Estate Planning for Blended Families: Preventing Accidental Disinheritance

By Paul E. Deloughery, Attorney at Law

The term "blended family" typically refers to a family unit consisting of two adults (married or unmarried) and children living with them that are not 100% related to both of the adults. This usually occurs when a person gets remarried and incorporates children (step children) from a previous marriage or relationship into a new family unit. This is becoming increasingly common. With blended families, the possibility of inadvertently disinheriting some or all of one's descendants is significantly greater. Let's consider a few of the possibilities.

• Bad Idea: Owning Assets (like the house) in Joint Tenancy with Right of Survivorship. This is the worst way to own assets if there are minor children or children from a previous relationship (or worse yet, both). The reason is that when you own assets in joint tenancy, you are only two steps away from disinheriting your children. Here is a common example. Two parents own a house in joint tenancy. If one of the parents dies, that person inherits the house by operation of law. Typically, the surviving parent will get remarried and again re-title the house in joint tenancy. If the surviving parent then dies, the new spouse inherits the house by operation of law, and the couple's children probably have no legal recourse.
  
• Good Idea: Premarital or Post-Marital Agreement. Such an agreement commonly addresses the parties' rights and responsibilities during the marriage, including the division of responsibility to pay expenses and the obligation to purchase long-term care insurance. It also should specify the parties' rights and obligations in the event of divorce and upon the death of one or both parties. In community property states, such an agreement also commonly provides that during their marriage, their separate property remains separate. However, if one of them dies, all of their combined property is considered community property so that all of the property receives a step-up in basis (thus creating the ability to save on capital gains taxes).
  
• Good Idea for Large Estate and Younger Spouse: Outright Gifts to Children. We all know someone who is remarried to a second spouse who is considerably younger (and sometimes roughly the same age as the person's own children). In that event, outright gifts to the person's children give the children some immediate money without having to wait for the death of the younger surviving spouse. (Be sure to consult with a CPA or estate planning attorney to strategize what amounts should be given in any given year -- otherwise, there may be gift tax or other legal implications.)
  
• Good Idea: The Revocable "Living" Trust. The parents should have a revocable trust naming both of them as co-trustees. If they want to maintain their separate properties and not commingle them into community property, they can have two separate trusts. In community property states like Arizona, however, married couples normally use a single joint revocable trust, so all of the community property receives a stepped up basis upon either spouse's death.

A joint revocable trust should normally have the following features:

a. The trust should divide into two or more sub-trusts upon one spouse's death or incapacity. The main purpose for this division is to save on estate and other taxes. It also allows flexibility in balancing the conflicting goals of caring for the surviving spouse while protecting assets for future generations.

b. The trust should become irrevocable upon one spouse's death or incapacity. The word "irrevocable" means that the surviving spouse cannot change the trust terms. This usually prevents the surviving spouse from disinheriting children or other beneficiaries, and is especially important when there are children from previous relationships.

c. The trust should appoint a "trust protector". Because the trust would become irrevocable at some point, it is important to provide some way of making changes to comport with unanticipated alterations in the family situation or applicable law. A trust protector is an independent person who has authority to remove irresponsible trustees or make changes in the trust as needed.

d. Upon one spouse's death or incapacity, another person becomes a co-trustee with the surviving spouse. This provides a check and balance on management of the trust and makes it harder to inadvertently disinherit children or other loved ones.

e. The trustees are given discretionary power. A discretionary trust (particularly a dynasty trust -- one that provides for the possibility of continuing for multiple generations) protects the trust assets from claims by creditors. The beneficiary's interest in a discretionary dynasty trust is not considered a property interest, because the trustee is the only person authorized to make any distributions to the beneficiaries.

f. The trust should contain spendthrift provisions. A spendthrift clause protects a beneficiary (including a surviving spouse) from most possible creditor claims.

• Good Idea: Family Holding Companies. Families are increasingly using holding companies, often in conjunction with other entities such as trusts, to achieve a variety of financial, income and estate planning objectives. A family holding company can increase the probability of maintaining family control of a business. Dental offices are not normally owned by such a holding company, but some or all of the dental equipment could be owned by the company and then leased back to the dental practice. This is one way of getting money out of the practice without it being considered wages. Family holding companies (1) protect assets from claims of creditors, (2) decrease the probability that interests in family assets will be transferred to outsiders, (3) facilitate gift giving, (4) centralize the management of business, investment and personal assets, (5) allow for shifting income among family members and others, and (6) reduce potential estate taxes, because assets held by the entity are valued at a discount.

Arizona Blended Family Estate Planning Information Lawyer
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Disclaimer: The information contained in this article is made available for general informational purposes only, and is not intended to constitute specific legal advice or to be a substitute for advice from qualified counsel. For that reason, you should not act or refrain from acting based on any information in this article without first obtaining advice from professional counsel qualified in the applicable subject matter and jurisdictions.