According to Pew research, fewer than half of all U.S. children are being raised in a traditional family structure. The “regular” rules of estate planning don’t work well for many blended families
Blended families include those with stepchildren, children born outside of marriage, and children being raised by a single parent or by grandparents. Let’s take a look at some of the issues to consider when making future plans for your blended family.
Guardianship Documents
Let’s say two divorced individuals, Judy and Ian, remarry and both have a child from a previous marriage. What happens when one or the other parent passes away? There needs to be a legal plan in writing for each child’s guardian designation so that there is no confusion for parents or children about where the children will live and who will take care of them if one or both parents die.
Inheritance Issues
In some cases, each parent will want to pass their estate onto their biological child. The problem here is that there might be large discrepancies in the size of the spouses’ estates. If step-children feel that they’re not receiving the same treatment as biological children, this kind of planning can leave disgruntled feelings among the children and the parents.
Talking with an attorney knowledgeable in estate planning can help you work through these types of issues to find a solution.
Spousal Inheritance Issues
What if Judy and Ian decide that if one of them passes away, the surviving spouse should have an inheritance from the deceased’s estate? What if Ian was 20 years Judy’s senior and has grown children from a previous marriage? Significant age gaps can also play a role in complicating blended family estate planning. There are countless issues that can come up when planning is inadequate or nonexistent.
Questions to Consider
- If you are divorced, have you updated your beneficiary designations to ensure that a former spouse is not set to receive valuable assets that should be going to the current spouse or partner?
- If one spouse or partner becomes incapacitated and needs long-term care, how will it be provided?
- What advance healthcare directives and powers of attorney are in place for you and/or a spouse or partner?
- Have you considered what life insurance products can protect a spouse or partner if one passes away?
- Have you made a will? Do your beneficiary designations agree with your will? This is important because if you leave an account to a beneficiary and say otherwise in your will, the designation on the account will remain dominant and the will could be ignored.
- Have you considered with an attorney if your division of assets to your beneficiaries are as equal as you may think they are? If you leave a house to one child, a retirement account to another, and a bank account to a third without carefully redistributing the wealth throughout the years to keep the net worths the same, your heirs will inherit very different amounts. You also must consider capital gains taxes if you are leaving a co-owned home to someone.
Living With a Partner
If you are single but living with a partner, what type of deed do you possess together? There are 3 kinds of deeds you can have with someone when owning a property together in NC.
- Joint Tenants With Right of Survivorship (JTWROS): This passes directly to the other partner at death without going through probate. However, if one partner in this arrangement develops a debt with a lien, it can attach to the part of the house that they own. A married couple does not face this issue with the “Tenant by the Entirety” type of deed. Each partner owes taxes and there is no step up in basis if one partner dies.
- Tenants in Common (TIC) passes into probate court for determination if one of the owners passes away.
- Tenants by the Entirety (TBE): Only for legally married couples, this type of deed protects the house from debt incurred by one spouse being in debt. The claimant cannot attach a lien to the property. When one spouse passes away, the home automatically belongs to the spouse left behind.
Capital Gains Taxes
When you sell a home for more than you paid for it, you usually pay capital gains taxes based on the increase in value on your income taxes for the year of the sale. If Joe purchases a home in 2009 by himself for $200,000 and sells it for $350,000 in 2020, he will owe capital gains taxes on the $150,000 income he made from the sale.
If you solely own your home and pass away, the capital gains taxes for your heirs are based on the increase in value from the date of death, not from the day you first acquired it. Let’s say Sam bought a house in 1980 for $100,000 and died in 2010 owning the home which is now worth $400,000. He willed it to his son, Joe. If Joe then sold the home for $410,000, he would only owe $10,000 in income tax (not the $310,000 he would owe if he had co-owned the home with his father)
Capital Gains Taxes with a Partner
If you own a home with a partner you are not married to, taxes can get more complicated. Let’s say Joe and Susan buy a house together jointly with right-of-survivorship in 2009 for $200,000.
Joe passes away in 2020 when the house is worth $300,000. Susan inherits his share of the house and now solely owns the house. However, she does not get a stepped up basis value on his share of the house. She will now owe $100,000 in capital gains taxes if she sells the home for $300,000 in 2021.
If Joe had owned the home and willed it to Susan as a beneficiary, she would only owe taxes on any increase in value from 2020 to 2021. Inheriting a property (rather than jointly owning it) could save your heirs money in capital gains income tax.
Other Ownership Issues
What happens if your co-owner somehow becomes incapacitated, through accident or illness? In that case, you may have to petition a court to appoint a guardian or conservator to represent the co-owner’s interest in the sale.
While you and your co-owner always worked together, an appointed guardian may see his responsibility as protecting the other owner’s interest–which might mean going against you.
And what if your co-owner has a debt or multiple debts tied to their share in your house? If they die, you inherit all of the debts. This is a point to consider before living with someone in a co-ownership capacity.
Gift Taxes
You could cause your partner to have to pay a gift tax if you buy property and place it in joint tenancy with an unmarried partner. The IRS will consider the home to be a taxable gift to your partner if you give more than $15,000 to someone in a year. However, if you directly pay doctor bills or tuition, it is not considered a gift.
Be Prepared
Whether you are remarried with a blended family or living as a blended family with a partner, it is worth looking into whether your home ownership titling, wills, healthcare power of attorney, and beneficiary designations are in order. There are many potential situations in a blended family that need some planning to be prepared.
There are different types of legal trusts, long term care planning, and powers of attorney that can help you manage your estate in such a way that all are provided for now and in the future.
Seek Help
Consult an experienced estate planning attorney to find your way through these issues. In many cases, a combination of strategies, from joint trusts, irrevocable trusts, LLCs, and other tools, can be implemented so that your financial and relational goals are achieved.