With so many clients falling into some category of a “blended family”, I wanted to post something everyone should know about setting up a trust when some of the assets and children came to be prior to your current marriage.
How Blended Trusts Work For Blended Families in AZ
Here’s How It Works…Josie Has 2 Kids From Her Prior Marriage and Felipe Has 3.
Both Felipe and Josie have their own separate property (maybe a 401k or a house) that they bring to the marriage, but it will remain their separate property. While they are married, they work and earn a living and accumulate some more things. Everything earned and purchased while married is community property in a blended family. They might buy a couple cars, a boat, put some more money in retirement, purchase life insurance, or maybe even a cabin.
One of these two is going to die first. If Felipe dies first, his “estate” includes all of his separate property and 1/2 of the community property. Because he has a surviving spouse and children who are not common to the marriage, Josie will get 1/2 of his separate property. His children will receive his 1/2 of the community property and the other 1/2 of his separate property.
Essentially, without any planning in blended family trusts, this could result in the surviving spouse basically stripped of the assets she might have been relying on during her husband’s life.
A better way would be for Josie and Felipe to set up something like a QTIP trust. This would give Josie the right to use Felipe’s separate property and community property while she is alive in a blended family. If Felipe wanted, what remains after her death could pass to his children or to any beneficiary of his choice.
A regular form trust will not provide this sort of option. It will most likely leave everything outright to the surviving spouse and will entirely disinherit your separate children.