Many of us who have lived a while have been conditioned to think that estate taxes are the number one issue when creating an estate plan—how do you avoid them; how do you reduce them? But in 2020, the first $11.58 million of a taxable estate is free from federal estate taxes. Most estates will never see an estate tax bill from the IRS.
Then what is the biggest issue? Maybe not surprisingly, it’s family conflict. In my own practice, I’ve seen it on multiple occasions. Money can bring out the worst in people. You see behavior you’d never expect. Quarrels and confrontations can occur in the closest of families, but conflicts can be more intense and more extreme in blended families.
Blended families result from multiple marriages, children from a current or former marriage or children involved in multiple marriages. The 2010 U.S. Census found 16% of children live in blended families.
Another shocking fact that adds to these blended families is the divorce rate among Americans 50 years old and older. The rate of gray divorce has doubled in the last few years while the nationwide divorce rate has been declining. 25% of the people going through divorce in America are 50 and older.
Here’s an example of a blended family situation. Harry and Sally are married for the second time. Each has two children from their previous marriage. Harry’s will directs that his entire estate go to Sally if he dies first. Harry dies. Everything goes to Sally and becomes part of her estate. She changes her will leaving everything to her kids and nothing to Harry’s children. Do you think there might be some conflict?
Raymond C. Radigan, head of private trust at TD Wealth, suggests some techniques that can help reduce potential family conflicts.
- Prenuptial Agreement: Executed before the marriage. It clarifies the financial rights of each spouse in case of divorce or death. Prenups are particularly relevant in second marriages, especially when there is a disparity in age and wealth between the soon-to-be married individuals.
- Communication: Explain a proposed estate plan to the family. If anyone objects, actively listen to their point of view and try to be empathetic to their position. Communication is especially important if you intend to leave everything outright to the current spouse. In the end, maybe a compromise is in order, or, if no changes are made, at least the family member had a chance to air their grievances.
- Minimize a Contest: One way to minimize the possibility of a contested will is to insert a “no contest” or “in terrorem” clause in the will. This clause provides that if a named beneficiary initiates any proceeding to contest the validity of the will and loses, then such beneficiary shall forfeit his or her inheritance and shall be treated as predeceased.
- Revocable Living Trust: Consider using a revocable living trust as a means of avoiding probate. This would deny children the golden invitation to object to an estate plan.
- Compromise: Perhaps a better solution is to craft an estate plan that benefits your current spouse AND your biological children. This could be accomplished by giving your children a partial outright distribution when you die, with the remaining estate going to your current spouse. Another option is to create a trust for your spouse’s benefit but have the remaining trust assets go to your children when your spouse dies. A final option is to create a trust that: (1) benefits both your spouse and your biological children and (2) is structured so the assets are protected and are beyond the reach of their future creditors.