Advisor Connections Newsletter™
April 26, 2016
A Gift of Love: Planning for the Blended Family
A Gift of Love: Planning for the Blended Family
In today's society, it is increasingly more common to find clients who have children from prior marriages and relationships. This can present all kinds of planning obstacles, as well as opportunities. Take Marge and John Sample (not their real names!). Both have children from a prior marriage. Marge is forty, divorced, and has two minor children, ages 12 and 10. John is in his mid-fifties, widowed, and has two children, ages 34 and 31.
To compound the problem, John's estate is approximately $4 million, while Marge's estate is approximately $200,000.
Both John and Marge recognize they each have different goals and concerns. Marge's principal concern is for her children, and she desperately wonders how they will manage should she die before John. Will their natural father have sufficient assets set aside to provide for their college needs? She knows better than to ask. He was incapable of saving money when they were married and he has struggled since their divorce to pay child and spousal support. What about John? Will he provide for her children?
John understands that Marge does not have the financial wherewithal to maintain their standard of living if he would pass away. Consequently, John has planned for Marge in his estate planning by providing her with access to funds in a restricted trust, which would provide her an income stream after his passing. The terms of his trust provide that after Marge's death, the remaining principal in his trust will pass to his two children.
John also recognizes that Marge's children are not provided for in his trust. Although he too believes that Marge's ex-husband will not be fiscally responsible to provide for Marge's children, he feels he is in an awkward position as he feels morally obligated to leave his assets to his children upon both his and Marge's death.
A Gift of Love:
There is a solution to our family's dilemma. Marge should create a trust for her children that will set forth all her instructions regarding how she wishes them to be taken care of after she is gone. She will then purchase a $500,000 life insurance policy on her life and name her trust as the beneficiary. John will be named as the trustee rather than her ex-husband. This will provide her the peace of mind of knowing that a responsible party will make certain her children's financial needs will be provided for through college.
The stumbling block to this solution is that Marge does not have sufficient funds to pay for the insurance premiums. This is where John takes the initiative to show his love and concern for his new family. Using the income from some of his investments, John will purchase the life insurance policy for Marge as his gift of love. Each year, on their anniversary, he'll pay the next year's premium, essentially reaffirming his love for Marge and her children.
Marge now has peace of mind knowing that should something happen to her, her children will be financially secure because her trust will hold real financial resources from her life insurance proceeds. Her trust will also have the right trustee to make sure that her children will want for nothing, even if her children go back to live with her ex-husband.
The Trusted Family Financial Advisor:
Now that Marge's children will have sufficient financial resources, a new challenge arises. Being of tender years, Marge's children have no experience managing wealth. Marge has seen first hand how some of her friends have spent their entire inheritance in a very short period of time. This is where the Trusted Family Financial Advisor can present a solution to Marge's dilemma.
By incorporating a Financial Advisor Requirement into her trust agreement, John in his capacity as trustee, will ensure that Marge's children work with their Trusted Family Financial Advisor in establishing a financial plan for how the inherited assets will be invested and managed for their long-range benefits. Marge recognizes that the relationship with her Financial Advisor is of such great value to her that she wants to include this relationship as part of her children's overall inheritance. This assures Marge that her children's inheritance will be something that makes a positive difference in their lives.
John has peace of mind in knowing this his wife is serene in her knowledge that his generosity has provided for her children. He also knows that as trustee for the children, he can see that their inheritance is not squandered or misappropriated by Marge's ex-husband. Additionally, he is able to leave the balance in his trust to his children from his first marriage.
We hope you have the opportunity to offer this gift of love—a simple life insurance policy used creatively—to empower loving spouses to solve a major problem that often plagues second marriages. Please feel free to contact our office I can address any questions about this planning strategy or any other estate planning questions you may have!