Hanlon Niemann Blog | A Freehold, New Jersey Law Firm

By Fredrick P. Niemann, Esq., a NJ Estate Planning and Administration Attorney

Many people don’t get serious about estate planning until they are well into middle age.  By then, some of them are part of blended families:  they are marries, and one or both spouses have children from previous families.  Estate planning in such families can be tricky because the spouses may want to provide both for each other and their own children.  If you’re in such a situation, you should proceed cautiously.

Rethinking Retirement Plans
In a blended family, one or both spouses may have a sizable retirement account such as an IRA.  One practice is to name the other spouse as primary beneficiary of the IRA, with the account owner’s children as secondary beneficiaries.  This approach is common in first marriages, in which the children are the offspring of both spouses, but it can lead to trouble in a blended family.

EXAMPLE 1: David Jennings has $500,000 in his IRA.  He names his wife Christine as the primary beneficiary and his tow children from a prior marriage as the secondary beneficiaries.  Thus, if Christine predeceases the children, they will inherit the IRA.  Even if Christine does inherit the account, the balance will pass to David’s children at Christine’s death.

There are two flaws in this strategy.  First, Christine can tap the IRA at will as long as she takes required minimum distributions.  She can take out all $500,000 at once, pay the income tax, and then either spend the money or give it to, among others, her own children from her previous marriage.

Second, in this example Christine is a surviving spouse and sole beneficiary of David’s IRA.  Under the tax code, Christine can roll over David’s IRA to her own new or existing IRA (no other beneficiary can do this).  Then Christine can name any beneficiaries she wishes, such as her own children.

In either scenario, there is no guarantee that David’s children will see a penny of his $500,000 IRA.

How can David avoid this outcome if he wants to provide for Christine and his own children?  One tactic is to divide his $500,000 IRA into two $250,000 IRA’S.  He can designate Christine as the beneficiary of one IRA; his children can be co-beneficiaries of the second IRA. Alternatively, David can leave the entire $500,000 IRA to his children, who can stretch out required minimum distributions over their longer life expectancy and thus enjoy extended tax deferral.  If David adopts this plan, he can leave other assets to Christine, depending on the size of his estate and her financial needs.

Trusts Traps
In blended families, spouses also may use trusts in their estate planning.  The first spouse to die might leave assets in trust for the surviving spouse, who will get the trust income and also might have some access to the trust principal.  At the surviving spouse’s death, remaining trust assets may pass to the children of the spouse who funded the trust.  Some trusts of this nature can be qualified terminable interest property (QTIP) trusts and defer estate tax.

Trusts can play a valuable role in estate planning.  Again, though, trusts can cause problems in blended families. With the arrangement described previously, the trustee might face a conflict between investing for current income (which would benefit the surviving spouse) and investing for long-term growth (which would benefit the trust creator’s children).  In addition, the children may have to wait for many years before receiving any inheritance if the first spouse to die leaves all of his assets to such a trust.

Dividing the estate might be a better solution.  Some assets could be left to the surviving spouse and some to the children, outright or in separate trusts.  If the spouses fear that such a plan would leave insufficient amounts to the beneficiaries, they might buy life insurance and increase the total estate value.

For further information and advice on any estate planning or estate administration matter, do not hesitate to contact me at 888-800-7442, or fniemann@hnlawfirm.com.

Your estate plan is an investment in you and your family’s future. As years pass, your family may grow, your assets will change, and new laws will be passed. We recommend all of our clients review their estate planning documents once every three to six years.

This Checklist focuses on the foundation of your estate plan, including documents such as a Last Will and Testament, Revocable Trust, General Durable Power of Attorney and Living Will. (Note that references to a “Will” on this Checklist are generally interchangeable with the term “Revocable Trust”, which can also be used as the centerpiece of an estate plan.) However, irrevocable trusts - such as a Life Insurance Trust - and other estate planning vehicles should also be reviewed periodically to see if they are performing as expected.

Below are some questions YOU should ask yourself when reviewing your existing NJ estate plan documents.  This is a three-part series.

• Do you have a (i) Last Will and Testament, (ii) Revocable Trust, (iii) General Durable Power of Attorney (POA), and (iv) Health Care Power of Attorney/Health Care Proxy/Living Will? Every complete estate plan must contain at least three of these documents.
   
• Have you moved to another state since you last updated your New Jersey estate planning documents? If you moved from another state to New Jersey, there may be questions of the interpretation or validity of your existing estate planning documents.Generally, estate planning documents executed in one state will be valid in another state, but your new state of residence may have specific statutes or tax laws that are not addressed in your existing estate planning documents. You may want to contact an attorney in your new state or residence to advise you as to what might need to be updated.
   
• Do you have a separate personal property designation in your will or trust? This is a separate writing where you indicate who should receive specific items of your personal property such as photographs, jewelry, art work, etc. If you have one, you should review it and make sure that it is still an expression of your wishes. If you don’t have a personal property designation, you may want to consider creating one so that specific items will go to specific people.
   
• Is any person receiving your estate a minor (under 18)? If so, your estate plan should make provisions for that property to be held by the minor’s Guardian or trustee under a carefully written trust until he or she attains an appropriate age.
   
• Do you have any specific gifts or bequests you want to make? Any gift of a cash amount or of an asset other than personal property should be stated in your Will. If you have given away a specific asset to a person in your existing Will (i.e. your shore house), be sure that the asset still exists. Also, your Will should provide for what happens if the specific asset is sold during your lifetime.
   
• Are your total combined assets, including life insurance death benefits, greater than $675,OOO? If so, there may be a New Jersey Estate Tax imposed at your death. Both Federal and New Jersey Estate Taxes can be reduced or even eliminated with appropriate estate tax planning. If you are married, both spouses’ assets should be totaled together to see if they exceed $675,000. If you have a taxable estate your estate plan should contain trusts or other provisions to reduce taxes.

Fredrick P. Niemann is managing partner at Hanlon Niemann located at 3499 Route 9 North, Freehold, NJ.  His practice focuses primarily in the areas of Elder Law, Asset and Estate Protection Planning, Medicare, Medicaid and Veteran’s Benefit Assistance. He can be reached at fniemann@hnlawfirm.com, or by calling 732-863-9900, Ext. 101.