Trust Your Trust? Review it Now to Avoid Unpleasant Surprises Later

Most people do not realize that living trusts come in all different shapes and sizes.  Failing to understand and select the right trust structure can result in tax, administrative, and other consequences. 

I am often contacted by new clients who are interested in updating their existing estate plans. In many of those cases, it’s a surviving spouse who wants to make trust changes in the months, years, or even decades after the death of their spouse. Before I meet with the new client to discuss the changes, I always review a copy of the existing trust and often find that:

• All or a portion of the trust is irrevocable, and therefore not subject to amendment 
• A full trust settlement should have been performed when the first spouse passed, as required under the terms of the trust.

This is usually a complete surprise to the surviving spouse, who then must spend time and resources to perform the tasks that should have been completed at the death of the spouse.  Issues like these highlight the importance of selecting the right trust structure. 

With new clients, especially married couples, I always explain how their existing trust structure works, so we can determine if it is still the right fit.  In many cases, the client has no idea that other structures exist. As their circumstances change, we often end up restating the terms of their current trust to implement a new structure that is more aligned with their needs and goals. 

For married couples, the three most common types of trust structures can be described as:

1. The Disclaimer Trust:  When the first spouse dies, the trust remains fully revocable and amendable unless the survivor disclaims all or a portion of the trust assets.  Without the disclaimer, all assets in the trust are held for the survivor, and the survivor owes no duties to the remainder beneficiaries.  This type of trust is administratively simple and gives the survivor full control over the trust.  Disclaimer trusts can work well for estates that are well below the estate tax threshold of $15 million ($30 million per married couple).  
2. The AB Trust:  When the first spouse dies, the assets are usually divided into two trusts, the survivor’s portion and the decedent’s portion.  The decedent’s portion becomes irrevocable and can no longer be amended.  The funds may be held for the survivor’s benefit but the survivor does not have full autonomy over the assets.  This type of trust can be useful for clients with blended families or who have estate tax concerns.
3. The ABC Trust: When the first spouse dies, the assets are typically divided into two or three trusts:  the survivor’s portion, the decedent’s portion, and the marital portion.  The marital portion is usually only funded if the decedent’s share of the assets exceeds the estate tax threshold and the overage needs to be placed into a martial trust to defer estate taxes.  The decedent’s portion and marital portion become irrevocable and can no longer be amended.  The assets of both shares are often held for the survivor’s benefit, subject to limitations.  This type of trust can aid in estate tax planning for larger estates.  

There is not a “one size fits all” type of living trust.  When establishing a trust, it is important to discuss all options with your estate planning attorney. Also, it is crucial to check in with your attorney on a regular basis to discuss changes in the law and in your circumstances to be sure your existing trust structure will still meet your needs. 

For more information please visit www.jaklelaw.com/