Life Insurance For Blended Families
July 11, 2012 
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Today’s average family looks completely different than the average family 3 generations ago. Back then, it was a huge deal if someone in your town was going through a divorce or separation. These days, it is all too common with over 50% of marriages ending in divorce. Besides inflicting emotional pain on everyone from the spouses to the kids, it also creates some unintended long term consequences in the form of estate planning. We refer to these families as “blended families”, and although estate issues usually don’t arise when both spouses are alive, the story can turn extremely nasty once the first spouse passes away.
This first passing (the first of two spouses to pass away) has created more trauma that the actual divorce did for the children in many cases. Some children have found themselves cut out completely upon the death of a spouse. Specifically, it’s not unusual to find that the bulk of a couple’s assets pass to the surviving spouse on the death of the first. In such a case, the children of the deceased spouse may not be provided for as the deceased spouse would have wished.
Alternatively, if assets are left to the children at the death of the parent, there may not be sufficient assets to provide for the surviving spouse. In addition, most states require that a portion of an estate be left to a spouse, or a spouse can make a claim against the estate that may defeat the objective of leaving assets to the children.
Almost routinely, the QTIP Trust is suggested as the preferred technique for blended families. The idea is to fund the QTIP Trust with some predetermined amount that provides a lifetime income for the surviving spouse. The children would receive trust residue on the stepparent’s death. However, a major concern with this structure is the delay in the children receiving an inheritance. If the spouse is close in age to the children, the legacy may not be distributed to the children until very late in life.
Life Insurance Solutions for the Blended Family
Life insurance can provide both estate equalization and certainty in distribution for blended families. Following are three approaches to using life insurance in a blended family.
One approach is to set up an irrevocable insurance trust (ILIT). The life insurance policy is owned by the trust with the client’s own children as trust beneficiaries. The problem with this approach is that not all clients have the resources or desire to establish estate plans involving ILITs and/or QTIP Trusts. However, a client may still want a way to control distributions. For clients without an estate tax concern, the solution is for the client to own a policy outright with the beneficiary a testamentary trust for the benefit of his or her children. However, many clients do not want the additional hassles of a trust.
For clients who want to control distribution, but don’t want the additional expenses of a trust, a few carriers have products that allow clients to customize death benefit distribution. For example, with some products it’s possible to combine payout options such as an initial lump sum at the insured’s death, guaranteed monthly payments for a specified period of years, and a final lump sum after the monthly payout period. Such product design features provide your “no hassle” clients with the ability to customize death benefit distributions without the need for a trust.
