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The Challenges of Planning for 'His, Mine, and Ours'

It's a balancing act for blended families.

Sandra L. Atkins and Helen Modly, 12/11/2014

It seems that couples who are still in their original marriage with shared children are becoming somewhat of a rarity. Instead, we are seeing more couples in second or third marriages, with children from previous relationships as well as children in common. To deal with the complexities of "his, mine, and ours" in estate planning, you need to ask sensitive, and often difficult, questions.

Planning for blended families, those with children from prior relationships, is a balancing act. The husband and wife usually want to provide for each other at the time of the first death, but they also want to make sure that their own assets and their share of the marital assets will ultimately pass to their children. The issues differ based on the ages of the couple and their children, the size of estate, the length of marriage, who brought what to the marriage, and so forth.

Educate the Client
Consider this example:

Bud and Rose have been married for several years. This is a second marriage for each of them--Bud has two children from his first marriage, and Rose has three. When they got married, they had an attorney draw up wills with trusts to make sure that each of their children would inherit their parent's share of the estate. During their marriage, they bought a house together and titled it in their joint names. They co-mingled their financial assets and named each other as beneficiaries of their life insurance and 401(k) accounts.

In their tenth year of marriage, when all the children are in high school and college, Rose is killed in an automobile accident. In spite of Rose's intention to protect her assets for her children, everything--cash, life insurance, her share of the house--transfer to Bud because of the way they were titled. He rolls her 401(k) into an IRA in his own name, and names his children as beneficiaries.

What happens to Rose's children? Presumably they can go live with their birth father, but what about the costs of college that were being covered by Rose and Bud from their joint funds? Will Bud feel any moral obligation to his step-children and continue to help them from Rose's share of their joint assets?

You can see how important it is to educate couples with a blended family on some basic planning issues regarding the titling of assets. They need to know that joint property with right of survivorship will pass to the surviving spouse with no strings attached and that assets with beneficiary designations bypass the provisions set up in a will or trust. A spouse like Rose basically disinherited her children by her lack of understanding.

As for whether or not Bud will feel a moral obligation to Rose's children, it's tempting for couples to say they trust each other to do the "right thing" after the death of the first spouse by making sure the ultimate estate is split between all the children. Unfortunately, there is no guarantee that will happen, especially if Bud should pass away unexpectedly soon after Rose. You need to make sure your clients have fully thought through their wishes and created a scenario that will allow them to be fulfilled.

Sandi Atkins, CPA/PFS, is president of Focus Wealth Management, a fee-only registered investment advisor in Middleburg, Va. In 2008, she was named by Wealth Manager Magazine as one of the 50 Distinguished Women in Wealth Management.

Helen Modly, CFP, CPWA, is executive vice president of Focus Wealth Management, a fee-only registered investment advisor in Middleburg, Va. Modly has more than 25 years of experience providing wealth-management services. She is a member of NAPFA and president-elect for the National Capital Area chapter of FPA. She can be reached at info@focus-wealth.com. The author is a freelance contributor to MorningstarAdvisor.com. The views expressed in this article may or may not reflect the views of Morningstar.

The authors are not employees of Morningstar, Inc. The views expressed in this article are the authors'. They do not necessarily reflect the views of Morningstar.

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