His, Hers & Theirs
Here are two trivia questions for you movie and television buffs. First,
what big name Hollywood stars played on-screen spouses in the 1968 film Yours,
Mine & Ours? The basic storyline of the movie paired a widow and
her eight children with a widower and his ten children. Second, a year
later Sherwood Schwartz (creator of Gilligan's Island) took the
same basic storyline and rolled out a hit television series that ran for
117 episodes. Can you name that show? [The answers are at the end of
this article.]
One reason commonly given for the popularity of
these two classics is that they gave traditional nuclear families a
lighthearted glimpse into the lives of blended families. Times
have changed. In the new millennium, blended families now outnumber
traditional nuclear families. And the number is likely to grow, based on
current statistics and trends.
Unlike the movies or 30-minute sitcoms, real
life is not always so lighthearted for blended families, whether due to
widowhood or divorce. Many face unique social, psychological and
economic challenges.
The Challenges
More than 60 percent of second marriages end
in divorce. Certainly some blame for that sad statistic lies in the
difficulty of successfully blending formerly separate families.
Fortunately, there are numerous organizations and support groups
dedicated to helping blended families with these challenges.
Unfortunately, little attention has been paid to the critical Life &
Estate Planning challenges confronting blended families. These
challenges include disinheriting your ex-spouse, protecting
your own children, providing for your new spouse and minimizing
your estate taxes.
Your Ex-Spouse
Without proper legal planning, your
ex-spouse (as surviving parent/guardian) would likely be appointed by
the probate court to manage the inheritance you leave to your children.
To make matters worse, what if your children later predecease your
ex-spouse, and are single and childless at that time? Who would inherit
your assets then? That is right ... your ex-spouse, as the next-of-kin
of your children.
Your New Spouse
Chances are you made a few solemn promises
to your new spouse on your wedding day. Among them were promises to be
there through thick and thin, personally and financially. Accordingly,
most spouses in blended families tend to blend their wealth, too.
Warning: If you predecease your new spouse,
then you may forever disinherit your own children from your share of
such blended wealth! Thereafter, upon the death of your new spouse, your
assets may be inherited by your stepchildren, or even by your new
spouse's next spouse and their children.
Your Own Children
Regardless of whether children are reared in
a traditional nuclear family or in a blended family, great care should
be given to protect any inheritance both for them and from
them. Wealth representing a lifetime of your hard work and thrift
can be squandered in very short order, or can quickly vanish through
divorces, lawsuits and bankruptcies.
Your Estate Taxes
Aside from disinheriting your own children,
blending your wealth with your new spouse may unnecessarily enrich the
IRS. How? The Internal Revenue Code provides an exemption to each
taxpayer for purposes of sheltering a certain estate dollar value from
federal estate taxes (with marginal rates reaching nearly 50 percent).
However, this is a use it or lose it exemption and you lose it
when title to your blended assets vests in your new spouse upon your
death. In addition to disinheriting your own children, this mistake
alone can trigger hundreds of thousands of dollars in unnecessary estate
taxes.
Answers:
First answer: Henry Fonda and Lucille
Ball.
Second answer: The Brady Bunch, of
course!
Estate Equalization
Quick. If your family is a blended family, would you rather
disinherit your new spouse or your own children? Without proper planning
it likely will be one or the other. Either way it is a lose-lose
proposition.
Alternatively, what if you could create a plan
that actually may increase your overall estate value, without increasing
your estate value for death tax purposes, and may allow you to equalize
the inheritance left to your new spouse and to your own children?
First Things First
Before continuing, however, you should know
that your insurability for life insurance is the financial planning key
to making this win-win inheritance arrangement work. It is an age-old
financial planning maxim that your health actually buys your life
insurance and your wealth merely pays the premiums. Assuming you are
insurable, we now turn to the legal planning.
Your New Spouse
To provide financial security for your new
spouse and to minimize your estate tax exposure, arrange for an Estate
Tax Exemption Trust (ETE Trust) and a Qualified Terminable
Interest Property Trust (QTIP Trust) to be created under either your
Last Will and Testament or your Revocable Living Trust. Through this
arrangement you may maximize your estate tax savings as you provide
income and even principal to your new spouse for life. Thereafter, upon
the death of your new spouse, the assets of both Trusts may pass to your
own children.
Your Own Children
Having taken care of your new spouse, we now
shift our focus to providing a concurrent inheritance for your own
children.
First, you create an Irrevocable Life Insurance
Trust (ILIT) with your own children as the beneficiaries. Select the
amount of life insurance that will represent their inheritance upon your
death, according to your estate equalization goals. Note: While you may
not serve as a Trustee, you may select the current and successor
Trustees.
Second, you make gifts to the Trustee on behalf
of your beneficiaries in an amount roughly equal to the insurance
premiums. The Trustee then provides written notice of the completed gift
to each ILIT beneficiary, giving each a designated period of time (not
less than 30 days is typical) to request distribution of their
respective share of the gift. After the designated period has lapsed,
the Trustee applies for the appropriate amount of Life Insurance and
pays the initial premium. [Note: This annual gifting ritual continues
until your death.]
Third, assuming all of the ILIT steps have been
followed, the death benefit will be estate tax free when paid to the
ILIT for your own children. Properly structured, this inheritance will
be protected both for and from your own children, as well. Later, upon
the death of your new spouse, the assets of the ILIT may be merged with
the assets of the ETE Trust and the QTIP Trust for more economical and
efficient administration for your own children (and even grandchildren).
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