Let’s say you remarry and adopt your partner’s children or have children from previous relationships. You need to plan carefully for each other and your kids. You can never guarantee that everyone in a blended family will be happy with the new arrangement, but you can avoid some mistakes. You don’t want anyone to get shut out of an inheritance; you want your assets distributed according to your wishes.
You may have a will or an estate plan from your first marriage and haven’t thought about updating it. You may feel confident that if you leave everything to your new spouse, the assets will automatically pass on to the children from each marriage equitably.
You can stop battles between your relatives by specifying who gets what when you pass. Here are some pitfalls to steer clear of:
- Not changing beneficiaries. Your first spouse may still be the beneficiary of your 401(k). Make sure you update this. Change everything with a beneficiary designation so that you don’t exclude or overlook anyone. In fact, go through all your financial accounts — checking, savings, retirement, insurance — to designate who inherits what.
- Not changing your estate plan. You probably don’t want your ex-spouse to get your home. You want your estate plan to reflect your current family situation.
- Undesirable changes. Are you concerned about what your surviving spouse might do? A contract could require your surviving spouse to maintain the will as it is, but such contracts are not valid in every state. In fact, sometimes contractual provisions can be blurry and not as clear as everyone thought they were when they were first written.
- Considering all heirs as the “same.” You may want your children, rather than your spouse or your spouse’s children, to get the proceeds when your house is sold. If you brought more assets to the marriage, you may want more of the money to go to your heirs than to your spouse’s heirs. You may want to discuss this in advance to avoid anger and disappointment after you’re gone.
A current plan can help prevent problems
An up-to-date estate plan creates a mechanism for your assets that considers community, separate property, and comingled assets. You can structure your estate plan to ensure specific assets go to the people you want to have them. Here are some ways to do this:
- Use a pay-on-death designation for certain bank accounts; this is a simple way to get cash immediately to heirs following your death.
- Establish an IRA legacy trust to ensure that a minor child cannot draw an entire IRA inheritance but must wait until age 26. The account earns more interest, even though taxes will have to be paid upon withdrawal.
- Leave a percentage of your IRA to your spouse and stipulate that when your spouse passes away, the funds go to your adult children.
- Establish a retirement trust to give you more control over how your retirement funds are handled after you die. A spendthrift trust doles out money at regular intervals to the beneficiary, who you may fear will squander the inheritance, and deters creditors from getting the money in the trust. A testamentary trust can protect and manage assets for minor children, too.
Make your assets work for multiple families — position everyone to make the most of their inheritance. If your blended family doesn’t get along, a great way to avoid conflict is to have a professional fiduciary make financial decisions should you become incapacitated or pass away. Every family is different, but one thing is true for all: Careful advance planning and clear communication are the keys to minimizing family and financial problems.
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