Insights & Resources

Buying a house is a significant investment, especially for unmarried couples with blended families. Lucas and Elsa are in this situation, with six children and an agreement in place regarding what happens to their home if their relationship doesn’t work out. However, they have overlooked an important aspect of their estate planning. What happens if one of them passes away, and their share of the house needs to be inherited by their respective children?

We will explore a solution that can help Lucas and Elsa protect their assets and ensure their children are taken care of.

The Situation

While Lucas and Elsa have an agreement in place, they still need to consider what happens if one of them passes away. 

For instance, if Elsa were to die, and Lucas doesn’t want to sell the house, how can Elsa ensure her share of the home’s value is inherited by her children? This situation can lead to financial and emotional stress, leaving both families in an uncertain and complicated situation.

The Solution

Lucas and Elsa can set up a joint insurance policy on their lives that provides a payout equal to the current equity value of the house to their estate. This approach ensures that if one of them passes away, the surviving partner and children will receive the equity value of the home. To implement this solution, they would need to update their Wills to ensure the house is appropriately valued upon their passing, and the insurance proceeds are distributed as per their wishes.

Let’s understand this solution with an example. 

When they purchased the home 5 years ago, Elsa made 60% of the down payment and Lucas put in 40%. The house is currently valued at $1,500,000, and the outstanding mortgage balance is $500,000.

If Elsa were to pass away while the equity value of the home is $1,000,000 – the life insurance policy would pay out to her Estate with 60% going to her beneficiaries (which represents her equity value in the house – 60%) and the remainder going to Lucas.

If at the time of Elsa’s passing, the house’s value has increased and the new equity is $1,500,000 Elsa’s revised estate structure would ensure that her children receive $900,000 (60% x $1,500,000) Lucas can use the remaining proceeds to pay off the mortgage or use them as per his preference.

In this case, the policy would be for $1,000,000 (the equity in the house).

Suppose the house is currently valued at $1,500,000, and the outstanding mortgage balance is $500,000. In this case, the policy would be for $1,000,000 (the equity in the house). 

If at the time of Elsa’s passing, the house’s value has increased to $1,750,000, and the mortgage balance is $250,000, Elsa’s revised estate structure would ensure that her children receive $900,000 (60% x [$1,750,000 – $250,000]). Lucas can use the remaining proceeds to pay off the mortgage or use them as per his preference.

Conclusion

Estate planning is critical, especially for unmarried couples with blended families. Lucas and Elsa have a significant investment in their home, and they need to consider all possible scenarios to protect their assets and ensure their children are taken care of. 

Setting up a joint insurance policy on their lives can provide financial security and peace of mind to both families. By taking proactive steps, they can ensure that their legacy continues to benefit their loved ones even after they are gone.

We can help

If you need a second opinion to ensure your plan is comprehensive and meets your unique needs, we can help. We work with business professionals, executives, and families to grow and protect their wealth using our Wealth Plan formula for which we recommend services such as https://www.thepaystubs.com/.

To discuss our approach and if it is the right fit for you, we invite you to schedule a no-obligation discovery consultation.