INTRO: Estate planning for blended families can be complex, sensitive and difficult. Here, I will explore a few potential strategies that can be used to help overcome limitations of commonly structured living trusts.
Case study facts: Jay, 65, and Bea, 55, marry. Each has children and assets, as follows:
The ‘J’ Family: Jay’s children are Jeff and Judy, 40 and 35 years old. Jay has an $800K home, with no mortgage; and cash and securities totaling $200K.
The ‘B’ Family: Bea has a daughter, Betty, 20 years old. Bea has cash, securities and retirement plan funds totaling $400K.
Upon marrying, Jay and Bea moved into Jay’s house, and plan to stay there indefinitely. They have good jobs, are in reasonable health, plan to retire within five to ten years and do not have long term care insurance.
Generally, it’s most efficient for couples – even blended families – to establish a joint living trust (which can hold community propertyand separate property assets). Typically, blended family trusts are structured to split into two pots (“sub-trusts”) on the first spouse’s death. The deceased spouse’s assets go into one pot and the surviving spouse’s assets go into the other.
Jay and Bea each need to make two critical decisions about their living trust – what will happen to the assets of the deceased spouse: 1) during the surviving spouse’s life?; and 2) upon the surviving spouse’s death (if any assets are left)?
Jay and Bea obtain expert legal advice and do some important soul searching about the first question. If he or she dies first, does he or she want his or her assets to go: a) immediately to his or her children?; and/or b) outright to the surviving spouse?; and/or c) into a trust to be used for the needs of the surviving spouse (on the survivor’s death, remaining assets in the deceased spouse’s pot, if any, usually go to the deceased spouse’s children).
If Jay dies first, he might give most or all his assets, including the house, to Jeff and Judy. If so, where will Bea live? She could use some of her own $400,000 to buy a small condominium or she could rent. But, would Jay be comfortable with Bea having that standard of living and financial risk – particularly if she lives a long life and has substantial long-term care expenses?
Alternatively, Jay could leave only his $200,000 outright to Jeff and Judy, and keep the house in trust for Bea. Thus, Bea will have a nice house to live in with low expenses. But Jay may not want to tie up the bulk of his assets (his home) that way. If Bea lives to age 100, Jeff and Judy would not inherit the lion’s share of their father’s assets until they are 80 and 85. Jay could avoid this by: a) keeping his home in trust for Bea for some fixed number of years; OR b) mandating that the house be sold; that a portion of the sales proceeds be used to purchase a (more modest) replacement residence for Bea; and that the other portion of the sale proceeds be distributed to Jeff and Judy; OR c) purchasing a life insurance policy for, say, $500,000 or $1 Million, naming Jeff and Judy as beneficiaries, and then leaving the home either outright to Bea or in trust for her lifetime.
PART TWO: What if Bea dies first? Find out in Estate Planning Strategies for Blended Families – Part Two.
This article is intended to provide information of a general nature, and should not be relied upon as legal, tax, financial and/or business advice. Readers should obtain and rely upon specific advice only from their own qualified professional advisors. This communication is not intended or written to be used, for the purpose of: i) avoiding penalties under the Internal Revenue Code; or ii) promoting, marketing, or recommending to another party any matters addressed herein.
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