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Estate Planning For Blended Families

Many of our clients have so-called “blended” families. In such a family, one or both spouses have children from a prior marriage. Each spouse often has an equally strong desire to provide for their spouse (should spouse survive them) as well as provide for their children from a prior marriage.
As a result, practitioners frequently recommend the type of revocable living trust that creates a decedent’s trust upon the first spouse’s death. In most cases, this decedent’s trust will provide the surviving spouse with income and principal for reasonable health, education, maintenance, and support – the so-called “HEMS” standard.

The major downside to this arrangement is that it forces the children from a prior marriage to wait for their stepparent to die before they receive an inheritance from their biological parent. Where the relationship is already strained, a decedent’s trust will do nothing to ameliorate tensions. Further, during the surviving spouse’s lifetime, the burden of trust administration will fall upon a trustee who will, at a minimum, be required to report to the beneficiaries, maintain accurate books and records, and file tax returns for the decedent’s trust. This burden may go on for years if the surviving spouse was much younger than the first spouse to die.

One alternative that may be appropriate, especially for couples with their own separate property and resources, is to establish a revocable living trust that makes distributions to both the surviving spouse and the deceased spouse’s children upon the deceased spouse’s death. In other words, a trust that does not make the surviving spouse a lifetime beneficiary of a decedent’s trust.

Consider the following scenario where this may be appropriate:

  1. Husband has two children from a prior marriage.
  2. Wife has two children from a prior marriage
  3. Husband has a separate property business worth $2 million. Both of his hard- working children from a prior marriage work for the separate property business.
  4. Wife has a separate property investment portfolio worth $3 million.
  5. Wife provides substantial financial support for both of her children from a prior marriage, who have struggled to become productive citizens.
  6. Husband and wife have a community property family home worth $1 million.

Given the foregoing facts, it clearly makes sense to implement a revocable living trust where the separate property of the first spouse to die passes directly to such deceased spouse’s children upon death. Husband would not want to put wife at the helm of the business that his children are actively involved in developing. At a time where children are supposed to grieve for a lost parent, it would be cruel to throw them into such business relationships.

Further, wife would not want to rely upon husband to continue providing financial assistance to her children – nor would husband want to be confronted with their outstretched hands.

As to the interest in the family home, husband and wife could decide to put that asset into a decedent’s trust – administering a trust holding that asset alone would not be unduly burdensome. Or, husband and wife could simply allow the survivor to take all interest in the family home.

In conclusion, estate planning for blended families brings many challenges. A decedent’s trust is an excellent tool, but in many situations its use should be limited.