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Blended Family Basics
 If you are a blended
family member, then you are in good company. Blended families now outnumber
traditional nuclear families. And the number is likely to grow, based on
current divorce statistics and trends.
The Numbers
Divorce
is rather common in America. In fact, an estimated 50% of first marriages
end in divorce after an average of 11 years. The average divorce will cost
the parties about $15,000 and take approximately one year to process from
initial filing to final decree. [Note: These average costs and processing
times vary greatly from jurisdiction to jurisdiction.] Thereafter, the
resulting economic fallout of divorce will tend to reduce the standard
of living of both ex-spouses. Not surprisingly, divorce is not only expensive,
but researchers consistently rank it as one of the most stressful life
experiences.
Dollars and cents aside, the impact of divorce on children is more difficult
to measure. Each year 1 million American children experience divorce firsthand.
However, a substantial number of these children will not be in single parent
homes for long. Why? When divorcing under the age of 45, 80% of divorced
men and 75% of divorced women remarry within three to four years. And divorced
adults with children tend to remarry quicker than divorced adults without
children. Statistically, half of all children born since 1970 will live
in a blended family arrangement.
The Challenges
Blended
families face unique social, psychological and economic challenges. As
a result, over 60% of second marriages end in divorce. Fortunately, there
are numerous organizations and support groups dedicated to helping blended
families with these challenges. Unfortunately, however, little attention
has been paid to the critical Life & Estate Planning challenges of
blended families. These challenges include disinheriting your ex-spouse,
protecting your own children, providing for your new spouse and minimizing
your estate taxes.
Your Ex-Spouse
Will
your ex-spouse inherit your retirement money, even if the laws of your
state automatically extinguish their interest in the assets of your estate?
It depends. In Egelhoff v. Egelhoff, 121 U.S. 1322 (2001),
the United States Supreme Court held that federal law under the Employee
Retirement Income Security Act of 1974 (ERISA) preempted state law regarding
the retirement plan of a recently divorced and deceased man.
Mr. Egelhoff had failed to replace his ex-spouse with his children as the
named beneficiaries of his retirement plan prior to his death. State law
automatically disinherited ex-spouses. In a 7-2 decision, the Court found
that the retirement plan administrator must follow the ERISA statutes requiring
distributions to the named beneficiary, even when the end result conflicts
with state law. Bottom line: Mr. Egelhoff’s former spouse inherited the
sizeable ERISA retirement plan instead of his own children.
Assuming you have removed your ex-spouse as the named beneficiary of your
ERISA retirement plan, does the rest of your Life & Estate Plan protect
the inheritance of your children from your ex-spouse? Without proper legal
planning, your ex-spouse (as surviving parent/guardian) would likely be
appointed by the probate court to manage the inheritance you leave to your
children. To make matters worse, what if your children later predecease
your ex-spouse, and are single and childless at that time? Who would inherit
your assets then? That is right…your ex-spouse, as the next-of-kin of your
children.
Your Own Children
Regardless
of whether children are reared in a traditional nuclear family or in a
blended family, great care should be given to protect any inheritance both
for them and from them. For starters, wealth representing a lifetime of
your hard work and thrift can be squandered in very short order. Dollars
earned just spend differently than dollars inherited. In addition to good,
old-fashioned squandering, an inheritance can quickly vanish through divorces,
lawsuits and bankruptcies.
Your New Spouse
Chances
are you made a few solemn promises to your new spouse on your wedding day.
Among them were promises to be there through thick and thin, personally
and financially. In the absence of a Pre-Marital Agreement to maintain
separate assets, most spouses in blended families tend to blend their wealth.
For example, they title their respective assets in the names of both spouses
and also designate one another as the primary beneficiary of their respective
retirement plans and life insurance policies.
Warning:
If you predecease your new spouse, then you may forever disinherit your
own children from your share of such blended wealth! Thereafter, upon the
death of your new spouse, your assets may be inherited by your stepchildren,
or even by your new spouse’s next spouse and their children.
Your Estate
Taxes
Aside
from disinheriting your own children, blending your wealth with your new
spouse may unnecessarily enrich the IRS. How? The Internal Revenue Code
provides an exemption to each taxpayer for purposes of sheltering a certain
dollar value from estate taxes (with marginal rates reaching 50%). However,
this is a use it or lose it exemption and you lose it when title to your
blended assets vests in your new spouse upon your death. In addition to
disinheriting your own children, this mistake alone can trigger hundreds
of thousands of dollars in unnecessary estate taxes.
Alternative
Solutions
If you
want to disinherit your ex-spouse, protect your own children, provide for
your new spouse and minimize your estate taxes, then you need to make proper
Life & Estate Plans now. While there is no one-size-fits-all solution,
there are a few alternative solutions you might want to consider.
To disinherit
your ex-spouse, make sure you have replaced them as the named beneficiary
of your ERISA retirement plans and create Long-Term Discretionary Trusts
(LTD Trust) to administer the inheritance for your children, appointing
a party of your own selection to serve as trustee. That way, even if your
children reside with your ex-spouse, your trustee will control the inheritance
through the LTD Trust and ensure its use only for your children. Should
your children predecease your ex-spouse, the inheritance would remain in
your LTD Trust for your grandchildren and, if none, alternatively for your
surviving children or for other beneficiaries of your own selection.
To protect
your own children, your LTD Trust does double duty by securing many additional
tax and non-tax benefits. For example, through Spendthrift Provisions contained
in your LTD Trust, the inheritance may be protected from their squandering,
divorces, lawsuits and bankruptcies.
To protect
your new spouse, create a Qualified Terminable Interest Property Trust
(QTIP Trust) to provide income and even principal to your new spouse for
life. Such arrangements will protect the inheritance for your new spouse
in the event of a subsequent remarriage and divorce. Thereafter, upon the
death of your new spouse, the QTIP Trust assets may pass to the LTD Trust
you established for your own children upon your death.
To minimize
your estate taxes, create an Estate Tax Exemption Trust (ETE Trust) to
shelter the maximum available exemption amount upon your death. Often used
in conjunction with the QTIP Trust for your new spouse, this ETE Trust
can help you disinherit the IRS and leave more wealth for your loved ones.
Final Thoughts
This has
been a very cursory examination of a very complex subject. Contact qualified
legal counsel before pursuing any sophisticated legal strategies.
* Sources: Center for
Law and Social Policy, the Stepfamily Association of America, and the Stepfamily
Foundation, Inc.
Copyright © 2005 Integrity Marketing Solutions.
All rights reserved. Some artwork provided under license agreement. This
publication does not constitute legal, accounting or other professional advice.
Although it is intended to be accurate, neither the publisher nor any other
party assumes liability for loss or damage due to reliance on this material.
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