A: A lot of people these days face questions just like yours. That's not surprising, considering that nearly two in five people age 50 or older belong to blended families, according to a Merrill Lynch study, Family & Retirement: The Elephant in the Room.
Each family situation is different. While I can't say what the right strategy might be for you personally, I do know that many in your situation name their spouses as primary beneficiaries of their estate and their children as secondary beneficiaries. Unfortunately, that can create problems—as your children might have to wait years after your death, or until their stepmother dies, to receive their inheritance or may not ultimately receive any inheritance at all.
Some people find trusts a fair and effective alternative. Though they may have a reputation for being complicated, trusts can actually make a lot of sense for people who are looking for ways to provide for their families from two marriages. In your case, you might consider something called an irrevocable life insurance trust, or ILIT. This is a trust that typically holds life insurance, but it may hold other assets as well.
Here's how it works: If you create an ILIT with a life insurance policy that names your children as beneficiaries, the death benefit is paid to the trust at your death, free of income and estate taxes. The death benefit proceeds can then be distributed to the children based on the trust’s provisions. And because the policy is in a trust, they won't owe estate taxes. (Note that if the life insurance policy was originally taken out in your name, the IRS requires that three years must pass after it is transferred to the ILIT before it will be considered exempt from estate taxes. You also need to be careful to follow proper procedures for premium payments.) Premiums on the insurance could be paid through annual gifts—which may be free of federal gift tax. This will likely free you up to provide for your current wife with the other assets in your estate.
I would like to point out another advantage of ILITs: the permanent life insurance policy within them can generate competitive returns. People often look at life insurance purely as something they pay into, but it might be more accurate to think of it as a way of investing that can help you reach your financial goals.
3 Questions to Ask Your Advisor
- Can you help arrange a meeting with me, my wife and my children to discuss a financial plan for my estate?
- What is involved in setting up an irrevocable life insurance trust?
- How can life insurance help me meet my financial goals?
Connect with an advisor and start a conversation about your goals.
Give us a call at
9am - 9pm Eastern, Monday - Friday
This article does not constitute legal, accounting or other professional advice. Although it is intended to be accurate, neither the author nor any other party assumes liability for loss or damage due to reliance on this material.
The investments or strategies presented do not take into account the investment objectives or financial needs of particular investors. It is important that you consider this information in the context of your personal risk tolerance and investment goals.
All guarantees and benefits of the insurance policy are backed by the claims-paying ability of the issuing insurance company. They are not backed by Merrill Lynch or its affiliates, nor do Merrill Lynch or its affiliates make any representations or guarantees regarding the claims-paying ability of the issuing insurance company.