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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.
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