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Using a Living Trust to Plan for Your Spouse’s Financial Future
Living trusts can be used to plan for a spouse’s well-being in a variety of ways. The decision about separate or joint trusts is not as straightforward as you might think. A revocable living trust is a popular way to pass assets to heirs. Assets titled in a revocable living trust don’t go through probate and information about the trust remains private. It is also a good way to plan for incapacity, avoid or reduce the likelihood of a death tax and make sure the right people inherit the trust.
There are advantages to a Separate Living Trust
They offer better protection from creditors. When the first spouse dies, the deceased spouse’s trust becomes irrevocable, which makes it far more difficult for creditors to access, while the surviving spouse can still access funds.
If assets are going to non-spouse heirs, separate is better. If one spouse has children from a previous marriage and wants to provide for their spouse and their children, a qualified terminable interest property trust allows assets to be left for the surviving spouse, while the balance of funds are held in trust until the surviving spouse’s death. Then the funds are paid to the children from the previous marriage.
Reducing or eliminating the death tax with separate trusts. Unless the couple has an estate valued at more than $23.16 million in 2020 (or $23.4 million in 2021), they won’t have to worry about federal estate taxes. However, there are still a dozen states, plus the District of Columbia, with state estate taxes and half-dozen states with inheritance taxes. These estate tax exemptions are considerably lower than the federal exemption, and heirs could get stuck with the bill. Separate trusts as part of a credit shelter trust would let the couple double their estate tax exemption.
More Reasons to Consider a Separate Living Trust for Your Spouse
During any period that you are disabled, the trust language may authorize the successor trustee—who will often be the surviving spouse either serving alone or serving with a co-trustee—to provide for the spouse’s needs out of the trust assets. Upon your death, the trust may specify that the trust assets are to be funded into one or more new “subtrusts” that may include the surviving spouse as a beneficiary. These subtrusts are often used for estate tax planning, to protect the spouse and other beneficiaries from creditors, and to provide you with some control of the assets after your death.
Typically, a portion of your living trust assets equal to the Federal estate tax exemption would be transferred to a “Family Trust.” This is usually designed so that the surviving spouse, children, or other descendants are beneficiaries of the principal and income. Your trust assets in “excess” of the Federal estate tax exemption would be funded into a “Marital Trust” that by its terms must distribute its income to your surviving spouse.
You have the option to authorize the Marital Trust trustee to make distributions of principal from the Marital Trust to the surviving spouse. Upon the surviving spouse’s death, the assets remaining in the Family Trust—including any growth of those assets—will pass to your children or other beneficiaries free of Federal estate tax. Assets in the Marital Trust will be included in the surviving spouse’s estate for estate tax purposes. Any portion of the Marital Trust assets not needed for payment of taxes will be available to pass to the next generation.