Estate Planning for Blended Families

When a couple in a blended family fails to address what will happen after the first spouse dies, families often find themselves embroiled in disputes.  According to the article “In blended families, estate planning can have unintended issues” from The News-Enterprise, this is more likely to occur when spouses marry after their separate children are already adults, don’t live in the parent’s home and have their own lives and families.

In this case, the spouse is seen as the parent’s spouse, rather than the child’s parent. There may be love and respect. However, it’s a different relationship from long-term blended families where the stepparent was actively engaged with all of the children’s upbringing and parents consider all of the children as their own.

For the long-term blended family, the planning must be intentional. However, there may be less concern about the surviving spouse changing beneficiaries and depriving the other spouse’s children of their inheritance. The estate planning attorney will still raise this issue, and the family can decide how important it is to them.

When relationships between spouses and stepchildren are not as close, or are rocky, estate planning must proceed as if the relationship between stepparents and stepsiblings will evaporate on the death of the natural parent. If one spouse’s intention is to leave all of their wealth to the surviving spouse, the plan must anticipate trouble.

One very common approach to this issue is to set up a trust for the surviving spouse, which is often called a marital trust.  This establishes a trust for the benefit of the spouse, but whatever remains in the trust will go to the deceased spouse’s beneficiaries.  So, you can have your spouse benefit from your money, but make sure what’s left goes to your kids.

In some families, there is no intent to deprive anyone of an inheritance. However, failing to plan appropriately—having a will, setting up trusts, etc.—is not done and the estate plan disinherits children.

It’s important for the will, trusts and any other estate planning documents to define the term “children” and in some cases, use the specific names of the children. This is especially important when there are other family members with the same or similar names or perhaps a lack of clarity as to who the children are.

In Texas, this issue is even bigger when you don’t have an estate plan for a blended family.  If the decedent raised a stepchild in their home, they could potentially be considered a child of the decedent through adoption by estoppel.  If that’s true, then they are a child as far as the estate is concerned.

As long as the parents are well and healthy, estate plans can be amended. If one of the parents becomes incapacitated, changes cannot be legally made to their wills. If one spouse dies and the survivor remarries and names a new spouse as their beneficiary, it’s possible for all of the children to lose their inheritances.

Most people don’t intend to disinherit their own children or their stepchildren when estate planning for blended families. However, this occurs often when the spouses neglect to revise their estate plan when they marry again, or if there is no estate plan at all. An estate planning attorney has seen many different versions of this and can create a plan to achieve your wishes and protect your children.

It also makes sense to consider the children’s role in your finances as you age as the blended family situation may complicate the matter.  See this article where I addressed that more specifically.  https://www.galliganmanning.com/the-blended-family-and-issues-with-finances-and-estate-planning/  

A final note: be realistic about what may occur when you pass. While your spouse may fully intend to maintain relationships with your children, lives and relationships change. Clients often struggle to confront this or admit it to themselves, but I assure you it comes out later, and we can plan better when all of the issues are addressed.  With an intentional estate plan, parents can take comfort in knowing their property will be passed to the next generation—or two—as they wish.

Reference: The News-Enterprise (Dec. 7, 2021) “In blended families, estate planning can have unintended issues”

 

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What Happens to Your Will if You Get Divorced?

It is especially important to review your estate plan in a divorce situation.
It is especially important to review your estate plan in a divorce situation.

Every time you experience a life changing event, including divorce, it’s time to revisit your Will to make sure there are no unpleasant surprises for you or your family. As reported in the article “Rewriting Your Will After Divorce” from Investopedia, failing to review your current estate plan when contemplating a divorce can lead to results that you never intended.

Texas Law Can Save You

Luckily, in Texas we have several laws that cover you if you forget or don’t get around to writing your ex spouse out of your Will. Texas law presumes that after a divorce you do not want a former spouse to be a beneficiary under your Will or to act as your executor or agent under a power of attorney to make financial or medical decisions for you.

In fact, if you do want your former spouse to be your executor or agent, you need to reappoint them in new estate planning documents you execute after the divorce.

One thing to remember is that if your ex is a parent of your children, you will not be able to eliminate him or her as a guardian of your children if something happens to you while they are minors. The only way the other parent will not be allowed to be guardian of his or her child is if the parent is found unsuitable.

But you should still execute a new designation of guardian for your minor children in case your ex who is the parent is deceased or is found to be unsuitable to be guardian.

So, Where’s the Problem?

What if you pass away before the divorce is final? The law only applies to a divorced spouse, not if you are only separated or waiting for the divorce to be final. That’s why it’s a good idea to change your estate planning documents when you’re contemplating a divorce.

Issues With Some Retirement Plans

Also, Texas law cannot override a very harsh US Supreme Court case holding that state law does not apply to employer related retirement plans, such as 401(k)’s and 403(b)’s. These kinds of retirement benefits are subject to federal law which supersedes state law.

This US Supreme Court case, Egelhoff v Egelhoff, was decided in 2001. Mr. Egelhoff, an employee of Boeing Company, had a pension and life insurance policy that was provided by his employer.

Mr. Egelhoff, died in a car accident two months after his divorce, but before he changed the beneficiaries on his retirement and company life insurance.  Though the company still listed Mr. Egelhoff’s ex-wife as beneficiary, Mr. Egelhoff’s children by a previous marriage claimed that he had every intention of removing their stepmother as beneficiary and naming them, his children, as beneficiaries. That would seem to make sense given the circumstances.

Mr. Egelhoff’s children sued their father’s ex-wife for the retirement benefits and the life insurance, claiming that there was no way their father wanted his ex-wife to have the benefits to the detriment of his children.

The Court said that, under federal law, the company’s plan documents control who the beneficiary is and that the benefits would be distributed to the person who was listed with the company as beneficiary at the time of death, even if the beneficiary had been recently divorced from the employee.

The moral of the story is to make sure that beneficiaries on company related benefits are changed immediately after divorce to avoid the unfair result that happened to the Egelhoff children. State law cannot save you in that situation.

What’s Our Takeaway from This?

Every time there is a major life event (divorce, death of a family member, marriage, increase or decrease in wealth, illness, etc.) it is time to review your estate plan to make sure that it reflects what you want and need now. If you wait too long, things may not work out the way you want them to for your family and yourself.

Reference: Investopedia (September 14, 2021) “Rewriting Your Will After Divorce”

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Estate Planning in Different States

Estate planning in different states addresses key nuances between the states’ laws for people who move or spend much time in other states.

In this very mobile society, clients often move from state to state.  Whether the move is due to job opportunities, to be close (or far) from family or just for a change of scenery, many people will live in multiple states in their lifetime.  They often don’t realize that estate planning laws vary greatly from state to state and understanding the difference could have a significant impact on whether your estate plan is effective.  It is best to get this straight shortly after moving, says The National Law Review in the recent article “Updating Your Estate Plan: What Michigan Residents Need to Know When Moving to Florida.”

It’s not just people from Michigan who move to Florida who need to have their estate plans reviewed, if they are snowbirds or making a full-time move—it’s anyone who moves to another state, from any state. However, Florida’s popularity makes it a good example to use.

Florida restricts who is permitted to serve as a Personal Representatives under a will. The personal representative, also known as an executor, must be a descendant or ancestor of the decedent, a spouse, brother, sister, aunt, uncle, nephew, niece or descendant or ancestor of any such person or a Florida resident.

Florida doesn’t recognize “no contest” clauses in trusts or wills. It also does not recognize unwitnessed testamentary documents, which are handwritten documents even if they are in your own handwriting. By way of example, Texas does and have had to utilize that option during the COVID-19 lockdowns.

Florida also has a special set of laws, known as the Homestead laws, designed to protect a decedent’s surviving spouse and children. You may have had other plans for your Florida home, but they may not be passed to the people you have designated in your non-Florida will, if they don’t follow the Sunshine State’s guidelines.

Power of Attorney laws differ from state to state, and this can create huge headaches for families. In many states, powers of attorney can be “springing,” meaning they become effective upon disability. In Florida, once a Durable Power of Attorney is signed, it is effective. Florida may accept a power of attorney from another state, but Florida law will be applied to the agent’s actions, and restrictions will be based on Florida law, not that of another state.

Estate planning in different states is very unique when it comes to estate planning documents concerning medical and financial decisions while you are living, these are also different. I routinely tell people that if you relocate, you have to change these documents.  A living will names a person, known as a “Patient Advocate” in Michigan or a “Health Care Surrogate” in Florida, who is authorized to make decisions regarding end of life care, including providing, withholding, or withdrawing life-sustaining treatment. In Michigan, you need two doctors to certify a patient’s incapacity for non-life-or-death decisions. In Florida, only one doctor is needed.  Even simpler, these documents will not be reviewed by attorneys.  They will be reviewed by medical professionals rendering care to you.  So, it is best to give them the format they anticipate so there is not delay in providing care to you.

On a broader prospective, estate administrations are very different in different estates, and that leads to different goals in estate planning.  I’m admitted in Pennsylvania, New York and Texas.  In Pennsylvania, we frequently used wills as the primary estate plan vehicle because the probate process is easy to initiate, and all of the work of an estate administration exists whether or not you are using a trust.  In New York, we almost exclusively used trusts.  Probate was far more involved and expensive, which made living trusts extremely helpful to clients. In Texas, we definitely draft more trusts as they are still beneficial, but it isn’t nearly as critical as it is in New York.   To make it one step worse, Pennsylvania has inheritance taxes, New York has estate taxes, and Texas has neither.  Those are three very different estate planning realities.

As a final point, if you expect to relocate in the future and are considering estate planning, I strongly recommend a living trusts.  Trusts tend to be portable as they go outside of the court probate process, which is where many of the state nuances lie.  This is also helpful because clients who move often have real estate in multiple states.  Real property in multiple states potential means multiple probates, which people don’t expect.

So, if you are planning on a move or even if you just spend substantial time outside of your home state, meet with your estate planning attorney to understand how any and all of your estate planning documents will work—or not—when you are in another state.

Reference: The National Law Review (June 30, 2021) “Updating Your Estate Plan: What Michigan Residents Need to Know When Moving to Florida”

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