Note: this is the transcript of the video. Please excuse the casual tone – it’s just my style!

Hey, everybody, welcome to another episode of Estate Planning TV. I’m your host, Christopher Small, and I’m the owner of CMS Law Firm and this is the Internet’s most passionate show about estate planning. Today, I’m excited for many, many reasons. It’s sunny outside. It’s getting lighter more and more every day. It’s January, it’s almost February. So much to be excited for. But I’m actually really, really excited to be talking about this topic today because it is a topic that is near and dear to my heart. What we’re talking about is basically, Estate Planning for Blended Families: A How to Guide. I decided to talk about this because it’s something that comes up often with clients. It’s something that I have experienced with my own family. It’s something that is really, really important to think about if you have a blended family

Now, to sort of get all the way to the top view to the 10,000-foot view let’s first just talk about what a blended family is. A blended family is like the Brady bunch, basically. If you remember, and I don’t even remember what the mom and dad’s name were, but the dad comes into the relationship and he’s got three kids from a previous relationship and the mom comes into the marriage and she’s got three kids from a previous relationship. They come in and get married and they create this big huge family. That is a blended family. Sort of as the name implies, you blend everybody together.

When it comes to estate planning, and, by the way, to sort of make this real and use my own real story instead of a client’s or something like that, I come from a blended family myself. When I was a kid, my parents got divorced. It was me and my sister, okay, and then later on my mom got remarried and my step-dad came in and he had three kids of his own. And then, to top it all off, then they had another kid of their own. So technically I have a sister, I have a half-brother and then I have three step-brothers. We’re actually pretty darn close to the Brady Bunch. Just if I’d of been a girl and my brother, Steven, would’ve been a girl, we would have been straight up Brady Bunch right off the set.

Anyway, I’ve experienced this firsthand and when it comes to estate planning, there are some important considerations to make for many, many different reasons. I think what I’m going to do is just sort of run through all of them in probably kind of a hodgepodge style because that’s just how I do it. And then we’re going to go from there. Okay. To begin with the critical component, the critical thing that really comes into play when it comes to blended families, because often preserving the assets of the first spouse to die for their kids down the road. Okay. Because they’re sort of, they’re not competing, but there are multiple considerations when the first spouse dies. The first spouse to die usually wants to take care of the surviving spouse, meaning allow them to sort of still utilize their assets to live and to enjoy life and to do the things that they need to do and/or but, or both also wants to ensure that when the surviving spouse dies, that the first spouse to die is kids are taken care of.

To better illustrate this, let me just use an example or create an example, a hypothetical example. So let’s say there’s a married couple, let’s just do the Brady Bunch, right? So let’s do the Brady Bunch. Dad dies first. Okay? He’s got his three kids are around, okay. When the dad dies in a scenario where estate planning really doesn’t work the way that it should, everything goes to his spouse. Okay. With the idea being that the surviving spouse is going to take care of all the kids. Okay? However, this doesn’t always happen because surviving spouses are free to change their own estate plans.

Although we all have the best of intentions and we all hope for the best sometimes the relationship between step-parent and step-child can get fuzzy, can get messy. It can be contentious, and particularly when the parent of the step-children passes away, unless that relationship has been firmly embedded over time, it’s easy for those relationships to sort of lose steam and fray and just sort of go away, quite frankly. In that scenario that is sort of the worst thing that could happen or probably in the plans of the first spouse to die. Because in that scenario, all of their assets go to their surviving spouse’s kids and not to their own kids.

And then they may want to split everything equally amongst everyone, and that’s great. But to ensure that you really have to plan, you have to do some things. You have to have some honest conversations with your spouse and just be real about what you want and then work that into a plan. All right, so let’s talk about the basics and then roll it all the way into really how you can get what you want, okay. Because the basics they won’t really do exactly what you want. They won’t accomplish all of your goals. Okay?

So it’s basics, right? We have his power of attorney, medical power of attorney, healthcare directive, and we’ve also got the will for the most part. Okay? Medical power of attorney, regular power of attorney, healthcare directive. They cover you when you’re life. Okay? And there are maybe some things to consider when it comes to that, but that’s not what we’re talking about for today’s episode, we’re talking about when you die. Okay.

Now, the will, right, the will does a couple different things. A, it names your personal representative, the person that’s going to be in charge of administering your estate, which means gathering your debts, gathering your assets, paying off your debts, and distributing your assets. Okay? Now, with the will, the downside is it’s a onetime distribution, okay? You can’t hold things back. You can’t control your assets once they’re gone. So if you want to really make sure that everyone is taken care of, if you want to make sure that your kids are taken care of, for example, you have to literally give them some of your assets at the time that you die. Okay?

Now, that also presents a problem because then you could limit or really reduce the assets that you’re surviving spouse has to live on and most married couple’s sort of earn together and grow together and do these things together. So to eliminate a piece of those assets to give to the kids before the surviving spouse dies, it can be troubling and it can be troublesome. So it doesn’t really do what you wanted to do. Okay. Now, there is a solution and it sort of checks all the boxes. Okay. Now, what is this solution? It is a revocable living trust. Okay. But not just any kind of revocable living trust. It’s a very special kind of revocable living trust. And it will actually, at least in Washington State, sort of kill two birds with one stone for you if you are over the estate tax threshold, which is a conversation for another day. There’re just so many fun things to talk about when it comes to estate planning. Right?

Basically, the way that this trust structure works is when the first … So I’ll get to the details after I explain the basics. Basically, what you have is a trust. While both spouses are alive, they are everything to the trust. Either the trustees, they’re the beneficiaries, they’re everything. They have complete autonomy and control over all the assets. They have complete autonomy and control over the details of the trust. They can update the trust that anytime they want. They can change anything that they want. They can do anything that they want. That’s the beauty of the revocable living trust.

Now, there is a special little thing that happens though when the first spouse dies, that helps to allow the family to have their cake and eat it too, essentially. Okay? So when the first spouse dies, what we do at that time is we take a look at all the assets, okay? And we say, “All right, what belongs to the deceased spouse?” Okay, “What belongs to the dead spouse?” Basically, in Washington State, most of the time you’re going to take the whole pie, chop it in half. One half is going to be for the surviving spouse. One half is going to be for the dead spouse, okay? And what you do then is you take that half of the pie that belongs to the dead spouse and you carve it out and you create an irrevocable trust that holds those assets. Okay? This is important because when the trust becomes irrevocable, what that means is no one is allowed to change sort of the down-line, beneficiaries or the down-line beneficiary distribution. What does that mean sort of in English?

It means the deceased spouse can ensure that his kids, or her kids are taken care of when the surviving spouse has passed away, all right? Because the assets that are in that trust are going to be there, and going to be available for those children when the surviving spouse dies. Okay, makes sense? That’s the gist of it. Okay. The surviving spouse gets their half of the assets to continue to do whatever they want with it and then when they die, their half goes to wherever they want it to go. So like I said, it allows you to have your cake and eat it too. But we’re not done yet because there’s one more consideration in this whole sort of thing. Okay. And that consideration is who is going to be trustee of the irrevocable trust? Who’s going to be in charge of this irrevocable trust? And when and how can the surviving spouse get access to the irrevocable trust assets? Right.

Because remember, one of the considerations that we have when it comes to claiming like this is that we don’t want to just chop up half of this pie and cut out the surviving spouse. They might need it for just living expenses for medical bills, for I don’t know, buy a new car. I don’t know. Whatever. Whatever they need it for. They might need it for that. And for me, I would hate for my surviving spouse to not be able to live comfortably because I gave the money away to my kids, for example. Okay. And so when it comes to who the trustee is, you can name the surviving spouse as the trustee if you want, or you can name anybody else related to step into that role. And then the other thing that you can do is you can set conditions and sort of restraints and controls on the irrevocable trust for how the distributions are made to the surviving spouse.

And this is really going to kind of depend on what you’re comfortable with, what your family dynamics are like, what your level of trust is. All of these kinds of things. Probably what your relationship is like with all of your kids, and your step-kids and your biological kids. All these things are going to probably be kind of factor into the amount of control that the surviving spouse has over the irrevocable trust. Some people give 100% control, where the surviving spouse is the trustee, they are also the beneficiary. So they have the ability to take out and pull out assets out of that trust whenever they want. Sometimes the surviving spouse is not the trustee. Sometimes there’s a different trustee, the surviving spouse still has the ability to access all the assets, but they have to clear it with the trustee first. That way they can’t just sort of pull everything out and spend it or use it or move it into their trust or do anything like that.

Another way, another sort of control that you can put on it is. depending on what kind of assets you’re going to put into the trust, you can set it up so that only the income derived from the trust is given to the spouse every year. Okay. So bottom line is there are a lot of different options that you can employ. A lot of different controls that you can put in place. A lot of different mechanisms that you can create to allow the surviving spouse to live a good full life, have access to these assets if they need them, but also preserve these assets for your kids, and make sure that nobody sort of comes in and it makes a play on them. Okay.

So that’s it, right? Fourteen minutes. That’s pretty good if you ask me. When it comes to blended families, there are a lot of considerations to make. This is something that I would always encourage you to talk with somebody about, to just get this kind of ideas about what you can do. Every family is going to different, their family dynamics are different and what they want is different. So this solution may not be right for everyone, they may not care or they may care so much they want to do some crazy, intricate and extensive. That’s fine too. But at the end of the day, knowledge is power, right? If you’ve got a blended family, this is definitely something that you want to think about. Again, this is definitely something that you want to have a conversation with your spouse about.

It may not always be the most comfortable conversation, but it’s definitely something that you want to have with your spouse. And quite frankly, I would also suggest you consider at least having this conversation with all of the kids, so they know you’re coming from, and they know what your goals are, and they know what the purpose is. So there aren’t any hurt feelings or anything like that. Right? Everybody knows exactly what’s going on. I can tell you that my mom, and my step-dad have talked to me about it. I mean, obviously, because I’m an estate planning attorney, and we’re talking about some of these options. I’m not doing their estate planning, but they wanted to get some feedback from me about what to think about and things like that, and so they nailed that.

I’m sort of coming in with a blank slate. I don’t have any dog in the fight necessarily, so I don’t care if they give me anything you’re not. But that’s beside the point. I’m getting too personal right now, guys. Chill. But in any event, important consideration to make if you have a blended family. Okay. That is it. To finish this off, as always, I’m Christopher Small. I’m the owner of CMS Law Firm. We do estate planning, we do probate and we love to help people sort of protect their family, create legacy, avoid estate taxes, make their assets, provide opportunities for their families in the future.

Let’s see, there’s a whole bunch of places that you can, you could probably be watching this if you’re on YouTube, subscribe if you’re on the podcast, subscribe. If you’re seeing this on Facebook, hit the like button. If you know somebody that needs this, share it with them. All right? That’s how you can pay this forward. All right, that is it. Thank you so much. And I will talk to you again soon. Bye.