A survivor’s trust is one part of a joint trust strategy, usually between married couples. Also known as a survivorship trust, or a spousal trust, a survivor’s trust is created when the first spouse passes away, as part of an estate planning technique usually utilized to minimize estate taxes and provide the surviving spouse with control over their loved one’s assets.
Survivor’s trusts are created with the provision that these assets are eventually bequeathed to family members and chosen beneficiaries, but with distinct tax advantages in contrast to simply leaving everything in a will or letting local state intestacy laws distribute a couple’s wealth among living relatives.
To better understand a survivor’s trust, it is important to understand joint trust or marital trust arrangements such as A-B trusts, and the uses and advantages of trusts themselves.
A trust is an agreement between a grantor (or trustor), a managing trustee, and the recipient beneficiary. The idea is to create a legal entity to be managed by a third party for the benefit of the second party. Rather than create an account at a bank or set up a safety deposit box, trusts are legal entities that can technically operate on their own, and don’t have to be “owned” or managed by their creator.
Many people use trusts to separate key assets from themselves for the benefit of their loved ones. While this gives up control over said assets (as most trusts are created while the creator is still alive, and are thus “living trusts”), it conveys the benefits of removing an asset from the creator’s potential liabilities, including debts and taxes.
Not all trusts are separated from the trustor, however. Revocable trusts can be amended or revoked at any time, and the assets funded into a revocable trust remain connected to the trust’s creator, even if they assign someone else to manage them as trustee. The advantages of a revocable trust include greater control over the assets inside the trust, and continued flexibility on how and when to distribute these assets after the trust’s creator dies.
For example, if you set up an irrevocable trust in your 40s, and die many decades later, the provisions set up for that trust might no longer line up with your deathbed wishes. Revocable trusts can be continuously amended until you pass away, at the cost of liability.
A survivor’s trust is a revocable trust, but it only exists as part of a joint trust plan, combining the best of both worlds.
Whenever a survivor’s trust is set up, a different portion of the couple’s wealth is placed into an irrevocable bypass trust.
While the survivor’s trust ensures that some of the couple’s wealth can be accessed and managed by the surviving spouse, the bypass trust ensures that a significant portion of the married couple’s wealth is sectioned off from their tax liabilities, and independently distributed among their loved ones when both spouses have died.
The IRS taxes estates past a certain value with a federal estate tax. The estate tax rate is steep, up to 40 percent. However, there is a significant exemption limit before that estate tax goes into effect. When someone dies, everything they leave behind must be evaluated under a state-specific probate code, during the probate process.
The total value of a person’s accumulated wealth – or, if they’re married, their joint wealth – may be exempt from federal estate taxes if it slips under the exemption threshold.
This threshold is adjusted every year for inflation and is currently based off the Tax Cuts and Jobs Act from 2017, through to the end of 2025 if the current changes are not extended or made permanent. While the current threshold for the estate tax is high, that can change with any given administration, or a lapse in the current provision, at which point many more Americans may find their bequeathment subject to estate taxes.
A survivor’s trust aims to ensure that the limit of what the surviving spouse receives upon their loved one’s death stays below the exemption limit, creating a sizeable, yet still estate tax-exempt trust fund.
The remainder is sectioned off in the irrevocable bypass trust, which means that it becomes inaccessible to both spouses the moment their trust plan goes into action, but also saves their estate from a significant tax hit. This legal form of tax avoidance allows wealthy couples to ensure that their future generations benefit as much as possible from the family fortune. This joint trust plan is usually called an AB trust.
The first step to establishing a joint trust or survivor’s trust of your own is to contact an estate planning professional. Setting up a will of your own is one thing, and can be difficult to do, as differences in local and state law render many online templates irrelevant. But trusts are altogether far more involved, and need to be tailored to each individual case.
If your combined wealth may be affected by a drop in the estate tax exemption limit, then you may want to consider a joint trust or an AB trust – and a survivor’s trust – to minimize your tax hit, and ensure that your wealth is secured for your family’s future.
Creating and implementing a survivor’s trust is an involved process, and one that requires a larger estate plan to support it. If your estate is not in any danger of a significant estate tax hit, then a simpler trust or estate plan may be more efficient, allowing you to preserve and control the entirety of your bequeathed assets at a lower cost, and with less of a hassle.
If you are interested in setting up an estate plan of your own, get in touch with our estate planning professionals at Werner Law. We can get you started on setting up a plan of your own and personalizing your estate planning solutions.
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