Have you reviewed your trust lately? When did you initially set up your trust? When I review a trust for a married couple, the first thing I look for is instruction on what to do after the first spouse dies. Many trusts written as recently as 5-10 years ago (and older) have stipulations and restrictions on what happens when the first spouse dies which the surviving spouse is then required to follow.
Specifically, these trusts (commonly known as A/B Trusts) provide that after the first spouse dies, the trust shall be divided into two sub-trusts. Typically the surviving spouse must re-title all trust assets into the “A Trust” (also called the “Survivor’s Trust”) and the “B Trust” (also called the “Decedent’s Trust”). Most often, the surviving spouse’s ½ community property and all of their separate property shall be allocated to the Survivor’s Trust, and the deceased spouse’s ½ community property and their separate property shall be allocated to the Decedent’s Trust. This proves to be time consuming for the grieving widow(er) as he or she must contact each financial institution and request statements from the date of death. The survivor then has to determine the value and character of the trust assets to determine how much to allot to each new sub-trust. Often, a financial advisor and attorney participates in determining the trust split.
Once assets are split and re-titled to the Survivor’s Trust and the Decedent’s Trust, the surviving spouse has complete control over and use of the assets held in the Survivor’s Trust, including the power to amend and revoke the trust. With regards to the Decedent’s Trust, the surviving spouse has little power. While he or she is typically entitled to receive all the income generated by the assets held in this trust, he or she has more limited access to the principal of this trust, nor can he or she make changes to the testamentary terms of the Decedent’s Trust. The last version of the trust that you both signed will govern how the assets held in the Decedent’s Trust are distributed upon the death of the surviving spouse. With regard to the Decedent’s Trust, other family members, such as children or step-children, may also be entitled to receive annual accountings, depending upon circumstances and mandates under the trust. Lastly, the Decedent’s Trust will require separate tax filings.
That’s not to say these sub-trusts are bad. For many families, I encourage having this trust set-up. Assets titled in the Decedent’s Trust can be funded with values up to the federal estate tax exemption amount ($5.49 million for 2017), thereby avoiding estate taxes later upon the surviving spouse’s death. Additionally, blended families may benefit for the reason one spouse can use the Decedent’s Trust at their death to hold their portion of the estate in trust for the benefit of the other spouse during his or her lifetime, but upon the surviving spouse’s later death the first spouse’s biological children or others as they direct will inherit the then remaining Decedent’s Trust assets.
For other families, this type of planning may no longer be necessary. The estate tax exemption amounts have changed over the years and was as low at $675,000 in 2001. Meaning, if your trust was written in the mid-2000s, or earlier, you likely have this split requirement.
Having this split isn’t a dire situation. With a typical revocable trust, the language requiring the split may be re-drafted to make it an optional split for the surviving spouse to determine at the time of the first spouse’s death in light of the tax laws in existence at that time. The language could also be removed entirely, meaning the surviving spouse does not have to take any action at the death of their spouse. Meeting with an attorney is the first step in determining your options with regards to the trust split and what you should do.
-Rachel S. Zaslow, Esq.