Advisors often ask us how to best help blended families (when either spouse comes into the marriage with previously born children). The answer is always client-dependent. Below are several ideas to help them get started regarding a few key areas requiring personal consideration.
Outright Gifts
In the trust, if Spouse #1 dies, gift Spouse #1's assets to their children and surviving spouse or adjust beneficiary designations on certain individual assets now. This is the cleanest break.
They might also consider life insurance to fund a gift like this. This is an excellent solution for situations where both spouses come into the marriage with enough money to live on and/or they can obtain cost-effective life insurance.
Real Estate Issues
If the primary residence is not gifted to the surviving spouse outright, they may want to leave a right for the surviving spouse to occupy the home for a specified time (even up to their lifetime). If so, there are often limiting provisions on this – for example:
Who pays for what? The trust usually pays property taxes, the surviving spouse pays utilities, and either can pay for maintenance or repairs.
How long does it last? Sometimes, it is 6-12 months; other times, it is for the surviving spouse's lifetime (subject to the below).
Are there additional restrictions? What if the surviving spouse tells the trustee they do not want to live there anymore? Will they be allowed to have another person to live with them? What are they required to do to maintain the home? If they fail to maintain the home, can the trustee take possession and end the right of occupancy?
Restrictions Within the Trust
Sometimes, the surviving spouse will need the deceased spouse's assets to live on. Regarding restrictions in the trust document, here are some of the ones we see listed from most to least restrictive. Options 2 and 4 are the most common choices.
Have one of the children act as co-trustee with the surviving spouse. (Usually, this is an undesirable option. Consider asking yourself, "Would I want to have one of the kids to have control like this?")
Split the assets at the first death so the surviving spouse cannot change the asset distribution to beneficiaries after the first passing. This sounds great in theory, but the surviving spouse must then file multiple tax returns each year (This is an AB Trust. It is a mandatory split of assets at the first death; our standard documents make this optional—Disclaimer Trust).
Include a clause stating the surviving spouse can change anything after the first spouse dies, EXCEPT the beneficiaries.
Include a clause stating that the surviving spouse can make changes to anything. However, if they are adversely affected, they must have the written consent of the beneficiary before making changes.
Do nothing if the surviving spouse states now that they won't make changes.