It doesn’t just happen in fairy tales – this actually occurs for more than 50% of divorced or widowed American men – you meet someone new and fall in love for the second time in your life. The best part is that the new missus adores your kids just as much as you love hers and everything is rosy. Yours is not like other families. There is no “evil stepmother” in the family portrait hanging on your living room wall. Your estate planning strategy is simple. You trust (this is, after all, a key requirement in a marriage) your spouse to do right by all your children, and plan to leave everything to her at the time of your death. When she dies, everything will pass on to your children anyway.
Here’s a bit of advice for you modern-day dads – don’t count on a fairy godmother to make things right for your child when things don’t go the way you planned them. And don’t get me started on Prince Charming.
There are many unforeseen – and common – factors that could come into play when you are no longer in the picture. The stepchildren could drift apart from their stepparent, which may lead her to favor her own children in the long run. Even a well-intentioned stepmother could remarry and have more children, thereby decreasing the inheritance meant for your own kids. Worse, she could disinherit your children for her new spouse and family.
Suppose you married someone much younger than yourself and closer in age to your adult children. Following traditional estate planning, they would have to wait for their stepmom to join you in your heavenly reward before reaping the benefits of their inheritance. Given the narrow age difference, they are unlikely to receive their inheritance until the end of their lifetime (if there is any left at all!).
Estate Planning Isn’t Just Drafting Your Will
One thing is certain – a simple will won’t do. First, you need to sit down and discuss with your lovely new spouse your collective debts and assets, as well as your shared goals for all of your children. The expected roles and responsibilities in terms of parenting, shouldering of expenses, and purchasing of assets during your marriage and in the event of your death should be clearly laid out. These decisions can be made legally binding through premarital or marital agreements.
I often recommend that blended families have plans that incorporate separate trusts for each of the spouses in order to keep separate property clearly separate. Often, three trusts are appropriate – one for each of the spouses’ separate property and one for jointly held property.
If you have minor children, a capable trustee can oversee assets funded to a living trust for the benefit of your children until they are mature enough to look after themselves and their financial responsibilities.
Life Insurance Works!
Don’t put your kids in a position that makes them dwell on the windfall that will come their way should their stepmother pass away. Consider purchasing life insurance and name your kids (or a trust for your kids) as your beneficiaries. It’s a sure way of giving them their fair share immediately after your death so they would be less inclined to hold a grudge against their stepparent. You can pay for the premiums as “gifts” and hold the policy in an Irrevocable Life Insurance Trust (ILIT) to avoid the proceeds being taxed by Uncle Sam upon your passing.
When Cinderella Turns Nasty
These days, stepmothers have something to worry about – the Cinderellas of the world are not as meek and helpless as they used to be! It’s not uncommon for the children who are appointed as trustees to turn the tables on their “evil stepmothers” by limiting their allowances and depriving them of the standard of living they are accustomed to.
California spouses can breathe a little easier knowing that in community property state, they are presumptively entitled to half of all assets acquired during the marriage. One way to make sure that your widow(er) is provided for while protecting your children’s inheritance is to set up a Qualified Terminal Interest Property (QTIP) Trust. With this type of trust, your surviving spouse will have access to the asset’s income, but not to the assets themselves. He or she cannot change the beneficiaries. Provisions can be made to ensure a lifetime income for her and at the time of her death, your children will receive the assets.
Modern Day Estate Planning
There are many other estate planning tools to consider. A “bloodline” trust may be suitable if your child’s prince turns out to be less than charming (a.k.a. spendthrift bum). This type of trust language can help protect assets from a child’s creditors or divorcing spouse, and helps ensure that the inheritance stays in the family. A family limited partnership (FLP) or limited liability company (LLC) may be ideal if you have real estate or business interests which can be efficiently transferred to the next generation in a manner that protects them from claims of future ex-spouses.
There are estate planning strategies available to fit every kind of family situation. Consult an attorney specializing in estate planning to find out which modern day estate planning tools could help realize the fairytale ending you envision for your family.