When I create a living trust for a married couple, one of the questions I raise with clients is what happens when the first spouse dies. The surviving spouse is often in charge of everything in the trust. The ultimate questions are whether that person will be subject to the influence of others and what that person is allowed to do. If you leave the survivor with the keys to the kingdom and full control, can that person change the trust? Change who the beneficiaries are? Use all the money?
One solution is to split the trust in two, if it is appropriate and the clients want it. These are the three common scenarios I discuss with clients. Your situation may be different and may call for something more complex, but most families fall into one of these.
Option 1: No split
Everything stays in one trust after the first death.
Option 2: Optional split
After the first spouse dies, the surviving spouse has the option to split the trust assets into two. One side is the survivor's trust, for the surviving spouse. The other is the decedent's trust. The survivor may, but does not have to, set some assets aside in the decedent's trust. There are tax and other reasons this can be a good idea for your family.
All of these trusts are addressed at the beginning, in the main trust document. The survivor is not creating a separate document, only following the rules set up when I created the original living trust for the couple.
Option 3: Mandatory split
After the first spouse dies, the survivor must split the estate into two portions. One is for the surviving spouse. The other is for the deceased spouse: certain money is carved out and placed in a trust that will ultimately go to the children. The decedent's trust is irrevocable, which means it cannot be changed. For some families that brings a sense of comfort.
When each makes sense
The first two options are very common. The mandatory split is common in these situations:
- There is a major concern about how the surviving spouse would handle money.
- There are children from previous relationships.
- The estate will certainly be taxed, so a lot of money is at stake. As I recorded this, that meant millions of dollars.
There are different variations to discuss. Call 661-414-7100 and ask about an appointment today. Perhaps we can assist you with your estate planning questions.