Financial Planning and Stepchildren

Inheritance can get dicey when blended families — children of spouses who were married before — join to form a new family unit. Family tensions can surface. With planning, you might be able to avert conflicts. A good estate plan can make things easier. Here are some basic tips:

Figure Out Your Goals

What do you want your financial plan to do? With family planning that includes stepchildren, if your spouse isn't the parent of your children, things get more complicated. If you die, you'll probably want to give your assets to your children and your spouse, but your children might not be old enough to inherit yet. If you're incapacitated, your spouse and any adult children may vie for the right to make decisions for you, and your plan will choose a party to give power of attorney to. If your children are minors at the time of your death, your plan will determine whether their biological parent or your current spouse takes charge of them, a major decision that depends on the specifics of your situation.

You may want to think about these issues alone before broaching them with your spouse. You want to do what's best for you and your children.

Review Old Decisions

Changes happen throughout life and can change your goals. Perhaps when you married, your only concern was your biological children's safety, but now you have stepchildren whom you regard as your own. If that's your situation, it's time to go back and change your estate planning documents to include your stepchildren. The first step is to update beneficiary designations.

Next, if you want a stepchild to make your health care and financial decisions, you'll have to change your power of attorney and advance directives. You'll want to discuss your intentions honestly and openly with your biological children. Full disclosure can reduce chances of disruptive, costly and emotional conflicts later.

Communicate

Make sure your children are well informed and that the process of inheriting is reasonably transparent. Talk with your spouse, be open to their input but don't just acquiesce to whatever your partner wants.

Be Especially Careful

Planning for blended families has unique problems. If the wealthier partner has children of their own, conflicts over inheritance are always possible. If that is your situation, you need to be rigorous in your second-family estate planning.

If you're not remarried yet, get a prenup. Address inheritance and elicit a guarantee from your spouse that he or she will not contest your estate plan. Specify how much your spouse will be able to receive. If it's too late for that, consider a postnuptial agreement. If you and your partner are not married, there is also such a thing as a domestic partnership agreement that serves the same purpose.

Give gifts to your children and other beneficiaries while you're still alive. This gives you direct control over your funds, not leaving anything to the caprice of your executor or trustee. If they're large gifts, you'll run into the federal gift tax, but the lifetime exemption for 2021 is $11.7 million. If you give $15,000 or less to any one person in a year, you don't have to report it to the federal government — that's $15,000 per person per year, not total gifts. (The gift tax situation is complex--this is just a summary. Consult a financial professional for details.)

You should also be thinking about heirlooms or other personal property. You might view your stepchildren with as much love and affection as you do your own children but want items that have been passed through the generations to go to a blood relative. You may use a personal property memorandum in your will or trust to list the items and who you'd like to receive them.

You want to be fair to everyone. Give according to your values and what you feel will be best. Listen to advice, but not if it goes against what you sincerely believe is right. You're going to be facing difficult decisions; it's crucial that you consult with everyone involved — including your attorney and tax adviser.

I provide the information in this e-newsletter for general guidance only, and it does not constitute legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.

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