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Yours, Mine, and Ours: Estate Planning for Blended Families

thetickertape.com), Kira Brecht, June 10, 2015

The number of second marriages in the U.S. has nearly doubled in the last three decades to 42 million adults, according to Pew Research Center. Marriage do-overs often stir estate planning challenges for blended families that should be addressed early on.

“Memories fade and intentions change,” warns Derek Hamilton, a partner at Elser Financial Planning, Inc., an Indianapolis-based, fee-only financial planning firm. Planning ahead and looking at tough questions before saying “I do” can save hurt feelings and financial vulnerability down the road.

Grab the reins and get your estate plan in place. If you don’t have one, state law will decide for you, and the results may be very different from what you intended. Laws vary from state to state, with different amounts directed to spouses and children.

Create a plan and be clear about who gets what, even if you don’t have a lot.

Ask the Tough Questions

If your plan is to simply leave all your assets to your spouse outright, thinking that he or she will “do the right thing” for your children, think again, because you may have created an impossible situation. “If you want your kids to have something, make it so in your estate plan,” Hamilton says.

“If you really want your son to have that classic Mustang, don’t just say it, put it in your will. Many times I’ve heard, ‘Dad wanted me to have this,’ but Dad didn’t write it in the will. Things can get ugly fast in a blended family,” he says.

Fair and equal are not, well, equal concepts. “Aim for what is fair, which may not be an equal distribution,” Hamilton says. “If you combined your family with your spouse’s later in life, treating all your children equally could be grossly unfair.”

Who Can You Really Trust?

Couples in a second marriage with blended families can turn to trusts to distribute to the surviving spouse and your children as you intended. The trust can also be set up to distribute to children and even grandchildren after both spouses are gone.

But  be careful about whom you choose to be the trustee. “This can be a recipe for constant strife and even litigation,” Hamilton cautions. “Consider instead selecting a bank or trust company to be the trustee. The price of a neutral professional can be well worth maintaining the family peace.”

Beware of the Hidden Estate Plan

Beneficiary designations can get lost in the shuffle of remarriage, and if not handled, could turn out to be a secret disaster in the making. A large portion of a couple’s assets may transfer through beneficiary designations on life insurance, IRAs, and other retirement accounts, in addition to jointly titled assets, which could include a residence and bank and brokerage accounts. Hamilton calls this the “hidden estate plan.”

“Make sure it fits with your actual estate plan,” he says.

Be aware of the “spousal elective share” that’s on the books in many states. “Unless your spouse waived it in a valid pre- or post-nuptial agreement, he or she may have the right to receive one-third to one-half of your estate, depending on the state,” Hamilton says. If your plan is for your spouse to receive less than that, get an attorney involved.

Your estate plan is your legacy and should be treated with care. Take the time now to create a plan that will distribute your assets in the way you intend.

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Minding Retirement Accounts in Estate Plans

Arden Dale, (WSJ) July 30, 2013

When crafting their estate plans, some people neglect to pay much attention to how best handle their retirement accounts.

And that lack of attention to detail can create potential problems–such as higher estate and income taxes–for their heirs.

Many people often assume an estate plan is as simple as naming a beneficiary. In fact, it can include a trust to protect spendthrift kids or a spouse. Or a well-developed plan may have provisions to get a tax advantage by giving an account to charity.

Financial advisers are careful to review retirement accounts because they are so often ignored, even when they comprise a large share of an estate–sometimes the biggest portion it. A surprising number of clients, for example, forget to even name a beneficiary or change the names after a divorce.

“We’re always asking clients about these accounts and they look like deer in the headlights,” said Karen Altfest, principal adviser at Altfest Personal Wealth Management in New York, which manages around $1 billion.

Last week, one of her clients, a single woman with an account worth around $500,000, chose her nieces as beneficiaries after Ms. Altfest discovered she hadn’t named anyone yet.

This year, changes to the federal estate tax add a new twist. Spouses need to review whether to name each other as beneficiaries now that they can share their estate-tax exemptions.

Michael Krol, a senior wealth counselor at Waldron Wealth Management in Bridgeville, Pa., said the new estate rules, known as “portability,” will have the biggest effect on spouses with a combined net worth over $10 million and who have a lot of money in IRAs. In the past, his firm often counseled clients with this profile to create trusts to be beneficiaries of the IRAs.

“Now we’re looking at all our client situations, and we would not want a trust to be a beneficiary,” said Mr. Krol, whose firm manages around $1 billion.

Divorce that leads to a second or even third marriage is the source of many of the missteps she sees with clients’ retirement accounts, said Susan C. Elser, an adviser with her own firm in Indianapolis, who manages $85 million. People either forget to change beneficiaries, or name the new spouse with no provisions to ensure their own children by a first marriage will get some of the money, she said.

Another common mistake, Ms. Elser noted, is when a person creates a trust in estate documents to distribute wealth to their children over time, and then naming the same kids as primary beneficiaries on a retirement account. All of the retirement money will go to the kids at once that way, circumventing the goal of the trust, she said.

To keep minor children from inheriting a large retirement account all at once–or any other heir not up to managing money–advisers sometimes recommend that an account name a trust as beneficiary. That way, a trustee can control when the funds get distributed.

Another common mistake with retirement accounts: Giving it to the kids when the charitably inclined owner could give it to a favorite cause instead. Charities don’t have to pay income tax on retirement accounts they inherit, and the donor gets a charitable deduction for the gift.

“I can’t tell you how many wills I’ve seen that leave some amount to charity when they have this lovely taxable IRA going to beneficiaries who will have to pay income tax on it,” Ms. Elser said.

Lesley Moss, an estate attorney for Oram & Moss in Chevy Chase, Md., said more states have adopted rules to let someone with a power of attorney change beneficiaries. That’s helpful as more grown children assist aging parents to get their retirement savings in order. An older person may have had 401(k)s with three or four different employers.

“We find where they moved from, say, Morgan Stanley to Merrill Lynch and didn’t change the beneficiary; the power of attorney can help,” Ms. Moss said.