What is a Step-Family?
A step family can include
- A couple where at least one person, and maybe both, have children from a prior relationship
- Same-sex couples where at least one partner has biological or non-biological children from a prior relationship
- A family with adult children who are in second or subsequent relationships with children a from previous relationships
- A family with adult children whose spouses have children from a previous relationship
How common are Step-Families?
According to StepFamilies.org, at least 1,300 new stepfamilies are formed every day and more than 50% of American families are remarried or re-coupled.
Over half of children under the age of 13 in America are living with one biological parent and that parent’s current partner.
Why is Estate Planning Especially Important for Step-Families?
Most families don’t understand how their property will be passed down if they die without a comprehensive estate plan.
Lana is a widow with two children, Ava (age 6) and Ray (age 9). She married Richard. Richard is divorced with one child, Paul (age 8). The couple buy a home ($1M) and hold it as community property. Lana has several retirement accounts and bank accounts ($2.5M) and she has named Richard as the beneficiary with Ava and Ray as contingent beneficiaries. She also has an IRA ($30K) from before she met Richard but has not named a beneficiary on that account. Richard owns real estate, purchased before he met Lana ($500K). Lana died without a Will. A couple years later, Richard died.
Here’s how the money was ultimately distributed:
- Paul, over $3.5M
- Ava, $10K
- Ray, $10K
This outrageous result is the consequence of a failure to make a comprehensive plan. On Lana’s death, title documents and beneficiary designations made Richard 100% owner of the family home, bank accounts, and Lana’s 401K. Richard, of course, kept title to his own real estate. Richard, Ava and Ray divided the IRA according to their state’s intestacy laws, ⅓ to Richard and Ava and Ray shared the remaining ⅔. When Richard died without a Will, his son inherited his entire estate. Ava and Ray had no legal position to inherit Richard’s estate.
This hypothetical is very simplified. In real life, there are always complications and inconsistencies. There are also a variety of issues not addressed here, such as who will care for Ava and Ray.
How Does An Estate Plan Help?
Most couples with children from a prior relationship want to protect and provide for their spouse and also make sure that their children are protected.
An estate planning attorney helps by going through your assets with you and designing a plan that sets out to whom, when, how and why your property should pass.
Trusts like an A/B trust, QTIP trust, Intentionally Defective Marital Deduction Trust, or a QDOT for non-citizens, can hold assets for your spouse during their lifetime while protecting your children’s inheritance. These trusts can hold on to the property for your children until your spouse dies or your attorney can include language that allows the trust to pay for your children’s education, healthcare and support during a time period that you decide. One drawback to consider about to these kinds of trusts, is that your spouse and children can (and often do) argue about how much money the other should be allowed to take out of the trust.
Life Insurance can also be an option to provide for your spouse or adult children. It can be especially useful if you don’t have enough assets to protect the people who depend on you or if you want to minimize the chance of an argument between your spouse and children.
Also consider whether your spouse actually needs an inheritance. In our hypothetical, Richard had a home of his own and may not have needed the family home as a place to live.
Estate planners need to listen carefully to their clients’ goals and must consider an entire estate profile in order to craft a solution that achieves these goals.