PLANNING FOR HIS, HER AND THEIR CHILDREN

When either or both parents have children from prior marriage(s) a fair distribution of property upon the first death often requires detailed thought.

If a family business is involved, or if there is a wide disparity in the ages of the children, the situation can be even more complicated. Normally, the first-to-die spouse will leave his/her estate to the surviving spouse. This takes advantage of the unlimited marital deduction for transfer taxes and also allows the surviving spouse the opportunity to manage the estate for his or her lifetime as well as provide for the children. However, if the decedent spouse’s children are from another marriage, this may not be what the decedent had in mind.

Take the case of a couple with older children from prior marriages that have a younger child of their own. If the older children of the first-to-die spouse are on their own while the younger one is still at home, which should benefit most if that spouse dies first? Certainly the younger child will have greater needs, since the older children have already benefited from prior parental support.

Often the older children will benefit from two sets of parents if both natural parents have remarried. If they require ongoing support, they have a larger support base than children from the current marriage.

Life insurance can be used to provide an easy solution to these problems. If the insurance will be used to benefit a minor child it can be made payable to a testamentary trust for the benefit of the younger child. This trust is established upon the death of the insured parent. The trust can provide income and principal to meet living and educational expenses until the child reaches an age and maturity level that allows him or her to take control of the trust.

The trust can easily distribute a portion of the life insurance proceeds to the older children, if that is the wish of the decedent. We often find this in situations where the remarried couple has a large age difference, with surviving spouse closer in age to the surviving older children. This allows the older children to receive a part of the inheritance at the death of the natural parent, without having to wait for the younger spouse to die and the estate to be divided.

The family business situation can be even more complicated. In many cases, the bulk of the estate’s value will come from a closely held family business. A business cannot easily be divided and from a practical point, often should not be divided. Again, life insurance on the life of the parent can provide the necessary liquidity to treat everyone in the estate equally. In this case, the child involved in the business should own a life insurance policy on the life of the parent, agreeing to purchase the business from the parent’s estate. At the parent’s death, the child in the business uses the life insurance to purchase the business from the estate. The cash can be easily divided among the other heirs, and the child participating in the business can continue running the business, without threat of outside family interference.

In both of these cases, life insurance on the life of the parent can escape taxation in the parent’s estate if owned by a third party or an irrevocable life insurance trust. Make sure you consult a tax or financial planning specialist when contemplating the use of such planning.