Ask Away Blog: Estate Planning Tips For Blended Families

Blended families, where a married couple has children from previous relationships or marriages, present unique estate planning concerns. Failing to plan properly can lead to legal issues, family disputes and assets being distributed in a way that does not align with your wishes.

Following these estate planning tips for blended families, you can help ensure that all family members are cared for after your death.

Consider a Prenuptial Agreement

While prenuptial agreements may have a negative reputation in media and rap music, they can offer significant long-term benefits for blended families. A prenuptial agreement is a legal contract that can be drawn up before marriage that outlines what will happen to the couple's assets should the relationship end. This can help to prevent disputes and disagreements about finances that could lead to family strife in the future.

It is also beneficial for blended families to update their estate plans to ensure that all parties are protected. This involves ensuring that individual documents such as RRSPs, insurance policies and workplace pension accounts reflect the new familial status and include the proper beneficiaries. In addition, a trust can be used to protect assets from creditors and to avoid unnecessary taxes.

A financial planner experienced with estate planning for blended families can assist you with creating a comprehensive plan to ensure that your goals are met, and all parties are taken care of. The most successful programs combine careful documentation with open communication and regular meetings.

A final note: it is important for couples, whether they have children or not, to consider their choice of agent for their medical and durable power of attorney. The person chosen must be someone who will be able to make decisions on your behalf if you are incapacitated.

Review Your Will and Trusts

A well-drafted will is the cornerstone of every estate plan. It provides instructions on who should manage your affairs if you become incapacitated and who you want to receive your assets and possessions upon death. It also specifies how you want your spouse and children to be provided for in the event of your death. In blended families, unclear or unstated instructions can lead to confusion and conflict after your death.

For example, if you outright distribute to your spouse, it could result in your children from a previous relationship being unintentionally disinherited. To avoid this problem, a marital trust allows you to balance providing for your spouse and leaving the remaining assets to your children.

Another benefit of a marital trust is that it can help protect your estate from creditors and lawsuits brought by former spouses. It can also provide greater flexibility and security for beneficiaries, including the ability to avoid taxable transfers.

Reviewing your will and trusts after marriage or remarriage, or whenever any major life events occur, is important. Taking the time to update your estate plan now can prevent problems later on. This includes updating beneficiary designations on your RRSPs, insurance policies and workplace pension plans. Also, having open conversations with family members regarding your wishes and expectations is a good idea.

Review Beneficiary Designations

When individuals die, they typically leave behind assets such as their family home, bank accounts, investments and life insurance policies. If a person has not created a will, state law determines how these assets are distributed, usually leaving everything to a surviving spouse and their descendants. This is problematic for blended families, as it may cause children from prior relationships to be disinherited.

In addition, remarried couples often need to pay more attention to review individual beneficiary designations for RRSPs, insurance policies and workplace pensions, which may cause their spouse to receive an inheritance they did not intend. Ensuring these individual documents reflect the new familial status can avoid conflicts and litigation after death.

Furthermore, remarried couples should also ensure they know who will act as their agents for financial and medical decisions if they become incapacitated. This can include a power of attorney that names an individual to manage their affairs and a health care power of attorney that designates an agent to make medical decisions on the individual's behalf in case they cannot do so themselves.

In addition to these legal documents, individuals should review their funeral and burial wishes while everyone is healthy. Discussing these matters can alleviate stress after death and foster communication throughout the family's life.

Review Your Assets

Everyone needs an estate plan, but it is especially important for people in blended families. It's common for spouses in second marriages to have children from previous relationships, making family dynamics more complex. A clear plan can prevent conflict and disputes after one's death and ensure one's wishes are fulfilled.

The most basic form of an estate plan is a will. Without a choice, state law determines who receives your assets after death. This may mean that your current spouse will inherit everything, or it might include your children from previous relationships and your biological grandchildren. In either case, it is unlikely that this will reflect your true desires.

In addition to a will, an estate plan should include trusts and beneficiary designations in addition to a choice. Trusts can help protect assets from creditors, avoid probate and provide tax advantages. Often, individuals will name their spouse as the trustee and their children as beneficiaries of these trusts.

It's also a good idea to inventory all your assets, including cash, real property, insurance policies, retirement savings accounts and investments (Vanguard has a helpful worksheet). This will give you an accurate picture of your wealth and will allow you to determine whether any changes need to be made.