive a full step up in basis at Dad’s death (held in a stand-alone separate property trust account that passes directly to his kids or remains in trust for their benefit at his death).
Either way, the proactive plan is designed to preserve harmony after Dad dies, and prevent his heirs from spending hundreds of thousands of dollars (or more) on legal fees and years of angst because no one anticipated this in advance.
My number #1 goal as an Advisor is to give my clients peace of mind. This type of planning is designed to do exactly that.
Finally, our specialty is helping successful families navigate wealth and all the complexity that comes with it. We want to continue to write about the topics that are most important and interesting to readers like you – so if you have questions or blog article ideas, please reach out to us and let me know: rob@swrpteam.com
This material is purely intended to be general and educational in nature, and should not be construed as specifically-tailored investment, financial planning, tax, legal, or other professional advice. Information and data contained herein is as-of the date of publication, and may be subject to change in the future without notice. Any investment performance referenced is purely past performance, which is no guarantee of any future performance. Nothing contained herein should be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation of any security or other financial product or investment strategy. All investment, tax, and financial planning strategies involve risk that you should be prepared to bear. You are highly encouraged to consult with professionals of your choosing before taking any action based on this material.