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What special planning issues does a “blended family” present? © kupicoo via iStock
Dec 7, 2016

What special planning issues does a “blended family” present?

If you have a blended family, you may need assistance in striking the balance between providing for your spouse and ensuring that children from your previous marriage are protected in regards to their inheritance.

Options to consider for estate planning that would help you achieve your goals include:

1. A QTIP Trust

With a qualified terminable interest property (QTIP) trust, some or all of your assets are, at your death, placed into a trust which benefits your surviving spouse during his or her lifetime with mandatory income distributions and, if you so choose, distributions of principal.

Upon the death of your surviving spouse, the assets of the trust would be either distributed to or continue to be held in trust for your children from your prior marriage and/or for other beneficiaries you may also designate. Note that assets in a QTIP trust would not be subject to federal estate tax at your death, but would be included in the value of your spouse’s estate for estate-tax purposes when he or she dies.

2. An ILIT

In this scenario, the irrevocable life insurance trust (ILIT) typically purchases a life insurance policy on your life with cash that you gift to the trust. The ILIT has as its beneficiaries either the children from your prior marriage or your current spouse, depending upon your planning objectives and possible tax considerations.

Use of an ILIT in this type of planning allows for your assets to benefit either your spouse or your children immediately upon your death, with the proceeds from the life insurance policy available to benefit those who did not benefit from your assets, if that is your intention. For example, if the spouse is the initial beneficiary, any assets remaining in the trust at his or her death would then be available for the benefit of your children and/or other beneficiaries.

Assets held in an ILIT would typically be excluded from the value of your estate for estate-tax purposes at your death. Often, QTIP trusts and ILITs would both be used so you could direct your assets to the beneficiaries you chose and leverage those transfers with the value of the life insurance. Your financial advisor, in conjunction with your attorney, can discuss with you the advantages and disadvantages of these and other financial instruments used in estate planning.

The Family Vacation Home

You may have purchased a family home as a place for your extended family to gather and a way to maintain family closeness after your children started families of their own. While you may want to keep the home in the family, your children may not all feel the same way. Depending on their financial resources and geographic location, some children may view the home and its associated costs as more of a burden than a benefit. To account for the potentially different interests of your children, you may choose to leave the property in a variety of ways, including:

  • Co-ownership among individuals, which may be vulnerable to claims of creators but will enable owners to transfer their interests freely.
  • A trust, which will provide better credit protection; however, you should have available both liquid funds to pay for maintenance and a reliable trustee to balance the interests of the beneficiaries.
  • A limited liability company (LLC) or family limited partnership (FLP), which restricts the transfer of interests, allows for coordinated management of the house and provides protection from creditors.

Regardless of the form of ownership used, it is important to develop a comprehensive governing document that details the rules and restrictions applicable to the use of the home.

Jeffrey S. Gerson and Shawn P. Landau are Financial Advisors with the Wealth Management division of Morgan Stanley in New York City. The views expressed herein are those of the authors and may not necessarily reflect the views of Morgan Stanley Smith Barney LLC, Member SIPC. http://www.sipc.org. Morgan Stanley Financial Advisors engaged Worth to feature this article. Gerson and Landau may only transact business in states where they are registered or excluded or exempted from registration (http://www.morganstanleyfa.com/ggmgroup). Transacting business, follow-up and individualized responses involving either effecting or attempting to effect transactions in securities, or the rendering of personalized investment advice for compensation, will not be made to persons in states where Gerson and Landau are not registered or excluded or exempt from registration. Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNERTM and federally registered CFP (with flame design) in the U.S. CRC1592750 09/16

This article was originally published in the December 2016/January 2017 issue of Worth.

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