Navigating the intricacies of your financial legacy can be a daunting task. Understanding the nuances…
Why Children Get Disinherited Under Will-Based Plans
Initially, partners’ wills are mirror images. You and your spouse give your entire estate to each other. When the second spouse passes, the property is distributed to the children and step-children of the surviving spouse. Unfortunately, under almost all will-based plans the biological children of the first spouse end up disinherited.
A typical will-based plan for blended families looks like this:
Wills are an expectancy, so the surviving spouse can change his or her will any time. Unless the wills are contractual, which is rare, your children have no legal right to inherit. Blended families may seem strong and cohesive for many years. But, time and changes to the surviving spouse’s personal circumstances frequently cause spouses to create a new will, cutting your children out.
Getting a New Spouse
When you have children and marry someone who is not your children’s biological parent, there is a risk your children will be disinherited.
Spouses who are not your child’s biological parent may not cherish your children as much as you.
If they have their own children, your spouse’s concern, most likely, is for his or her own children’s futures.
Just as you care deeply for your children, so does the new spouse about his or her kids.
As you can see, it’s possible a surviving spouse will change their will and disinherit your children.
The Spendthrift Spouse
The thought of someone else enjoying your money while your children wait for their inheritance may not sit well with you.
Even if your spouse does not change their will, your children’s inheritance could be gone by the time your spouse passes.
The Child in Need
It’s difficult to think about something tragic happening to your child. Unfortunately, accidents and illnesses occur.
If you have a will-based plan, do you know what happens if your child becomes disabled or has a medical emergency in the future? Will they have access to much-needed money?
Unfortunately, a will-based plan doesn’t allow your child to access any of the money, even under dire circumstances.
Lost Wills & No Right to Inheritance
What if your spouse never remarries, but the will is destroyed or lost? Under Colorado law, if the will was last seen in the possession of the decedent and can’t be found, the presumption is that he or she intended to destroy it.Overcoming the presumption is difficult and seldom accomplished, as was the case in re Estate of Perry, 33 P.3d 1235 (Colo. App. 2001).
In re Estate of Perry, the decedent’s will could not be found. The will’s proponent originally testified in local probate court the decedent kept the will in a desk drawer. The proponent also told the local court the decedent cleaned out the desk knowing the will was kept there.
The local probate court determined the decedent knowingly revoked the Last Will and Testament when it was thrown away during the cleaning. The court declined to enter a photocopy of the will for probate. The will’s proponent appealed.
The state appeals court affirmed the local probate court’s decision.
In the case of a missing or lost will, a court must be satisfied that a will has not been revoked by the testator before admitting the will to probate. Therefore, the court properly considered the issue here.
– Appeals Court Judge Janice B. Davidson
Under Colorado law, if a will can’t be found, then your spouse’s children inherit 100 percent and your children get nothing.
Like minds, wills can change. Wills are generally not contracts. So that means the surviving spouse can change their Will and cut out their deceased spouse’s children.
Widowed spouses may their Will due to a new partner. Perhaps there is now a distance between the stepchildren and the surviving spouse. After several years it’s common for stepchildren to be disinherited.
A quickly-drafted or poorly-written will may not account for the emotional attachment to family heirlooms, pictures, and other sentimental items. If all personal property is left to the surviving spouse, as is typical in most wills, the decedent’s children may never receive family heirlooms or family history associated with their lineage.
Estate Planning Solutions for Blended Families
The first step to solving this problem is to be clear with your spouse about what should happen after one of you dies. A frank conversation with your spouse, often done with the guidance of an estate lawyer, is needed to express these concerns.
You may have never had this conversation with your spouse. But these difficult conversations are necessary to avoid future conflict and prevent your kids from being disinherited.
An estate lawyer can help you develop a plan that outlines how biological children and the surviving spouse are financially protected. Your lawyer will be able to facilitate the conversation and provide solutions to problems commonly faced by blended families.
The Joint Pour Over Trust
One solution that allows each spouse to dictate the terms of their estate and protect the surviving spouse, as well as their biological children is the joint pour over trust. The joint pour over trust lets each spouse transfer assets where they want, when they want, to whom they want, and in the way that they want.
Under a joint pour over trust, one umbrella trust is created with a separate trust under the umbrella for each spouse. That means three trusts are created in one trust document.
Upon the first spouse’s death, the joint trust rolls its assets into two separate trusts based on an allocation the couple determines. The trust of the first spouse that dies often provides for the surviving spouse. Then, upon the surviving spouse’s death, the assets are distributed to the first spouse’s biological children
The joint trust pours over into the separate trust when the first spouse dies. Then, the income in the separate trust is paid to the survivor for life, followed by a distribution to the biological children when the second spouse passes.
It’s important to note that this is only one distribution pattern, and it is a simplified example.
You may desire a different distribution pattern. For example, you may want your spouse to access more than just income and receive principal payments as well. Or, perhaps you want your children to access the funds for their education or medical expenses while your spouse is still alive. Likewise, you may want your children to receive money outright on your death, or you may want to continue holding the money in a further trust for your children upon the second spouse’s passing.
What’s important to note is that each spouse gets to choose the distribution pattern for their trust.
More Benefits of a Joint Pour Over Trust:
- The surviving spouse is provided for during their life, but they can’t change how the assets are distributed
- Each spouse chooses how their portion of the estate is distributed to their children and ensures their wishes are followed
- Each spouse picks their own fiduciaries, such as the trustee and personal representative
- The funds are protected against your spouse’s and children’s creditors
Funding the Trust
A trust that is unfunded is useless. After all, we created the trust to put things in it. Far too many families have trusts that are never funded, which only ends up adding complexity after their death.
There are two ways to fund a trust:
- You can directly state which assets go into which trust.
- You can use a general assignment. (A general assignment simply says all of my property I did not specifically transfer to the trust should go to my trust.)
With a pour over trust, both spouses determine which of the three trusts we will transfer or assign the property to. We could assign the property to the joint trust or one of the separate trusts (or a mixture of the trusts).
For a marriage later in life, both spouses may wish to assign their separate property to their individual trusts. A younger couple may choose to assign the property to the joint trust.
Alternatively, it may serve the couple best by assigning any joint property to the joint trust, and the separate property to the separate trust.
Choosing Beneficiaries for Blended Families
For blended families, it is important to carefully choose the beneficiaries. You should avoid terms such as “to my descendants” or “to my children.” This kind of language is found in most wills. After all, whose descendants and children are we talking about? Your biological children, your stepchildren, or both?
Don’t invite disaster and litigation between your children and spouse by not clearly stating your beneficiaries.
Best practices include:
- Identifying your spouse
- Identifying your stepchildren
- Identifying your biological children
- Identifying any other beneficiaries
- Specifically determining who gets items of sentimental value
- Always using a mandatory distribution pattern in your trust.
Avoid disclaimer trusts, standard revocable trusts, marital trusts, and simple wills. These give too much flexibility and, therefore, are too easily abused.
Not only must you choose beneficiaries, it is important to discuss who inherits and the timing of the inheritance.
- What does the surviving spouse inherit and when?
- Does the surviving spouse only have access for limited uses such as for their health, education, maintenance, support, or is the use unlimited?
- After the second spouse passes, where do the funds go? To the biological children, stepchildren, or both?
- Are the children entitled to any funds during the surviving spouse’s life?
- Who will be the trustee? Will the trustee be independent or a corporate trustee?
- Will the first spouse’s children from a previous marriage receive funds immediately?
If your beneficiary is your biological child, for example, you can determine items such as:
- When the child should receive the trust’s funds
- Provide for disability planning for the child
- Provide for creditor protection for the child
The surviving spouse often has a right to receive income for a period of time. For example, the surviving spouse may receive payments or access to the funds until remarriage, a certain number of years, or their entire life.
Important Estate Planning Considerations for Blended Families
Because the joint trust is divided at the first spouse’s passing, you must determine the division of the joint trust, as well as the deceased spouse’s separate trust. The division is generally not driven by a formula.
Always use a mandatory division of the trust. Otherwise, the majority of the time one of the spouse’s children will be disinherited.
Because both the spouse and the biological children of the first spouse that passes may share assets of the same trust, you should carefully draft the trust to avoid a dispute over whether the assets are invested for current income (favoring the spouse) or long-term growth (favoring the children).
Unitrusts, which are outside the scope of this article, may help alleviate that problem.
Powers During Incapacity
Our goal is to protect both spouses, the disabled and non-disabled spouse, as well as the beneficiaries during incapacity. It’s important to ensure the non-disabled spouse does not dissipate the trust’s assets. But it is equally important to ensure the disabled spouse receives adequate care. These are important considerations when drafting a trust.
Likewise, we want to make sure the non-incapacitated spouse is taken care of during the incapacity, particularly if they are financially dependent on the disabled spouse. And, if the disabled spouse passes, the surviving spouse should have enough assets in the future.
Some concerns when drafting a trust for a disabled spouse include:
- Should the power of attorney have the right to amend the trust?
- Who gets primary consideration during incapacity?
- The disabled spouse
- The disabled spouse’s children
- The non-disabled spouse
- Someone else
- Should the trustee have the right to gift from the trust to facilitate tax or disability planning?
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