Independent Thinking^®

Trusts for Blended Families

Providing for a spouse’s needs while ensuring that assets eventually transfer to children is the usual goal in family estate planning. For blended families in which the spouse is not the parent of all or any of those children, trusts can provide effective planning structures.
 
For many blended families, the need to provide for a surviving spouse has to be balanced with the desire to protect children born outside that relationship. If, for example, a woman brings substantial assets, as well as children, to a new relationship and then dies, she would want to ensure that her husband can live out his life in comfort but that the remaining assets are then passed on to her children and grandchildren.
 
A Qualified Terminable Interest Property Trust, or QTIP Trust, enables her to do just that. Property passing to a QTIP trust is eligible for the marital deduction, so the property is not taxed at the death of the first spouse, leaving the entire amount available to support the surviving spouse. A QTIP trust provides income and discretionary principal to the spouse during his life and then distributes the remaining principal, after taxes, to her beneficiaries, namely the children from her previous marriage. At the death of the surviving spouse, the balance remaining in the trust can, after payment of estate taxes, be distributed to her children.
 
For some families, notably those with a significant age gap between the spouses, the QTIP doesn’t provide adequate protection. If, as we see often, an older man marries a much younger woman, their new life can eclipse his commitments to his children from his earlier marriage (particularly if they are close in age to his new spouse). Even if there is a prenuptial agreement in place, the outcome can prove markedly different than the intent.
 
Say, as is often the case, that prenup provides his second wife with their home and its furnishing after his death and provides his children, currently young adults, with all the other assets comprising his estate. Sounds reasonable, right? But several years go by and the couple buys a larger house and some valuable art. Now his liquid estate is worth a fraction of what it was and his wife stands to inherit significantly more than his children.
 
For this man, as for so many people in a similar position, an Irrevocable Life Insurance Trust, or ILIT, is an efficient wealth-planning solution. By establishing this type of trust and naming his children as trustees, the investor removes the trust and its value from his taxable estate. He then makes annual gifts to the trust, which the trustees use to purchase life insurance on his life. As the grantor of the trust, he dictates the terms of the trust and how distributions are made to the beneficiaries – in this case, his children. The use of the trust is particularly attractive, because trust property is generally excluded from the grantor-insured’s estate.
 
On his death, his wife will inherit their remaining shared assets, and his children will receive the life insurance. He and his entire family are more likely to enjoy a peaceful life in the interim, as well, knowing that these decisions have already been made and funded.
 
Each situation is unique, and a solid estate plan designed to accommodate individual and family circumstances is essential. In a blended family, consideration needs to be given to each spouse’s diverging interests and the impact those interests have on the overall estate plan. As Jewelle Bickford notes in the article on page 14, it’s important to take the time to identify and discuss individual objectives and plan how to communicate them with the extended family.
 
It’s also important to inventory assets and review both the beneficiary designations in retirement plans and insurance policies and any existing powers of attorney, healthcare proxies or living wills to determine whether changes need to be made. What will happen to your assets on your death? Is that what you want? What if your spouse or a child predeceased you? Would that change the disposition of your assets? These are just some of the challenging questions that need to be resolved.
 
At Evercore Wealth Management, we help clients be as specific as possible in their planning and avoid ambiguity. With open and honest communication, estate planning for the blended family can provide orderly, equitable, compassionate distribution of assets and hopefully strengthen the relationship between the surviving beneficiaries.
 
Karen Francois is a Partner and Wealth Advisor at Evercore Wealth Management in New York. She can be contacted at [email protected].