California estate planning requires an understanding of estate, gift, capital gains, and property taxes.
Estate Planning for Blended Families
Blended family estate planning presents challenges, and one size fits all estate plans may not work.
If you have a blended family in California, your estate plan needs to address two concerns:
- Do you have separate property and community property assets?
- How to make sure your children and your spouse’s children each receive a fair share.
Community Property or Separate Property
California is a community property state. Unless you and your spouse signed a prenuptial agreement, then once you say “I do,” fifty cents of every dollar you make will be your spouse’s, and fifty cents of every dollar your spouse makes will be yours.
What about the assets you bring to the marriage? Your separate property assets can remain separate so long as you keep them separate. But that isn’t so easy. Without a prenup, most couples eventually commingle their assets, and over time, everything becomes community property.
Joint Living Trust or Individual Living Trusts or Both
If you and your spouse consider your assets community property, you may want to use a joint revocable living trust as the primary document in your estate plan. If one of both of you have significant separate property, it may be easier and cleaner to have separate revocable living trusts for your separate property and a joint revocable living trust for your community property.
The challenge with a blended family is to plan so that regardless of which spouse dies first, both spouses' children will receive their intended share.
Design Your Revocable Living Trust so All Children Are Protected
Most couples with a net worth of less than $5,000,000 design their revocable living trust as follows:
- While both spouses are alive and mentally competent, they can jointly amend their trust.
- When the first spouse dies, all the assets remain under the control of the surviving spouse and the surviving spouse can amend the trust.
This design works great where all the children are joint children, because both spouses have a vested interest in each child receiving the intended share.
But this design may not work with a blended family. What if the surviving spouse amends the trust after the first spouse dies and names only her children as the trust beneficiaries? Her children would receive all the assets, and the deceased spouse’s children would receive nothing. Not a good result.
With a blended family, you have to design your revocable living trust to make sure each spouse's children receive the intended share while still leaving enough assets for the surviving spouse.
One solution is to design your trust so that at the first spouse’s death the deceased spouse’s children will receive certain assets or a share of the estate. With this design, the deceased spouse’s children’s inheritance will be locked-in, even if the surviving spouse amends the trust.
This is easy if there are enough assets. If not, you can use life insurance. At the first spouse’s death, a percentage of the deceased spouse’s life insurance death benefit can be paid to the deceased spouse’s children. If the children are young, the death benefit can be paid to what we call asset protection trusts for the benefit of the young children. Read more on Asset Protection Trusts for your children.
Using a Marital Trust
Another solution is to design your trust with a marital trust provision. When the first spouse dies, the deceased spouse’s share of the assets will be allocated to an irrevocable marital trust. Irrevocable means it cannot be amended by the surviving spouse.The marital trust could name the surviving spouse as the beneficiary, but because it is irrevocable, the surviving spouse cannot change who gets what’s left when the surviving spouse dies.
This design can work, but it has its limitations. If the surviving spouse is the sole trustee and the sole beneficiary of the marital trust, then he could drain the trust by distributing all the marital trust assets to himself. Then it wouldn’t matter if the marital trust is irrevocable, because nothing is left in the marital trust. You can prevent this by including provisions to name a co-trustee to serve with the surviving spouse and require both trustees to approve any distributions. The co-trustee can be an adult child, relative or friend of the surviving spouse. This would prevent the surviving spouse from draining the trust, but it would also drastically restrict the surviving spouse’s freedom and control. Many couples don’t like the idea of sharing control of their assets.
Separate Living Trusts
For some couples with separate property assets, it's easier to simply create separate living trusts. Husband funds his trust with his separate property and wife funds her trust with her separate property. Each trust can have distinct remainder beneficiaries.
If they also have significant joint assets, such as their home, they can use a joint living trust for their joint assets.
One Size Does Not Fit All
A blended family presents estate planning challenges and one size fits all living trust estate plans may not work. You need to work with an experienced estate planning attorney who will listen and help you design a custom estate plan for your unique needs.