Blended Families

<div class="Section1">Many individuals who are engaged in estate planning for a blended family choose to establish trusts to ensure that their wishes in providing for various heirs are carried out. In these cases, it is important to carefully consider who will serve as trustee in carrying out those wishes.</div><br /> <div class="Section1"><br /> <br /> Many remarried individuals may be tempted to appoint their surviving spouse as trustee, but the relationship between the surviving spouse and any children from prior marriages should be considered before making this choice. Animosity between these parties can make trust administration difficult, and can lead to dissatisfaction among the children that the deceased spouse intended to benefit. The same issues can arise if another family member is named as trustee. These issues are magnified if the trust provides for discretionary distributions, as many trusts do. For this reason, a corporate or institutional trustee may provide the best option in order to minimize conflict in blended family situations in that an impartial third-party will be making decisions regarding trust distributions and general administration.<br /> <br /> </div>

<div class="Section1">Typically, a surviving spouse may be entitled to receive Social Security survivor benefits based upon the earnings record of the deceased spouse. In the case of divorce, however, if one spouse remarries before age 60, he or she may no longer be entitled to claim survivor benefits based on the prior marriage unless the subsequent marriage ends. This is the case unless the prior marriage lasted for at least 10 years.<a href="#_ftn1" name="_ftnref1">¹</a></div><br /> <div class="Section1"><br /> <br /> Social Security survivor benefits are not impacted if the surviving spouse remarried after he or she reached age 60.<a href="#_ftn2" name="_ftnref2">²</a> In certain cases where the surviving spouse remarries after age 50, but before age 60, that spouse may remain entitled to a prior spouse’s Social Security benefits if he or she was disabled at the time of the remarriage.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> <hr /><br /> <br /> <strong>Planning Point:</strong> Practically, the Social Security rules provide that a divorced surviving spouse will not be entitled to receive Social Security survivor benefits based on a prior spouse’s earnings record unless he or she is unmarried or has remarried after reaching age 60 (unless the disability exception applies).<br /> <br /> <hr /><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  20 CFR § 404.331(a)(2).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.  20 CFR § 404.335(e)(1).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.  20 CFR § 404.335(e)(2).<br /> <br /> </div>

<div class="Section1">The term “blended family” can encompass any number of modern family structures. Most commonly, the term refers to individuals who have remarried after prior marriages have ended in divorce. These couples may have children from prior marriages, and may have children together, potentially resulting in a situation where individuals may wish to provide for children from both current and prior marriages, and also stepchildren. Each client may wish to ensure that his or her own children (rather than stepchildren) are provided for in the event that they are the first-to-die spouse, but may concurrently wish to provide for their surviving spouse even if their own children are the ultimate beneficiaries.</div>

<div class="Section1">Pursuant to state law, a surviving spouse is entitled to claim a portion of his or her deceased spouse&rsquo;s estate in lieu of the inheritance that the decedent chose to leave for the survivor (whether via will, trust or otherwise). In the traditional family context, this is often not an issue because the first-to-die spouse simply leaves his or her entire estate to the survivor with the understanding that the surviving spouse has sufficient incentive to provide for the couple&rsquo;s mutual children or other heirs.<div class="Section1"><br /> <br /> In the blended family context, a deceased spouse may choose to leave certain of the assets to children from a prior marriage, with only a specified portion of the estate passing to the surviving spouse. This can create a problem when such a scenario intersects with state elective share rules, which may provide that the surviving spouse is entitled to a greater portion of the estate than the decedent directed. As a result, the elective share rules must be considered when engaging in estate planning for a blended family.<br /> <br /> In many cases, blended families will use a qualified terminable interest property (QTIP) trust (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="9123">9123</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="9124">9124</a>) to ensure that the surviving spouse is satisfied with his or her inheritance while still providing for children from a prior marriage.<br /> <br /> </div></div><br />

<div class="Section1">When an individual enters into a second or subsequent marriage, it is entirely possible that he or she has entered into agreements with a prior spouse (whether in the form of prenuptial or postnuptial agreements, divorce or property settlement agreements, <em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="9092">9092</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="9096">9096</a>) that must be taken into account when entering into estate planning strategies in contemplation of providing for a spouse from a subsequent marriage. These existing agreements could provide for continuing support obligations, required funding of life insurance policies for the benefit of a former spouse or previously agreed upon beneficiary designations on retirement accounts or other financial products.<div class="Section1"><br /> <br /> Importantly, many individuals who enter into second or subsequent marriages already have children from a prior marriage, and may wish to ensure that those children are provided for before leaving any assets to stepchildren. Both accurate, updated beneficiary designations ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="9115">9115</a>) and trust arrangements ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="9123">9123</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="9124">9124</a>) can be useful in this context.<br /> <br /> Other issues can arise when there is a disparity in wealth or age between the spouses. Disparities in wealth can require planning to fully use the federal estate tax exemption (i.e., either through trust arrangements or by taking advantage of portability ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="9121">9121</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="9122">9122</a>)) of both the wealthier and less wealthy spouse. Disparities in age can lead to conflicts between adult children from prior marriages and stepparents that should be addressed in estate planning (i.e., via trust planning and open conversation) in order to ensure that a decedent&rsquo;s wishes are properly carried out.<br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; Del. Code. Ann. Tit. 12, &sect;&nbsp;3570(4).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; Del. Code. Ann. Tit. 12, &sect;&nbsp;3570(8).<br /> <br /> </div></div><br />

<div class="Section1">Although the issue of wealth disparity can present an issue in any marital context, more extreme differences in both age and wealth tend to become important in the blended family context (where individuals may be entering a second or third marriage, potentially later in life). In these cases, estate planning must take into account the potential use of a less wealthy spouse&rsquo;s estate tax exemption, especially if the couple intends to keep their assets relatively separate.<div class="Section1"><br /> <br /> For some couples, portability makes it easier to make full use of both spouses&rsquo; estate tax exemptions even in the face of wealth disparity. Portability, which is the right of a surviving spouse to use any of a deceased spouse&rsquo;s unused transfer tax exemption amount, allows the surviving spouse to increase his or her own estate and gift tax exemption amount in order to exclude more of his or her assets from transfer tax liability (essentially excluding $27.98 million from estate tax liability per couple in 2025; $27.22 million in 2024).<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> In a first marriage, portability can be useful because the assets of the first-to-die spouse will typically pass directly to the surviving spouse (sheltered by the marital deduction), so that the first-to-die spouse will use none of his or her exemption. Portability ensures that the surviving spouse (whose eventual estate may be larger because he or she has inherited the assets of the first-to-die spouse) can make use of both spouses&rsquo; exemption amounts.<br /> <br /> In the case of a subsequent marriage/blended family scenario, however, using portability may not be ideal because the spouses may wish to leave more property to children from previous marriages rather than leaving all assets to the surviving spouse. As a result, trust options may provide a more attractive strategy to allow spouses in a blended family to make full use of both spouses&rsquo; estate tax exemption amounts. <em><em>See</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="9121">9121</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="9123">9123</a> for a discussion of some of the trust options that can be used by spouses in a blended family.<br /> <br /> <hr><br /> <br /> <strong>Planning Point:</strong> Clients should be aware that only the estate tax exemption of the most recent spouse can be used via portability.<a href="#_ftn2" name="_ftnref2">²</a> Therefore, if a client&rsquo;s spouse predeceases him or her and the client chooses to remarry, the exemption amount of the first spouse will be lost if the subsequent spouse dies before the client. However, the client can continue to use his or her first spouse&rsquo;s exemption for lifetime gifts made before the death of the subsequent spouse.<br /> <br /> <hr><br /> <br /> Portability is also discussed in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="9108">9108</a>.<br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; Rev. Proc. 2023-34. Portability was introduced in the Tax Relief, Unemployment Reauthorization and Job Creation Act of 2010, and was made permanent by the American Taxpayer Relief Act of 2012.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; Treas. Reg. &sect;&sect;&nbsp;20.2010-3(a), 20.2010-1(d)(5).<br /> <br /> </div></div><br />

<div class="Section1">As discussed in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="9120">9120</a>, many individuals in a second or subsequent marriage may not wish to rely on portability in order to make use of both spouses&rsquo; federal estate tax exemption amounts. If the first-to-die spouse were to leave all assets outright to the surviving spouse (in order to take advantage of portability), that surviving spouse would have total control over those assets, including the ability to disinherit children from a prior marriage or even leave the first-to-die spouse&rsquo;s assets to a new spouse.<div class="Section1"><br /> <br /> In this case, an <em>inter vivos</em> trust may be desirable, as it can allow the first-to-die spouse to control the ultimate disposition of his or her assets, and can also provide the spouse with income during life.<br /> <br /> One example of such a trust provides the less wealthy spouse with a testamentary general power of appointment over the trust assets in the amount necessary to use that spouse&rsquo;s estate tax exemption if he or she is the first-to-die spouse. This type of trust can also continue to provide the grantor of the trust (the wealthier spouse) with income rights during life. These trusts can be revocable, so as to provide protection in the event of a divorce.<a href="#_ftn1" name="_ftnref1">¹</a> One downside to these types of trusts is that the power of appointment allows the poorer spouse to provide an inheritance to whomever he or she chooses (this feature avoids gift tax issues that would otherwise arise to make the trust structure undesirable).<br /> <br /> <hr><br /> <br /> <strong>Planning Point:</strong> Because these types of trusts are not specifically approved by IRS regulation, competent professional advice must be sought out in order to weigh the potential risks and benefits of the many available types of trust structures.<br /> <br /> <hr><br /> <br /> A joint revocable trust is another type of revocable trust that can be used to ensure both spouses&rsquo; exemptions are used, but this type of trust requires both spouses to contribute the assets (in the case of wealth disparity, this would mean that the wealthy spouse makes gifts to the poorer spouse to fund the trust).<br /> <br /> With both of these types of trust, a risk also exists that the IRS will determine that one spouse actually made the gift after his or her spouse&rsquo;s death, causing potential problems in claiming the marital deduction. While a lifetime power of appointment may avoid this problem, it causes another in that the poorer spouse then has the lifetime power to appoint to whomever he or she chooses, unless the spouses agree that the spouse either exercise the power immediately in writing (with testamentary effect, becoming effective on the wealthier spouse&rsquo;s death) or release the power. Because of these complications, many individuals prefer to use the qualified terminable interest property (QTIP) trust structure, which is governed by specific IRS regulations, discussed in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="9123">9123</a> and Q <a href="javascript:void(0)" class="accordion-cross-reference" id="9124">9124</a>.<br /> <br /> <em><em>See</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="9125">9125</a> for a discussion of &ldquo;A-B trusts&rdquo;. Q <a href="javascript:void(0)" class="accordion-cross-reference" id="9126">9126</a> discusses some of the potential uses of an irrevocable life insurance trust (ILIT).<br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; For examples of these types of trusts, <em><em>see</em></em> Let. Ruls. 200403094 and 200604028.<br /> <br /> </div></div><br />

<div class="Section1">The difference between an <em>inter vivos</em> and testamentary qualified terminable interest property (QTIP) trust is that the <em>inter vivos</em> trust is created and funded during the grantor’s life, while the testamentary trust only becomes effective at the grantor’s death (i.e., his or her will provides for creation of the trust).<br /> <br /> <hr /><br /> <br /> <strong>Planning Point:</strong> Note that with an <em>inter vivos</em> QTIP trust, the trust documents can provide that the funding spouse will actually become the trust beneficiary if the less wealthy spouse is the first-to-die spouse. This option, however, still requires that the grantor not be given the right to amend, alter, revoke or terminate the trust.<a href="#_ftn1" name="_ftnref1">¹</a> This strategy also carries the risk that the trust could be treated as a self-settled trust reachable by the grantor’s creditors.<br /> <br /> <hr /><br /> <br /> An <em>inter vivos</em> trust can also provide asset protection to the couple while both spouses are still living. Further, an <em>inter vivos</em> QTIP trust is “defective” for income tax purposes for the lives of both spouses—this eliminates the need to file separate income tax returns for the trust.<br /> <br /> Property held in the <em>inter vivos</em> trust is valued separately from property held individually by the surviving spouse for his or her benefit. This generally means that if, for example, a portion of a piece of property is held in the QTIP trust and a portion remains outside of the trust, each portion of the property could potentially be eligible for any applicable valuation discounts that may be available.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> One primary disadvantage to the <em>inter vivos</em> QTIP trust is that it is not revocable upon divorce. Therefore, once created, the divorced spouse remains entitled to the benefit of the QTIP trust assets if he or she survives the trust creator. Despite this, the trust document can limit the trustee’s power to invade the trust principal by providing that such a discretionary right is available only if the beneficiary was married to the trust creator at his or her death. Prior to 2018, after divorce, income from the trust was includable only in the income of the beneficiary spouse.<a href="#_ftn3" name="_ftnref3">³</a> Because the testamentary QTIP trust only becomes effective at death, the grantor is able to modify his or her will following a divorce so that a prior spouse does not receive the benefit of the QTIP trust.<br /> <br /> <hr /><br /> <br /> <strong>Planning Point:</strong> The 2017 tax reform legislation repealed IRC Section 682. Generally, the legislation modified the treatment of alimony payments with respect to divorces that occur after December 31, 2018, so that alimony will no longer be included in the income of the payee and deductible by the payor. Prior to its repeal, Section 682(a) provided that if a divorced spouse received income from a grantor trust (which would otherwise be taxable to his or her former spouse), the income would be taxable to the spouse receiving the payments. New IRS guidance provides that this rule will continue to apply if the divorce occurred on or before December 31, 2018 (unless the relevant instrument is modified to provide that the post-reform rule will apply). For divorces that occur after December 31, 2018, the grantor will now be taxed on income paid to the former spouse through the grantor trust. Because of this, spouses who create grantor trusts prior to or during the marriage should consider this issue, and potentially provide that the grantor trust will terminate upon divorce (or that the payor spouse will otherwise be reimbursed for taxes through other assets of the donee spouse).<br /> <br /> <hr /><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  Treas. Reg. § 25.2523(f)-1(d).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.  <em><em>See, e.g., Estate of Mellinger v. Comm</em></em>., 112 TC 26 (1999).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.  IRC § 682(a).<br /> <br /> </div>

<div class="Section1">An irrevocable life insurance trust (ILIT) is a trust funded by life insurance that cannot be modified, amended or revoked without the permission of the beneficiary. It is mechanism used in estate planning in which a grantor effectively removes all of his or her rights of ownership to the assets that have been transferred to the trust. The primary purpose of an ILIT is to reduce a decedent&rsquo;s estate tax liability (while simultaneously providing for heirs) by removing a life insurance policy from the decedent&rsquo;s gross estate.<div class="Section1"><br /> <br /> An ILIT can be a valuable tool both for providing for children from a first marriage or a surviving spouse, and for reducing a decedent&rsquo;s taxable estate. Prenuptial agreements ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="9092">9092</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="9093">9093</a>) can be helpful in providing that a surviving spouse&rsquo;s inheritance will be limited to proceeds from the life insurance policy held by the ILIT. A prenuptial agreement can also provide that if the couple divorces, the beneficiary-spouse must forfeit all rights to the trust assets (which would presumably then pass to the insured&rsquo;s children or other heirs).<br /> <br /> An ILIT allows a decedent to control who receives the proceeds of the life insurance policy because the proceeds are actually paid to the trust, and the governing trust documents then provide specific details as to who should receive the proceeds and under what circumstances. This strategy can also allow a decedent to protect an inheritance from the beneficiary&rsquo;s creditors.<br /> <br /> For individuals who wish to benefit a generation of beneficiaries that is more than one removed (so that the generation skipping transfer (GST) tax would apply), a portion of the GST exemption amount ($13.99 million per individual in 2025; $13.61 million in 2024, $12.92 million in 2023; $12.06 million in 2022; $11.7 in 2021)<a href="#_ftn1" name="_ftnref1">¹</a> can be applied to the transfers to the trust (thereby sheltering the entire amount of the proceeds from the GST tax). It should be noted that this can provide a valuable strategy for wealthy individuals who anticipate transferring wealth in excess of the exemption amount, as only the cash actually transferred to the trust to fund the life insurance policy premiums must be exempted. By allocating the GST tax exemption to those cash transfers, the larger value of the life insurance proceeds can be paid out entirely GST tax-free, while leaving a greater proportion of the exemption for allocation to other assets.<br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; Rev. Proc. 2020-45, Rev. Proc. 2021-45, Rev. Proc. 2022-38, Rev. Proc. 2023-34.<br /> <br /> </div></div><br />

<div class="Section1">It is common for couples who have been divorced and remarried to have children from prior marriages, complicating the transfer of wealth both during life and upon death. In some cases, an individual may have some idea of the specific assets he or she wishes to transfer to a particular child, or may wish to provide more generous gifts to heirs who are less able to provide for themselves. In other cases, the goal of the individual is to create some level of equality in each heir&rsquo;s inheritance and minimize conflict in general. In any event, federal transfer taxes (estate, gift and generation skipping transfer taxes) must be taken into account in order to minimize tax liability.<div class="Section1"><br /> <br /> If the individual plans to begin making gifts during life (perhaps in order to minimize the necessity for complicated estate planning or to ensure that specific tangible assets pass to a certain beneficiary), he or she should attempt to take advantage of the $19,000 in 2025 per donor/donee annual gift tax exclusion amount (if the spouse consents, up to $38,000 per donee can be sheltered each year).<a href="#_ftn1" name="_ftnref1">¹</a> The exclusion amount applies only to present interest gifts (i.e., it does not apply to gifts where the donee only has the right to enjoy the property in the future (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="905">905</a>)). Generally, if the gifts exceed the annual exclusion amount, the donor is responsible for paying gift tax on the fair market value of the property transferred and must file a gift tax return (Form&nbsp;709) by April&nbsp;15 in the year following the year in which the gift is made.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> Individuals who choose not to transfer wealth gradually during life should plan for the estate tax and the generation skipping transfer tax (GSTT; applicable if the individual wishes to &ldquo;skip&rdquo; a generation in making his or her bequests).<br /> <br /> With respect to the estate tax, individuals should note that most transfers between spouses fall within the unlimited marital deduction, so will not be subject to estate tax.<a href="#_ftn3" name="_ftnref3">³</a> Transfers to certain types of trusts (QTIP trusts, <em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="9123">9123</a> and Q <a href="javascript:void(0)" class="accordion-cross-reference" id="9124">9124</a>) also qualify for the marital deduction.<a href="#_ftn4" name="_ftnref4">⁴</a> Estates that are valued at below the transfer tax exemption amount are also exempt from the estate tax. In the blended family context (where age and wealth disparity are often factors), it can be important to plan to make use of both spouses&rsquo; exemption amounts (either through portability or trust planning (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="9122">9122</a>).<br /> <br /> If an individual wishes to transfer wealth to a &ldquo;skip&rdquo; generation (i.e., his or her grandchildren or great-grandchildren), GSTT planning becomes important. The transfer tax exemption amount discussed above also applies to the GSTT. In many cases, the individual may wish to transfer assets into a trust, allocating a portion of his or her GSTT exemption to the transfer. In this case, the assets in the trust can be allowed to grow sheltered from any GSTT and provide for grandchildren and great-grandchildren in the future while using up only a minimal amount of the transferor&rsquo;s GSTT exemption. Of course, for direct transfers to skip generations made during life, the $19,000 (in 2025) per donor/donee gift tax annual exclusion amount is available. <em><em>See</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="874">874</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="891">891</a> for an in-depth discussion of the GSTT.<br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; Rev. Proc. 2018-57, Rev. Proc. 2022-38; IRC &sect;&nbsp;2513; Treas. Reg. &sect;&nbsp;25.2513-2.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; IRC &sect;&nbsp;6019.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; IRC &sect;&nbsp;2056.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp; IRC &sect;&nbsp;2056(b)(7).<br /> <br /> </div></div><br />