For many remarried and blended families, a traditional “joint RLT” estate plan is often extremely challenging to design. With complex family histories, separate, commingled, and community property, and different planning needs (e.g. children from prior relationships), trying to capture all of the contingencies would be convoluted at best.
Separate RLTs are not always a great option either. For couples that live in a community property state, it is both challenging and disadvantageous to sever community property and transmute it to separate property. Furthermore, many couples feel that having completely separate trusts amounts to getting a “divorce on paper.” They may think this suggests fractures in their relationship that aren’t there. Wholly separate trusts won’t work for their needs in this case.
Thankfully, there is a solution that combines joint RLT planning for their needs as a couple with separate RLTs for their individual needs.
The case of Jim and Carol:
Jim and Carol are in their fifties and have been married for 13 years. It’s a second marriage for each of them, and each has children from prior relationships. They each have their own careers: Jim is a veteran pilot for a large freight carrier; Carol is a mid-level executive for a multi-state engineering firm. Together they earn $350,000 in annual income. They are domiciled in Texas and have no prenuptial agreement. Their combined gross estate value is $4,500,000.
Jim has two sons from his first marriage, while Carol has three daughters from her first marriage. They also have another son together. Jim’s ex-wife and Carol’s ex-husband are still living. As a result, Jim and Carol have not been able to legally adopt each other’s children.
Jim and Carol have a lot of property they acquired together. They also have separate property from before their marriage and they intentionally kept that separate. They’re fully committed to their marriage, but they know from experience that life can bring unexpected changes to an otherwise happy relationship.
They want to make sure to provide for the surviving spouse after the first of them dies, and they want to provide for the son they have together. They also want to divide their joint (community) property evenly among their kids, and they want safeguards in place to protect their property from a later remarriage. They want their separate property to provide for their surviving spouse and their own children, insulated from meddling by their ex-spouses.
What are Jim and Carol’s planning options?
The joint RLT pour-over strategy
Given some of the concerns of blended and complex families mentioned above, what route can meet Jim and Carol’s needs? The joint RLT pour-over is one good option for such a situation. The strategy contains three separate trust agreements: a joint RLT for Jim and Carol, and a separate RLT each for Jim and for Carol.
Joint RLT:
The joint trust will be funded with Jim and Carol’s joint/community property. This preserves the community property nature of their joint property. For Jim and Carol it also provides the peace of mind to avoid a “divorce on paper” with purely separate RLTs.
The joint RLT is simple in that it does not contain any marital deduction language and thus will not create a marital trust or a nonmarital bypass trust. All of those provisions will be found in Jim and Carol’s separate RLTs.
When the first spouse dies, the community property in the joint RLT will divide equally and “pour over” the joint trust’s assets into the separate trusts, where the provisions of those documents will manage the marital deduction option and structure the shares for the children.
Separate RLTs:
The separate RLTs will be funded during Jim and Carol’s lifetime with the couple’s separate property. After the first spouse dies, the separate RLTs will additionally be funded with half of the community property assets from the joint RLT. The separate RLTs will provide for marital deduction planning.
This plan will best preserve the separate assets of Jim and Carol, provide support for the surviving spouse, and also ensure that the community property be divided appropriately among the couples’ children.
Therefore, pour-over strategies with RLTs are often a very effective way to manage the complexity of blended families and ensure that client needs are met and assets are preserved.
Fortunately, Wealth Docx® includes a series of specific trust assembly options to create a joint RLT pour over strategy for blended families or for any couple with different planning objectives.
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