How To Plan for a Generational Wealth Transfer When You Have a Blended Family

A family having fun at the park sitting on a bench together.
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Having a robust plan for passing on wealth is essential to ensure that your assets are distributed to your wishes, and it’s even more important to do so when you have a more complex family situation. Tasha Dickinson, a partner at Day Pitney in West Palm Beach, Florida, said that estate disputes are particularly common when stepchildren are involved, especially regarding real estate assets.

Dickinson, who works with high-net-worth individuals in planning their estates, notes that estate planning for blended families is complex — there are a number of additional issues unique to these families that must be addressed in the estate plan in order to mitigate litigation. Here’s what she said needs to be considered when planning an estate that involves children from a previous marriage.

Plan With the Possibility of Disagreements in Mind

Dickinson notes that when you are the tie that binds a blended family together, you should be prepared for fractures to occur when you die. You need to keep this in mind when creating your estate plan.

“The guiding premise in this area is that the decedent parent is the glue,” she said. “Without that person, any fissures in relationships will grow and this is the recipe for disaster. Relationships between blended family members rarely improve in this situation. Clients who acknowledge this and plan accordingly typically have a more seamless transfer of their assets than others.”

Consider Putting an Impartial Third-Party in Charge

When choosing guardians and executors, Dickinson recommends selecting someone outside of the family.

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“The best option is to name someone who is independent to be in charge,” she said.

If you do want to keep these roles within the family, assign them wisely.

“For families who insist on having family members from both sides of the family involved in these types of roles, it is best to have equal representation from both sides of the family, along with an independent person to step in to make decisions in the event that the two family sides cannot agree,” Dickinson said. “With a carefully drafted estate plan, however, these types of issues can be mitigated so that there aren’t inherent conflicts between family members.”

Minimize Shared Interests

How you distribute your assets is up to you, but Dickinson recommends that you do not make any arrangements where an asset is shared with both your current spouse and children from a previous marriage.

“Sometimes that means that the division of assets is equitable and sometimes that is not the case,” she said.

Dickinson said that in an attempt to be equitable, some people will want to leave an asset, such as a piece of real estate, to both a surviving spouse and descendants from a prior marriage, but she does not recommend this.

“For example, if I draft a very common type of plan where the assets go into a trust for the benefit of a surviving spouse during his/her lifetime, and direct that the assets go to the client’s children from a prior marriage at the surviving spouse’s death, I have, by definition, bound the surviving spouse and the descendants from the prior marriage together financially for the rest of the surviving spouse’s life,” she said.

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“There is no way around that the surviving spouse and the descendants have divergent interests in that the spouse benefits from more distributions from the trust and the descendants benefit from fewer distributions,” Dickinson said. “Add in children from a prior marriage of the surviving spouse who have an interest in maximizing what their mother/father can give them at death, and there is suddenly a real dispute over distributions, how the assets are invested, who is in charge, etc.”

This is most certainly not your intent when you create this arrangement, but it is common.

“Unfortunately, when there is a dispute like this, the intent of the settlor often doesn’t always prevail, so it is best to try to avoid this scenario altogether,” Dickinson said. “Note that the situation can be further complicated if the client owns certain types of assets, like family-run businesses, especially ones that one or more of the children may be involved in, or certain assets that have been held by the family over a long period of time.”

Talk To All of Your Family Members About Your Wishes

The best way to avoid any disputes is to be clear about your intentions with all members of both of your families.

“Those who communicate their intent and expectations to family members often mitigate the chance of litigation,” Dickinson said. “What clients should not do is assume that those who are left behind will work it out. I’ve been involved in many litigations that prove that this strategy does not work.”

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