When Robin Fray Carey married for the third time two years ago, she vowed to avoid the estate-planning conflicts she had seen in other blended families -- children from earlier marriages cut out of the will, kids barred from visiting a sick parent or attending the funeral.
Carey has two sons from a prior marriage, and her husband, John Casey, has four daughters from his two earlier marriages; their kids' ages range from 22 to 45. Carey and her husband each have financial assets accumulated over a career, she as an entrepreneur and he as a novelist and professor at the University of Virginia.
"We decided what's yours is yours and what's mine is mine," says Carey, CEO and co-founder of Social Media Today, a new-media company. They share an account for household expenses but have told their children they're leaving their estates to them -- each to his or her own kids -- not to one another. "It's been critical to the success of my relationship with my stepdaughters,” says Carey, 60, who wants to avoid estrangement from her stepdaughters as she and her 75-year-old husband grow older.
With more baby boomers on their second or third marriages, the already touchy matter of who will inherit can become a colossal challenge. Two out of five first marriages in the U.S. end in divorce, and about half of divorced people marry at least once again. In unions of those who marry twice, about 65 percent include children from prior marriages, according to the National Stepfamily Resource Center. That can complicate the transfer of brokerage accounts, real estate and personal possessions. Throw in resentments over divorces and rifts between stepchildren and step-parents, and the situation is ripe for legal battles.
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One easy way to avoid feuds and lawsuits between a surviving spouse and stepchildren is to share your estate plan before you die. "It helps to say, 'This is the plan I want followed' and face whatever conflicts arise then,'' says Amy Wilfert, a partner at Day Pitney LLP who specializes in trusts and estates. It may lead to uncomfortable conversations, but laying the cards on the table is the best way to avoid what could be unhappy surprises for heirs later.
Here are some ways blended families and advisers tackle the challenge of keeping the peace while dividing family wealth.
Focus on fairness. Some remarried couples, especially those who each have substantial assets and are close in age, bequeath their entire estates to their biological children. But most people want their surviving spouse to inherit some or even all their wealth. Under IRS rules, estate tax is imposed only on transfers of assets of more than $5.34 million in 2014 and $5.42 million next year. But the law also allows for a "marital deduction" for financial assets -- of any amount -- passing directly to a spouse.
Children from a prior marriage often feel disinherited if their step-parent gets most or all of their biological parent's wealth. If he or she isn't much older than they are, they likely won't inherit anything until they're old. The step-parent could also leave some of their parent's estate to his or her own children.
The easiest way to minimize potential bitterness is to divide your estate so that your children and spouse each get something when you die. One upside of this move, says Kevin Ruth, head of wealth planning for Private Wealth Management at Fidelity Investments, is that your adult kids may get their inheritance while they're young enough to enjoy it.
Trust in trusts. Thoughtfully crafted trusts increase the odds that heirs won’t be at each other’s throats. A QTIP trust, for example, directs all of the annual income from your estate to your surviving spouse, but it also lets you specify who, in the event of his or her death, gets the remaining funds in your estate. The downside: Your heirs could have to wait a long time to enjoy any of their inheritance.
There’s still room for conflict. Your spouse will likely want to invest the funds conservatively as he or she ages, while your children may want to invest for growth. One solution: Give your spouse the right to withdraw a certain percentage of the trust's assets annually -- say, 5 percent. That could make your spouse more willing to invest the funds for growth and align his or her investment strategy more closely with your children's, says Day Pitney's Wilfert.
Keep documents up to date. Busy lives make it easy to put off tedious chores like updating paperwork. If you jointly own a vacation home or other real estate with your ex-spouse, remember that the property will pass to her or him on your death. It will go to your children only if you’ve changed the title records.
If you've remarried, it's also important to update beneficiaries on 401(k) and other retirement accounts. Fidelity's Ruth recently advised a couple who had been married for 15 years and still had IRAs that named their ex-spouses as beneficiaries. It's typical for people to put off updating documents or mistakenly think a divorce agreement is all they need, he says.
Specify health care, end-of-life and burial wishes. A second or third spouse who is named as health care proxy can prevent biological children from seeing their ill parent. Leaving specific instructions can guard against that. And unless you specify what you want, your surviving spouse and kids from an earlier marriage may argue about your funeral and whether you will be buried or cremated.
Estate planning is never a do-it-once-and-it's-done exercise, but something you'll probably return to as you age. Even if what you decide today isn't perfect, it's better than not having any of your wishes spelled out.