30 May 2023 Estate Planning Considerations for Blended Families
When two people with children from previous relationships get married, they form a blended family. While this can create a unique and loving situation, it also raises some complicated estate planning considerations.
Most of us want to ensure our children and stepchildren are taken care of financially should something happen to us. However, many are unaware of the ways children can be unintentionally disinherited. In this article, we will provide some critical considerations for estate planning for blended families. We’ll discuss how to ensure that your stepchildren are included in your estate plan and how to make sure that your biological children are never left out. For more help with estate planning and inheritance tax rules, contact a Haynie tax professional today.
What Are The Inheritance Rights Of Stepchildren?
In most states, stepchildren do not have automatic inheritance rights unless they’ve been adopted by their stepparent. This means that if you die without a will or other estate planning documents in place, your stepchildren would not inherit anything from you.
Clarity is key. If you want them to be able to inherit from you, you need to clearly include them in your estate plan. You cannot simply say, “I leave my assets to my children,” in your will, as this may not legally include your stepchildren. You must explicitly name your stepchildren as beneficiaries to ensure they are included. Review your beneficiary designations periodically to make sure everything is in order.
Another thing to consider is whether or not your stepchildren are entitled to a share of your pension or other retirement benefits because these assets are typically left to designated beneficiaries outside of a will or trust. Designating “your children” as beneficiaries may not legally include your stepchildren and therefore, specifically naming your stepchildren as beneficiaries ensures that they are included. With that said, your ability to designate beneficiaries will vary depending on the rules of the particular retirement plan, so it’s essential to check with your plan administrator to find out how to properly plan for the disposition of retirement benefits.
How Children Of Divorce Are Unintentionally Disinherited
In some cases, biological children may be unintentionally disinherited if their parents divorce and remarry. For example, let’s say John and Linda Doe have a child, Steve. John and Linda both divorce and each re-marry. If John Doe dies and leaves everything to his new spouse in his estate plan, his biological son Steve will not automatically be entitled to inherit anything from the new spouse unless she explicitly includes Steve in her estate plan.
This is one of the most common ways children are unintentionally disinherited.
Since Steve would be the stepson, he would not receive anything from his Dad’s estate, nor his stepmother’s estate when she passes, unless she thought to include him as a beneficiary in an estate plan.
Inheritance Tax Considerations
In addition to federal inheritance tax, you must also consider state inheritance tax. If your state taxes inheritance, this means your heirs will have to pay taxes on the value of assets they receive from your estate. (Unlike estate tax, which is paid by the estate of the deceased person, inheritance tax is paid by the recipient of the inheritance.)
Inheritance tax rules vary by state. Some states with inheritance taxes employ different tax rates depending on the relationship between the deceased person and their heir. Unfortunately, this means stepchildren may be taxed at a higher rate than one’s biological children. In Kentucky, for example, children are exempt from paying inheritance taxes, while stepchildren may have to pay 6-16% in taxes based on the value of their inheritance. To determine whether your children or stepchildren must pay tax, you will need to review the laws of the state where your children live, which may be different than where you reside.
How is Inheritance Tax Calculated?
Generally, inheritance tax is applied only to the portion of the inheritance that exceeds a certain exemption amount. The exemption amount and the tax rate vary by state and by relationship. Usually, closer relatives have higher exemptions and lower rates than distant relatives or non-relatives. Some states also exempt certain types of assets, such as life insurance proceeds or retirement accounts, from inheritance tax.
To calculate inheritance tax, you need to know the value of your inheritance, your relationship to the deceased person, and the rules of your state. Consult a tax professional to help you estimate inheritance tax liability.
How to Avoid Inheritance Tax
- Give gifts during your lifetime: If you give away your money and property while you are alive, your estate will be smaller and might not rise above the threshold at which taxes would be triggered. You can give up to $15,000 per person per year without triggering any gift tax, and you can also make unlimited gifts to your spouse, charities, or medical and educational expenses.
- Write a will: Another way to avoid inheritance tax is to write a will that specifies how you want your assets to be distributed after your death. A will can help you avoid intestacy laws, which are the default rules that apply when someone dies without a will. Intestacy laws may not reflect your wishes and may result in higher taxes for your heirs. A will can also help you designate beneficiaries for your accounts and policies, such as retirement accounts, life insurance, and annuities, which can bypass inheritance tax.
- Use trusts: A trust is a legal arrangement that allows you to transfer your assets to a trustee, who manages them for the benefit of one or more beneficiaries. When trusts can help you avoid inheritance tax by remove assets from your estate and give you more control over how they are distributed. There are different types of trusts that serve different purposes.
- Move to a state that doesn’t have inheritance tax: Currently, only six states impose an inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. However, some states have an estate tax, which is similar to the federal estate tax and applies to the value of the entire estate before it is distributed to the beneficiaries. The federal estate tax only affects estates worth more than $12.92 million in 2023, but some states have lower exemption amounts.
Protecting Your Children Through Estate Planning
No matter what your family dynamic is, it’s important to take into account how your estate plan will affect your children. If you have stepchildren or children from a previous marriage, make sure to consider their rights and needs when creating or updating your estate plan. With careful planning, you can ensure that your children are taken care of regardless of what happens to you.
Estate taxes and inheritance taxes can take a chunk out of what you leave behind. Careful estate planning can prevent this. To learn more about creating a plan that will protect your family and your assets, contact our office today.
The information contained in this article is provided for general informational purposes only, and should not be construed as legal advice on any subject matter. You should not act upon any such information without first seeking qualified professional counsel on your specific matter.
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