Avoiding Probate When You Have a Blended Family

Planning is especially important when there are children from a former marriage.

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Esther and Mark met when they were both convinced that they would spend the rest of their lives alone. Esther had divorced after a long marriage; Mark was a widower. But their friendship grew until they realized it wasn't just friendship, it was love. They were married soon after and moved into Esther's home in Connecticut.

Esther has considerable property of her own: the house, which is worth $1 million, stocks and CDs worth another several hundred thousand dollars, and valuable household furnishings. Mark is also quite comfortable financially, with his own small business and considerable savings. He has one grown son from his first marriage. Mark and Esther have kept their property separate for the sake of simplicity.

Esther wants her property, much of which she inherited from her parents, to go to her three daughters. But she doesn't want Mark to think that she's trying to cut him out, and she would want him to keep on living in her house for as long as he wished to after her death. Difficult as it is to talk about these issues, she raises them to Mark. She's immensely relieved to find that he would prefer that she leave her wealth directly to her children and that he will be happy to sign a waiver of any right to claim a portion of her estate.

Esther's house and other valuable items. Esther wants to give Mark the right to live in the house for the rest of his life, but have her daughters inherit it after his death. A simple probate-avoidance living trust can't do that; she needs a more complicated "AB" trust, which will also avoid probate. (With an AB trust, the surviving spouse gets to use property for life; then, the children inherit the property.) She'll use the trust to transfer other valuable and not-so-valuable items, too, such as household furnishings and art. An AB trust can save on estate taxes, which Esther's estate may owe, depending on the tax laws in effect when she dies.

Esther's stock and bank accounts. Esther calls her stockbroker and asks about the procedure for naming her children as TOD beneficiaries for her stocks, so they can inherit them without probate. The broker sends her the paperwork. She also fills out a form provided by her bank to name her daughters as POD payees for her CDs and other accounts.

Mark's business. Mark wants his son, David, to inherit the family business, a camera store. David already works with Mark managing the business. Mark decides that for the time being, a probate-avoidance living trust is the way to go. He transfers the business assets to a trust, naming David as the beneficiary and successor trustee.

Mark's investments. Mark wants to leave much of his other wealth, in the form of stocks and bonds, to several charities. To avoid probate for these assets, he could name the charities as transfer-on-death beneficiaries of his securities. But because his estate could be large enough to owe estate taxes, Mark plans to talk to the charities about setting up a charitable gift annuity or a donor-advised fund. These arrangements would provide income tax breaks for him while he's alive, and leave more for the charities after his death. The charities will be more than happy to discuss these plans with him.

Esther and Mark's Probate-Avoidance Plan

Asset

Plan

Esther's house

Put in AB living trust to avoid both probate and estate tax and to give Mark rights after Esther's death.

Esther's bank and stock accounts

Name her daughters as payable-on-death beneficiaries.

Esther's leftovers

Leave by will (won't avoid probate).

Mark's business

Put in living trust to avoid probate (and explore other techniques to avoid estate taxes).

Mark's securities

Name charities as payable-on-death beneficiaries (and explore other ways to give).

Mark's leftovers

Leave by will (won't avoid probate).

by: , J.D.

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