Engineering An Estate Plan For A House Divided

This due diligence applies as well to individual retirement accounts, which advisors say are the most overlooked and, the family house notwithstanding, the largest asset in the client's portfolio.

"I can't tell you how many times clients have come to me to review a new will, but they've never changed the beneficiary designations of their IRAs," says. "Yet, the retirement account is often the most important asset they own. That's particularly true among high-paid execs who are putting away substantial amounts of money into 401(k)s and non-qualified deferred compensation plans."

Adds Ferris: "The blended couple has to be made aware that a train wreck is waiting to happen if they don't get the beneficiaries right on the IRAs and other assets."

But getting the beneficiary designations right for certain parties can be disadvantageous for others, absent counterbalancing measures. How, for example, is the wife of a second marriage to make ends meet if, upon the death of her spouse, she has no recourse to alternative sources of income and the adult children of the husband's first marriage inherit his accumulated wealth and property?

Enter life insurance, which advisors say is the primary vehicle for achieving estate equalization. Thus, when making the children the beneficiaries of the IRA, a parent can also establish a life insurance policy of equal value for the spouse. By placing the insurance inside an irrevocable life insurance trust, the parent can also assure that death benefits are not subject to estate tax.

Advisors say an ILIT (or wealth replacement trust) might also be leveraged in instances where the client is charitably inclined. A charitable remainder trust can be established to provide the vehicle's grantor with a lifetime income stream, the trust's remainder interest going to charity at time of death. The ILIT provides cash to the surviving spouse (or children) to replace family assets sold by the CRT's trustee to fund the charitable objectives.

Should the client be unable to buy life insurance due to uninsurability or poor rating, he or she might purchase a non-qualified deferred annuity as an alternative, observes Ferris. When the client dies, the spousal beneficiary can take ownership of the annuity, maintaining the tax-deferred treatment of the cash value, or start taking income.

Often, the issue is not estate equalization or asset replacement, but how to transfer property held jointly by the spouses in an equitable and tax-efficient manner. In these instances, Ferris advocates the use of revocable living trusts, one for each spouse. Should either become disabled, the other becomes a successor trustee, placing the individual in a fiduciary capacity.

The jointly held assets are retitled as "tenants in common" and divided evenly between the 2 RLTs. Within this structure, credit-shelter and qualified terminal qualified terminal interest property (QTIP) trusts are set up. When one spouse dies, the credit shelter and QTIP trusts become irrevocable, providing the surviving spouse with income and principal for support and maintenance. When the surviving spouse dies, assets remaining in trust revert to the children.

"The QTIP lets you transfer money to children at the death of a surviving spouse free from probate administration and the claims of the surviving spouses' creditors or ex-spouses," says Jeffrey Levine, a financial planner and partner at Empire Asset Management, Albany, N.Y. "It's a special marital trust that lends itself well to blended family situations."

However well-versed the advisor may be in these and other estate planning techniques, sources say, success in arriving at a satisfactory solution for the blended family will depend on other factors. Among them: superior fact-finding and listening skills; access to a knowledgeable estate planning attorney; and fortitude in surmounting seemingly intractable positions dividing family members.

"As advisors, we have to expect and embrace the challenges [engendered by estate planning]," Keffer says. "If people could do the planning themselves, they wouldn't need us. It's our ability to navigate a difficult process that makes us valuable."