Blended Family Estate Planning

ESTATE PLANNING STRATEGIES FOR BLENDED FAMILIES

1. Who Inherits the Family House?

The Family House is an interesting concept because the family house consists of two (2) possibilities.  The first possibility is the family house is a non-marital asset of one person.  For example, Sue Smith is recently divorced and keeps the family house in the divorce proceeding. 

After a couple of years, John Jackson moves in and marries Sue Smith.  Sue Smith has been divorced once time with two (2) adult children (18 and 23 years old) and John Jackson has never been married and has one (1) adult child, 25 years old. 

How should the family home have been distributed upon Sue Smith’s death?  This is a real and interesting situation.  First, Sue Smith will be committed to her adult children and will want her adult children to inherit her house and assets.  On the other hand, her husband, John Jackson, has paid the mortgage and the expenses of the new “family home”. 

Option 1: No Estate Plan

Sue Smith deceases in 2018 without a will or trust and John Jackson was never on title to the house.  John Jackson and Sue Smith have lived together for five (5) years and John Jackson is confused and does not know what his legal options are. Under Illinois law, John Jackson inherits fifty (50) percent of the house and Sue Smith’s adult children, inherit fifty (50) percent of the house. Thus, Sue Smith’s children each inherit a twenty-five interest in the house.

Under 755 ILCS 5/15-1(a), Spouse’s Award may in no case be less than $20,000.  Under Illinois law, the surviving spouse of a deceased resident shall be allowed a sum of money that the court deems reasonable for the proper support of the surviving spouse for the period of 9 months after the death of the decedent in a manner suited to the condition in life of the surviving spouse and to the condition of the estate and an additional sum of money that the court deems reasonable for the proper support of the surviving spouse. 

As you can imagine, this situation is a family conflict disaster because any money that the surviving spouse gets is money that the adult children will not receive.  The step children of John Jackson likely have a major distrust for Sue Smith’s children.  First, this matter likely will get decided in Probate Court.  Probate court requires attorneys and can be adversarial and expensive. 

Option 2: Sue Smith had a traditional will

Sue Smith had a will and the same scenario as above plays out except Sue Smith’s wishes are outlined on paper.  John Jackson or Sue Smith’s children will likely be unhappy and consider contesting the will.  Again, John Jackson and Sue Smith’s children will likely either hire an attorney or consult an attorney regarding their legal options. Option 2 is a bad option.

Option 3: Sue Smith goes to an estate planning attorney and creates a Revocable Living Trust

Option 3 involves Sue Smith consulting Gateville Law Firm and getting estate planning advice to plan her and her husband’s estate plan.  Sue Smith decides to create a Revocable Living Trust and leave her house to John Jackson until he dies or sells the house. 

Upon death or selling of the house, John Jackson will keep the house proceeds. Sue Smith decides to use her life insurance proceeds to distribute to her children. Sue Smith’s Revocable Living Trust has a provision where upon John Jackson’s death, the house will go to her adult children who will equally split the inheritance (if any). 

In this situation, the estate planning attorney purposely attempts to alleviate the family conflict and find a win-win situation which does not put John Jackson and Sue Smith’s adult children in an adversarial position. 

Furthermore, Sue Smith’s parents will be concerned about leaving her an inheritance because if Sue Smith dies, John Jackson likely will inherit her parent’s money. A simple solution here is to set up a Bloodline Trust

The benefit of a Bloodline Trust is to keep family money in the family.  Thus, the Bloodline Trust is an estate planning and asset protection tool to prevent the in-law from inheriting Sue Smith’s parents’ money. 

There are several advantages of a Bloodline Trust. The first advantage is the inheritance is protected from creditors such as a divorcing spouse or your beneficiary’s creditors. Here, the key is to remember that your beneficiary’s creditors are the target and they cannot touch her money. 

The second advantage is Trust Assets only can be used for blood family (or adopted family). This prevents the in-law from touching the family inheritance. Trust assets cannot be utilized to provide alimony or support to the divorcing spouse. Your child can distribute Trust principal and income to themselves or their decedents.

Upon your child’s death, the Trust terminates and can only be distributed to blood relatives such as your grandchildren. More importantly, the Trust is revocable during your lifetime, which means that you can alter, amend, or revoke the Bloodline Trust. 

The Bloodline Trust solves a couple of problems. The first problem is the family inheritance can be taken by the son or daughter-in-law. The second problem is the son or daughter-in-law can change the terms of their Revocable Living Trust after their spouse dies and disinherit your children or grandchildren. 

The third problem is your daughter’s inheritance can lose its’ non-marital status by being commingled with their current spouse’s money and assets.