Preparing your estate can be complicated, but if you’re a part of a blended family estate organization can be even more complex and nuanced. Blended families take on many forms, but typically consist of couples with children from previous relationships. Here are a few case studies to illustrate some of the challenges.
Case Study #1: Children From Previous Marriages Simple wills often are structured to leave all assets to the surviving spouse. If your estate strategy relies on this type of will, you could risk overlooking children from previous marriages. Also, while it's unsettling to consider, the surviving spouse can end up changing a will without proper measures put in place. When new children join a blended family, estate strategies can get even more complicated. But with a well-structured approach, you can direct how to distribute your assets.
Case Study #2: When One Partner Has Significantly More Assets While the divorce rate has been trending lower, the number of remarriages (2nd or more marriages) has increased. One person entering into a new marriage may have more assets than their spouse, given that 40% of all new marriages are remarriages for one or both spouses. An estate strategy can help ensure that your assets pass down according to your wishes.
Case Study #3: Traditional Trusts May Not Be Enough In blended families, a traditional trust is a good start, but it may not go far enough. Trusts can be revocable, and upon one spouse's death, you can also restructure the trust. One possible solution is to create three trusts (one for each spouse, in addition to a joint trust) to help address different scenarios.
Using a trust involves a complex set of tax rules and regulations. Before moving forward with a trust, consider working with a professional familiar with the rules and regulations.
Starting the Process Blended families are pretty common these days. If you’re in that position, it’s important to remember that you can create an estate strategy to address your specific situation. The first step may be an estate document review, and we can offer some guidance on how to start that process.
A PROPERLY STRUCTURED ESTATE PLAN
A properly structured estate plan includes the following documents:
Revocable Living Trust - permits you to avoid probate and provide a quick, simple and private distribution to your beneficiaries upon your passing.
Pour-Over Will - acts to direct assets to the trust if you neglect to transfer title to your trust during your lifetime.
Financial Durable Power of Attorney - gives someone the power to act for you financially if you are unable to do so.
Advanced Health Care Directive (including Living Will) - gives someone the power to make health care decisions for you if you are unable to do so including life support and organ donations.
HIPAA Waiver - allows your agents to receive your health care information so they can act and make decisions for you.
Funding Documents (Deeds, Assignments) - transfers ownership of your real and personal property and any business interests to the trust.
BEWARE OF THE A-B TRUST OF YESTERYEAR These days very few families need a complicated tax avoidance trust also known as an A-B Trust. Many trusts were set up over the years to help protect wealth from death taxes. The old A-B Trust allowed you to double the tax savings by creating 2 trusts. However, the federal death tax exemption has risen steadily in recent years from $600,000 to $11,180,000 for 2018 (or to over $22,000,000 for couples). Congress has made the death tax exemption permanent until 2026 and indexed it for inflation. As a result very few people need estate tax planning, and many A-B Trusts that were created years ago are no longer necessary. But what if you set up an A-B trust years ago? You may want to act now to get rid of it and avoid unnecessary expense and hassle for your family. The current laws make A-B trusts less desirable than they have been in the past when the exemption amount was $600,000. How does an A-B trust work? When one spouse dies the trust is split into two (2) trusts, Trust A for the surviving spouse, and Trust B for the deceased spouse. Trust B is irrevocable, the surviving spouse cannot change its terms. When one spouse dies the survivor must hire a lawyer or an accountant to determine how to best divide the couple’s assets between the deceased spouse’s irrevocable trust and the surviving spouse’s revocable trust. This decision can have important tax consequences. The irrevocable “B” Trust is a separate tax paying entity. The surviving spouse must get an employer identification number issued by the IRS for the trust, and file annual trust tax returns (both a 1041 and a 541). These returns are in addition to the 1040 and 540 returns required for Trust A. Therefore the surviving spouse will need to file four (4) separate income tax returns for the rest of her life! The surviving spouse must keep separate records for the irrevocable trust property. The surviving spouse would need two bank accounts: one for Trust A and another separate bank account for Trust B. The A-B trust becomes complicated after the death of the first spouse, and most surviving spouses are upset about these complications. The children are upset with the A-B Trust because the assets in the B trust are subject to income taxes that could have been avoided if their parents had busted the A-B Trust. As long as both spouses are alive you can revoke your old A-B Trust and avoid the expense and hassle that will come after one spouse dies. To do it correctly, you should restate your old A-B Trust and update it to a simple probate avoidance trust with disclaimer provisions. You will also want to update your wills, health care directives, and powers of attorney for property. The title and date originally used for the trust will stay the same, so you don’t have to worry about changing title to any of your assets.
NEW LAWAs of January 1, 2017 and for decedents dying after January 1, 2017, assets held in a living trust are ineligible for recovery by Medi-Cal. Under SB 833, Medi-Cal’s can only be reimbursed from assets which pass as part of the decedent's “probate estate.” Those assets include those (1) held in the decedent’s name alone; (2) passing via a Last Will and Testament; or (3) not in a Living Trust. Thus, assets held in a revocable living trust avoid both probate and Medi-Cal recovery further preserving your estate for your loved ones. It is now, more than ever, important to plan for your loved ones by establishing a revocable living trust.
Living Trusts Living trusts are an efficient and effective way to transfer property, at your death, to the relatives, friends or charities you've chosen. Essentially, a living trust performs the same function as a will, with the important difference that property left by a will must go through the probate court process. In probate, a deceased person's will must be proved valid in court, the person's debts are paid INCLUDING MEDI-CAL REIMBURSEMENT and, usually after about a year or two, the remaining property is finally distributed to the beneficiaries
WHAT IS A REVOCABLE LIVING TRUST? A living trust is a trust created during the lifetime of the settler (the creator of the trust) for the benefit and support of another person. They're called "revocable" because you can revoke or change them at any time, for any reason, before you die. You can abolish the trust or alter its terms or change the beneficiaries at any time you wish. To be valid, a living trust must have a settler, a trustee (a person who manages the trust property), and the beneficiary (person for whom the trust was created). Prior to death you (the settler) may be all three of the above. A trust can be created for any purpose which is neither illegal or against public policy. By contrast, property left by a living trust can go promptly and directly to your beneficiaries. They don't have to bother with a probate court proceeding because the decedent had nothing in his name at the time of death, all assets were titled in the name of the trust with the decedent as Trustee during his life and his Successor Trustee after his death.
HOW DOES THE LIVING TRUST WORK? The trust is created by transferring your assets into the trust. The beneficiary of the trust (your spouse, children or other heirs) and the Trustee (i.e., you) who'll manage the trust must also be identified at that time. Your Living Trust is created while you are alive. You are the "trustee" which enables you to maintain full control over your assets just as before the trust was created. You can do whatever you wish to do with your assets - manage them, sell them, or give them away. The trust does not become effective till you die or become incapacitated. The person you designate to administer the trust after your passing (your spouse or children) is called the "successor trustee." Upon your death, the successor trustee takes over the estate immediately without going through probate, then distributes the assets and terminates the trust. Assets are transferred to the Living Trust and are held in the name of the Living Trust. You are the “Trustee” (owner) of the Living Trust so you NEVER lose control of the assets held in the name of the Living Trust
WHAT ARE THE ADVANTAGES OF THE LIVING TRUST? A Living Trust DOES avoid Medi-Cal reimbursement. A Living Trust DOES avoids probate. A living trust is a PRIVATE document and NEVER becomes public record. No one other than the beneficiaries ever needs to know the contents of the trust. A Living Trust DOES avoid conservatorship (your trustee whom you appoint will manage your estate should you become incapacitated). A Living Trust can reduce or eliminate estate tax which is applicable to all estates valued over $11.4 million for single persons and $22.8 million for a married couple (A-B trust or marital trust). The estate tax begins at 37% and can climb to 55% of your estate’s value. A Living Trust allows you to retain power over you estate during your life and power over the distribution of your estate after your death. A Living Trust is extremely difficult to contest. Since the trust is created and managed by you during your life, your capacity is difficult to question. A Living Trust can be revoked and amended at anytime. A Living Trust can manage assets for dependants until the trust is vested in them. A Living Trust can prevent creditors from attaching judgments and/or liens to a beneficiary’s inheritance. A Living Trust enables the assets to be transferred to your beneficiaries quickly and stress-free after your death. Although there are many benefits of a Living Trust, it will not insulate your assets from lawsuits or from liquidation should you become ill and be in need of a nursing home situation.
IS YOUR LIVING TRUST OUT OF DATE? As a general rule, a Living Trust should be reviewed every 5 to 10 years. The following are some general guidelines to assist you in determining whether your trust is out of date and a review is needed. DEATH – If your family has experienced the loss of a loved one, a trust review is in order. If the deceased is an Original Trustee or a beneficiary, Amendments and certain documents may need to be filed with the County Recorder. BIRTH – If your family has experienced the addition of a new family member and you wish to provide for them, an Amendment to your Living Trust may be needed. ASSETS – Just a life changes, so do our assets. Perhaps you have acquired or sold certain property. Perhaps you have made changes in your investment portfolio. CAUTION: Any asset inadvertently left out of your Trust could trigger Probate. TAX LAW CHANGES – The estate tax exclusion is currently at $11.4 million. Your Living Trust should work in conjunction with these changes to give you full benefit of the exclusion. FINANCES - Unfortunately, the stock market has performed poorly over the past few years and sadly, some estates reflect that loss. These monetary losses combined with the increased estate tax exclusion could work against you and your beneficiaries depending on the type of Living Trust you currently have.