Trusts for Two

Living Trust Options for Spouses & Partners

Before you sign a living trust, you should know what will happen when one of you survives the other.  Will the survivor be forced to create and maintain a separate trust and, if so, what are the terms of that trust (or trusts)?  Will the deceased person’s property go directly to the survivor without any protection?  Under the terms of your living trust, will the survivor have any options?  Let me outline your issues and choices.

Each person in a marriage or partnership can decide what happens to their property when they die. Standard living trusts often split a couple’s property into separate trusts when the first person dies.  The deceased person’s property consists of half of the community property and all of their separate property.  To simplify community property law in one sentence, all of a couple’s property is community property except for property brought into the marriage and property received as a gift or inheritance – which is separate property.  Thus, half of the community property and all of a person’s separate property (or a portion thereof) can go into one or more irrevocable trusts when that person dies.  Why would you want to do this?

One reason to split the property is to protect the deceased person’s children.  Those children might be children of a prior relationship or the present relationship.  The concerns are that the surviving spouse might favor other children, remarry, or become the victim elder financial abuse and thus cutoff the deceased person’s children.

Locking the property up into an irrevocable trust will protect the children, but what about the surviving spouse or partner?  This is where the terms of your living trust become important.  A common arrangement is to force the deceased person’s property into an irrevocable trust which pays the surviving spouse income for life with the remainder going to the deceased person’s children.  Sometimes, a trustee is given the discretion to distribute more if the surviving spouse needs it to maintain a particular lifestyle.  Sometimes the protected children receive direct distributions for their education and support. Distribution options are limited only by your imagination.  Many options have tax implications that are beyond the scope of this article.

One disadvantage of a forced property split is that it is a hassle for the survivor to administer.  The split property will be put into one or more irrevocable trusts (or subtrusts of your living trust). Generally, each irrevocable trust will have its own tax ID number, file a separate tax return, and require separate accounting.  The surviving partner or spouse may be required to report to the deceased person’s children.  It’s a hassle.

If you are not sure whether you want your assets split at death, you can give your survivor the option to either split or retain your property.  This allows the survivor to reassess the tax laws, family resources, and exposure that exist when the first person dies.  I often draft such options when there is only one set of shared children and modest resources.

There is a lot to talk about before you sign a declaration of trust. There is no such thing as a standard living trust. The often dismissed boiler plate defines your legacy. Call me when you are ready to talk about your family and circumstances.