Estate Planning for the blended family

Most of us know how important it is to have a will and an estate plan. If you have a “blended family” (i.e., children from a previous marriage), estate planning takes on added importance. The following tips will help make the planning process a little easier.

Assess your needs
Sit down with your current spouse and discuss what you want to accomplish. Make an inventory of each spouse’s assets and discuss how you want these assets distributed after your death. Even if you have a will, your spouse may be able to override the terms and receive a percentage of your estate. Federal law says your spouse is the sole beneficiary of your company pension or profit-sharing plan, unless he or she waives those rights in writing. This means that, even if your children can produce a will giving them the bulk of the estate, the surviving spouse could go to court and demand the spousal share before the provisions of the will are invoked.

Consider a pre nuptial or post nuptial agreement
Pre nuptial agreements allow a future spouse to waive his or her rights to a set share of an estate. Such agreements can be made at any time, but they require informed consent to be binding. Each side should be represented by a lawyer and should make a complete disclosure of individual assets and estimated worth.

Establishing a trust
Trusts are another way to protect your children’s inheritance. Trusts allow you to transmit gifts and inheritances to whomever you choose now or in the future while putting the management of the property under the control of a trustee.

Like a gift with strings attached, you can leave instructions on how the property is to be managed and how it’s to be distributed after you’re gone. When assets are left outright to your spouse, he or she controls the distribution of those assets.

Several trust formats are available. A residual trust offers a unified credit account in which assets may be sheltered from federal estate taxes up to $XXX,XXX. A residual trust may offer income based on interest or an allowance from assets, leaving the remainder of the estate to the bloodline of the originator upon the second spouse’s death. An encroachment provision also may be set up for use of a portion of the principal for education, emergencies, purchase of a car, and other expenses.

A qualified terminable interest property (QTIP) segregates a specific amount to provide an income for a surviving spouse. The principal would be designated as the creator of the trust directs. You may want to use a qualified terminable interest property trust (commonly referred to as a QTIP trust) to protect your children’s interests. Assets you designate are placed in this trust, with income distributed to your spouse during his or her lifetime. Since this qualifies for the unlimited marital deduction, no estate taxes will be paid when you die. After your spouse’s death, the principal is distributed to your heirs.

It may be wise to pick a professional as trustee if a trust has sizable assets. If you wish to place a familiar face on the trust’s administration, appoint a reliable relative or friend as co-trustee. He or she should be able to referee family squabbles.

And finally
Review beneficiary designations and life insurance amounts. These assets will be distributed to your named beneficiaries, regardless of the terms of your estate planning documents. Take a look at these designations to ensure they are coordinated with your estate plan. Also review how much life insurance you have. You may need more to ensure that your heirs are treated equitably.