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Co-authored by Zach Wiewel & Ann Lumley
Zach Wiewel, J.D., is an Estate Planning attorney at Texas Trust Law and earned his LL.M. in Taxation from NYU School of Law.
Ann Lumley, J.D., is the Director of Probate and Trust Administration at Texas Trust Law
About 40 percent of all families now are blended. When spouses bring children from prior relationships into a new marriage, the question of “Who gets what?” becomes more complicated than in a more traditional nuclear family. Careful estate planning is essential to ensure that assets are distributed according to your client’s wishes while minimizing conflict, confusion, and unintended consequences. Understanding community property rules and addressing the special issues faced by blended families are key steps.
Community Property Issues
In community property states, most assets acquired during marriage are considered community property regardless of who earned the income or whose name is on the title. Each spouse is presumed to own an undivided one-half interest. Separate property is usually limited to assets owned before marriage, inheritances, and gifts.
For blended families, community property rules can significantly affect estate planning outcomes. A surviving spouse automatically retains his or her one-half share of community property, but the decedent’s one-half share can only be directed to the other spouse by a will or trust. Without a clear estate plan, state law may determine how that share is distributed. This can potentially favor the deceased’s children from a prior relationship. This is a very difficult conversation to have with the surviving spouse.
Care must be taken to identify which assets are community property and which are separate property. Over time, separate property can become “commingled” with community property, making it harder to trace and increasing the likelihood of disputes after death between the surviving spouse and the stepchildren. At our law firm, we rarely recommend for the first marriage, but we strongly recommend marital property agreements when there is a subsequent marriage. “Quasi-community property” is a legal fiction that holds that assets acquired in a common law state by one spouse (and therefore the separate property of that spouse) will be considered community property in Texas. It is important to note that there is no “quasi-community property” at death in Texas, only divorce. We have administered many estates over the years and have found that determining what property is community property and what property is separate property can be very time-intensive and expensive.
Balancing the Needs of a Spouse and Children from Prior Marriages
One of the most common concerns in blended family estate planning is balancing financial security for a surviving spouse with the desire to leave assets to children from a prior marriage. Leaving everything outright to a surviving spouse could result in disinheriting the children of the first spouse to die, because the survivor can change the plan. On the other hand, leaving assets directly to children on the first death can leave the surviving spouse financially vulnerable.
Trusts are often used to address this tension. For example, a marital trust can provide access to income and assets for a surviving spouse during his or her lifetime. At the second death, the remaining assets can then pass to children of the first to die. This approach can protect both parties’ interests while reducing the risk of conflict.
Stepchildren and Inheritance Rights
In Texas, stepchildren do not automatically inherit unless they are legally adopted or explicitly included in an estate plan. This can come as a surprise to families who assume all children will be treated equally. If your clients want stepchildren to inherit, their estate planning documents must say so. Again, under Texas law, failing to properly plan can result in the children of the first spouse to die to inherit the deceased’s portion of the community property, thereby disinheriting the survivor of that share. This normally creates a disaster for the survivor –and it is the most problematic situation we have to contend with.
Other Concerns
This article only touches on some of the most relevant concerns that we encounter at our law firm, Texas Trust Law; there are many others. Perhaps the most important loose end is adjusting beneficiary designations on retirement accounts and life insurance policies to reflect the blended family goals. Failing to do that could pose tragic consequences, particularly for plans governed by the Employee Retirement Income Security Act (ERISA).
Getting It Done
Navigating a blended family is fraught with challenges under the best of circumstances. In our years of experience, lawyers are the worst when it comes to forming an effective plan for themselves and heir family. Be sure to share this information with your clients and get it done for yourself!
