Estate & Wealth Transfer Planning for Blended Families... Yours, Mine, and Ours

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1 Estate & Wealth Transfer Planning for Blended Families... Yours, Mine, and Ours

2 The new normal With over 65% of remarriages involving children from a prior relationship, 1 blended families have become increasingly common. The unique issues these families face often make financial strategies and decision making much more complex than they are for traditional families Providing for a new spouse and adult children from a prior relationship Providing for a second family and children from a prior relationship Providing for your children as well as those of your spouse If you have a blended family, achieving your financial goals may require additional planning as well as more sophisticated wealth preservation or transfer techniques. To ensure that assets reach intended recipients and eliminate disagreements among family members, well thought out and carefully documented plans are needed. Shared goals Blended and traditional families share many of the same goals providing for the needs of loved ones, funding each child s or grandchild s education, passing on a legacy, and preserving special assets such as a cherished beach house, a private business, or an art collection for future generations. Balancing the needs of children of very different ages or of a new spouse and children from a prior relationship can be challenging. Working with your legal and tax advisors, your Merrill Lynch Financial Advisor and Wealth Structuring Specialist can help you articulate and refine key goals, identify useful strategies and tactics, and implement your plan. Building on the knowledge of your goals and values, your Merrill Lynch Financial Advisor, together with a Wealth Structuring Specialist, can work with you and your legal and tax advisors to identify and implement strategies designed to help you achieve your goals. The asset protection, wealth transfer and income protection strategies that you implement now can help you create enduring benefits for the people who matter the most to you. Merrill Lynch Wealth Management makes available products and services offered by Merrill Lynch, Pierce, Fenner & Smith Incorporated ( MLPF&S ), a registered broker-dealer and member SIPC, and other subsidiaries of Bank of America Corporation ( BAC ). Investment products offered through MLPF&S and insurance products offered through Merrill Lynch Life Agency Inc.: Are Not FDIC Insured Are Not Bank Guaranteed May Lose Value Are Not Deposits Are Not Insured by Any Federal Government Agency Are Not a Condition to Any Banking Service or Activity Merrill Lynch Life Agency Inc. is a licensed insurance agency and a wholly owned subsidiary of BAC.

3 Providing for a new spouse and adult children from a prior relationship Case study Jack, the owner of a private company, and Diane, a successful architect, met in their early 60s. Both were divorced and had children from a prior marriage. Individuals with adult children who are entering into a new relationship are often concerned about balancing the needs of their new spouse along with those of their children. For many, the goal is to provide a comfortable life for their spouse, while ensuring that any assets that are not needed pass to their adult children. Implementing a strategy that assures adult children that they will not be disinherited can foster closer relationships by removing uncertainty and alleviating a common concern. For many couples, a revocable, bypass or QTIP trust that provides for the needs of the spouse but preserves assets for each individual s children may be useful. Life insurance may be helpful as well, removing the need for children to wait until the new spouse s death to receive an inheritance. Until they met, neither had planned on remarrying. Now, after two years of marriage, Jack is considering selling his business so he can focus on consulting and spend more time traveling with Diane. Jack s business is worth an estimated $4 to $5 million and he has approximately $1.5 million in an investment account. Diane has $1.0 million in an investment account and owns a lake-front house which she designed that is valued at an estimated $2.5 million. Although both want to make sure the other s needs are met, Jack wants to make sure the bulk of his assets pass to his son. Diane wants Jack to have use of the lake house, but ultimately have ownership pass to her two daughters. Working with their Merrill Lynch Financial Advisor, Jack and Diane each establish a revocable trust that enables them to withdraw assets as needed and direct how the remaining assets are to be used after they are gone. Jack s revocable trust is designed to provide Diane with the income she needs to live a comfortable life, and upon her death, pass the remaining assets to his son. JACK $1.5M INVESTMENTS $5M BUSINESS REVOCABLE TRUST $3M Life Policy Jack s Son Jack places all of the shares of his company in the trust so that if anything should happen to him before the company is sold, the trustee would be able to step in and provide day-to-day management, preserving the value. Jack also purchases a $3 million life insurance policy that names his son as beneficiary. The policy will provide his son with a sizeable inheritance at the time of Jack s death. Trusts Provide Income and Use of the House to Jack and Diane DIANE $1M INVESTMENTS $2.5M LAKE-FRONT HOUSE REVOCABLE TRUST Diane s Daughters Diane transfers ownership of the lake-front house to her revocable trust. It will continue to hold the property for the benefit of Diane s two daughters and their families once Jack no longer needs the house. 3

4 Providing for a second family and children from a prior relationship Starting a second family later in life often raises concerns about funding a legacy for older children at the same time that younger children and a new spouse may need income for living expenses or to fund a college education. Issues of equity can arise, straining the relationship between older and younger children. Using life insurance to provide a legacy and equalize the expected inheritance of your children may help. It enables you to leverage the funds placed in a trust and reassure older children that they will receive an inheritance of known value 2 upon your death. Implementing a plan now to provide for older children may go a long way towards relieving any tension about the standard of living enjoyed by you, your spouse and your younger children. A hybrid life insurance policy with a long-term care benefit rider may also be useful by providing cost-effective coverage of qualified long-term care expenses and helping preserve more of your assets for heirs. The death benefit is income tax free and these policies often provide for a return of premiums paid if you ultimately do not need the long-term care benefit. Case study Jim and Kathy have been married for five years and have a child together. Kathy is in her late 30s and this is her first marriage. Jim, a successful attorney in his late 50s, has accumulated substantial wealth and has an estate valued at $8 million. He also has two adult children from his first marriage who are in their early 30s. In discussing his estate planning needs with his Merrill Lynch Financial Advisor, Jim explained his desire to leave Kathy and their child a significant income stream while at the same time leaving a sizeable inheritance to his adult children. He is pleased that the two families have a close relationship, and he wants to ensure that his estate plan not only reflects, but helps maintain those relationships. Given how close Jim s wife and his older children are in age, he is particularly concerned about not making his older children wait until Kathy s death to inherit assets. Jim s Financial Advisor, working with a Wealth Structuring Specialist, suggests creating two trusts. The first trust will provide for his older children and be set up as an irrevocable life insurance trust (ILIT). Jim will use part of his lifetime gift tax exclusion to fund the ILIT, keeping the appreciation on those assets out of his taxable estate. Establishing the trust as an ILIT will enable the trustee to use the assets and income on them to purchase a life insurance policy that will provide a death benefit of known value 2 that is free from income and estate taxes. JIM IRREVOCABLE LIFE INSURANCE TRUST Trust Assets Including Tax-Free Death Benefit from Life Insurance Jim s Adult Children The second trust will provide for Kathy and Jim s youngest child. By establishing it as a Qualified Terminal Interest Property or QTIP trust, it will provide professional management of the funds, require that income be made available only to Kathy during her lifetime, and preserve the principal for Kathy and Jim s child. The assets transferred to the QTIP will qualify for the unlimited marital deduction and will not be taxed at the time of the transfer. However, the assets remaining in the QTIP at the time of Kathy s death will be included in her taxable estate. Jim establishes two trusts: to provide for his adult children, and for his new family KATHY QUALIFIED TERMINAL INTEREST PROPERTY Managed Assets to Provide Income as Needed. Not Taxed at Transfer Kathy and Jim s Child Jim s Financial Advisor also recommends that Jim purchase a hybrid life insurance policy with a long-term care benefit rider that will cover qualified longterm care expenses and may help him preserve more of his assets for Kathy and their child. The death benefit is income tax free and some or all of the premiums Jim has paid may be available for Kathy and their child if Jim does not draw on the long-term care benefit. 5

5 Case study Providing for your children as well as those of your spouse Individuals with school-aged children who enter a new relationship often face the challenge of providing college funding for an expanded household if their new spouse has school-aged children as well. For many couples, this comes at the same time they are trying to save for their own retirement and can be complicated further by financial commitments established by either spouse s divorce settlement. The ability to provide college funding without relying on support from a prior spouse may help alleviate a common point of contention and reduce concerns about the former spouse s ability to fulfill his or her future commitments. Providing funding should something unexpected happen to either spouse may be a particular concern. Life insurance can be a cost and tax-efficient way to complete the funding and ease concerns. This can be done with term life insurance that will provide coverage through the college years or permanent life insurance that can be purchased through a trust and used to help fund your children s inheritance. Will your son or daughter qualify for financial aid? Applying for financial aid to help with tuition is often more complicated for blended families. If a custodial parent has remarried, the stepparent s income will be included in the need calculation even when the stepparent has made no commitment to pay expenses for children from a spouse s prior relationship. 3 A small number of schools also require noncustodial parents to complete a profile form. This can pose a problem if the relationship with an ex-spouse is strained; some noncustodial parents choose not to cooperate out of concern that divulging information about their current income could prompt an ex-spouse to seek additional support. 1 Tom and Elaine, both in their early 40s, recently married. Tom is a successful sales executive who has 8- and 10-year old daughters from his prior marriage. Elaine is a successful software engineer with a 7-year old daughter and a 5-year old son from her prior marriage. Although they are each contributing to 529 plans to fund anticipated college expenses, they recognize that their children s ability to attend the college of their choice might be compromised if either of them were to die prematurely. Their Merrill Lynch Financial Advisor has suggested that life insurance would be a cost-effective way to complete their college funding plans and provide additional resources to cover childcare costs until their children are older and more self-sufficient. Given their age and good health, Tom and Elaine are pleased to discover that the cost of covering college tuition for all four of their children is very reasonable. 6 7

6 Other considerations Alternative to a prenuptial agreement For individuals entering a new relationship, starting off by negotiating a document that anticipates the relationship s demise may feel like planning for failure instead of success. There are alternatives. Placing assets in a revocable trust enables you to segregate and control how they are invested and used. A revocable trust also enables you to arrange for professional management of the funds should you become incapacitated and to direct how the assets are to be distributed and used when you are gone. By its very nature, a revocable trust also gives you the freedom to withdraw assets at any time and even close the trust, should that become desirable for any reason. Updating insurance and retirement plan beneficiary designations Regardless of your age, if you remarry, you should review the beneficiary designations for your insurance policies and retirement accounts including any 401(k)s, IRAs and any qualified employer plans to ensure that they reflect your current needs and circumstances as well as any divorce settlement requirements. A Merrill Lynch Trusteed IRA that can accept funds from IRAs, 401(k)s and other types of qualified plans, may help you integrate these assets into your overall financial and wealth transfer strategy. In contrast to the typical custodial IRA, a Trusteed IRA allows you to provide for your spouse during his or her lifetime and direct who will receive the funds that remain after your spouse s death. Incorporating life insurance into your wealth transfer plan Life insurance can be an attractive addition to most wealth transfer plans in large part because of the beneficial tax treatment it receives. When properly incorporated into a trust, the proceeds of life insurance are free of both income and estate taxes. This can make life insurance a cost as well as tax-efficient component to provide liquidity to offset estate taxes, equalize inheritance or provide a specific legacy for heirs. Working with your Merrill Lynch Financial Advisor: Aligning your financial goals Your Merrill Lynch Financial Advisor, working with an experienced and knowledgeable Wealth Structuring Specialist, can help as you redefine your financial goals to fit your new circumstances. Working with your legal and tax advisors, they can help you identify and implement strategies that address your new financial goals. Learn more today Contact your Financial Advisor to learn more about the role that Merrill Lynch can play in helping you refine and achieve your financial goals. With your Financial Advisor s guidance, you can harness the combined intellectual capital of Merrill Lynch s experienced trust, investment and insurance professionals, all of whom work to help meet your unique needs. Avoiding issues over payment of long-term care expenses Individuals who remarry later in life may also be concerned about health care costs burdening a spouse or creating tension with children who believe their inheritance may be diminished. A hybrid life insurance policy with a long-term care benefit rider may be useful in helping you avoid this sensitive issue. It not only provides cost-effective coverage of qualified long-term care expenses, but also a potential death benefit that is income tax free or a money-back guarantee for the return of the premiums paid if you find you do not need the long-term care benefit. 2 Policies can be structured to cover each of you separately or together as a couple, which often reduces the cost of coverage. Purchasing long-term care while you are in good health and before issues arise about the cost of any care you may need, may help you avoid potential conflict and preserve a close relationship with your spouse s children. 1 Source: Robert Laura, Four Money Traps of Blended Families, BankRate.com, February 15, All guarantees and benefits of the insurance policy are backed by the claims-paying ability of the issuing insurance company. Policy guarantees and benefits are not backed by Merrill Lynch or its affiliates, and none of them makes any representations or guarantees regarding the claims-paying ability of the issuing insurance company. 3 Section 475(f)(3) of the Higher Education Act of

7 All life insurance policy guarantees and benefits are backed by the claims-paying ability of the issuing insurance company. Policy guarantees and benefits are not backed by Merrill Lynch or its affiliates, and none of them makes any representations or guarantees regarding the claims-paying ability of the issuing insurance company. Life insurance death benefit proceeds are generally excludable from the beneficiary s gross income for income tax purposes. There are a few exceptions, such as when a life insurance policy has been transferred for valuable consideration. Long-term care insurance coverage contains benefits, exclusions, limitations, eligibility requirements and specific terms and conditions under which the insurance coverage may be continued in force or discontinued. Not all insurance policies and types of coverage may be available in your state. The case studies presented are hypothetical and do not reflect a specific strategy we may have developed for an actual client. They are for illustrative purposes only and intended to demonstrate the capabilities of Merrill Lynch. They are not intended to serve as investment advice since the availability and effectiveness of any strategy is dependent upon your individual facts and circumstances. Results will vary, and no suggestion is made about how any specific solution or strategy performed in reality. This brochure was prepared to support the promotion and marketing of life insurance. We do not provide tax, accounting or legal advice. Any tax statements contained herein were not intended or written to be used, and cannot be used for the purpose of avoiding U.S. federal, state or local tax penalties. Please consult your own independent advisor as to any tax, accounting or legal statements made herein. Trust and fiduciary services are provided by Merrill Lynch Trust Company, a division of Bank of America, N.A., member FDIC, and a wholly owned subsidiary of BAC. MLPF&S makes available certain investment products sponsored, managed, distributed or provided by companies that are affiliates of BAC or in which BAC has a substantial economic interest, including BofA Global Capital Management Bank of America Corporation. All rights reserved. ARJJC6R PM-1013