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Blended Families and the Accidental Disinheritance

Blended Family

Robin Williams, Casey Kasem, Dennis Hopper, Tom Clancy, Gene Roddenberry and Audrey Hepburn. What do they all have in common? They all left blended families that found themselves in court battling each other over estate issues.

These types of clashes are not unique to the rich and famous. By their very nature, blended families are at heightened risk for money conflict, which often doesn’t end (or begin until) after a parent’s death.

A recent article by Geoff Williams in U.S. News & World Report, entitled “Blending Families and Your Finances,” does a nice job of discussing the issues and complexities of blending families and finances. With respect to estate planning, the article notes:

“Estate planning for blended families can be a minefield and will eventually be a big problem if not adequately addressed. The proper use of trusts can ensure that everyone is treated fairly and that one side of the family is not accidentally disinherited,” says Jeffrey Gottlieb, an estate planning attorney in Palatine, Illinois.

A good point, if I may (and since I did) say so myself.

I thought I’d expand on what I meant by an accidental disinheritance and summarize some of the issues and strategies. First, an example to illustrate how one side of a blended family might be accidentally disinherited.

A bunch of children, but no estate planning

  • Mike, a widower, has three children: Greg, Peter and Bobby.
  • Carol, also a widow (did she kill her first husband?), also has three children: Marcia, Jan and Cindy.
  • Mike and Carol meet (one day), fall in love and get married.
  • Mike and Carol title most of their assets jointly. Mike also has a substantial 401(k) with his architectural firm, naming Carol as beneficiary.
  • Mike dies (a surfing accident in Hawaii?). Carol inherits everything.
  • A few years later, Carol dies, without a will.

Who inherits Mike and Carol’s estate?

Greg, Peter and Bobby meet with Marcia after Carol’s funeral to ask about how they are going to divide everything. Greg is especially interested in his father’s blueprints. To the boys’ surprise, Marcia tells them that she already talked to a probate attorney who told the girls that they were their mother’s sole heirs and would inherit their mother’s entire estate. And since Carol had already inherited all of Mike’s assets when Mike died, the boys would get nothing from their father.

Greg storms out, thinking that Marcia is trying to pull a fast one. But when he meets with his own probate attorney, he’s told that Marcia was actually correct and that the boys were not entitled to anything because Carol survived Mike and they hadn’t done any estate planning.

Mike and Carol with a basic estate plan

Another alternative with a similar result? Mike and Carol have an estate plan. Their plan leaves everything outright to each other (the “I love you” plan), providing that after the survivor’s death everything is divided equally among all 6 children.

But after Mike’s death, Carol has a falling out with the boys. She meets with an estate planning attorney who tells her that she is free to change her will however she wishes. She does. And the boys have no recourse.

Considerations and strategies

Of course, this is only one family situation and there is no one-size-fits-all solution when it comes to estate planning for subsequent marriages and blended families. Ages, wealth, relationships, types of assets, tax ramifications and so on all play a factor. But in any case, thoughtful estate planning can help ensure that assets eventually pass as intended and not in a manner that is dependent only on the order of deaths. A few considerations:

1. Prenuptial agreement. The first line of attack might be a premarital agreement. Less common back in the Brady days, the use of prenups are much more common now and can be very helpful in setting understandings and expectations ahead of time. In some cases, a post-nuptial agreement may even be possible. These agreements can establish what’s mine, yours and ours. I’ll discuss these in more detail in a future post.

2. Using a trust. Suppose Mike had established a trust that provided for Carol’s benefit after his death. The trust permitted distributions to Carol as needed to maintain her standard of living for as long as she lived, and then at Carol’s death would be distributed to Greg, Peter and Bobby and/or their descendants. In this way, Carol would be taken care of, but would not be able to redirect everything to her children. If estate taxes were a concern, Mike might have established this as a “Qualified Terminable Interest Property” (QTIP) trust. A number of different variables would dictate the structure and terms of the trust.

3. Consider gifts at first death. Under the prior trust example, the boys have to wait until after Carol’s death to receive anything. But sometimes that creates tension and is not ideal. Mike might have considered instead leaving something to his boys even if Carol survived him. Maybe a separate trust for their education or support? And maybe those blueprints that Greg coveted?

Another family meeting?

Mike and Carol might have benefited from one extra family meeting. When details are known and understood in advance, the odds of dissatisfaction are reduced. In contrast, when heirs are left in the dark with mistaken assumptions, hard feelings are more likely to develop. Advance consideration of the objectives and the relationships can help smooth a process that is often inherently challenging.

Image courtesy of Roadsidepictures via Flickr