Revocable Trusts 102 – Trusts for Married Couples
A revocable trust is a legal structure. Its terms are contained in a document known as a “trust agreement.” You and your spouse will always be considered the “settlors,” or creators, of the trust. The trust will exist from the moment you sign your trust agreement and transfer some of your property to the managers, or “trustees,” of the trust. The two of you will be the initial trustees, but you may not always be the trustees. For example, when you can no longer manage the trust because of incapacity and after your death, someone else will take over. These people are known as “successor trustees.”
Successor trustees give a revocable trust significant advantage over a will. Both documents contain instructions about what should happen to your assets after your death, but no one can carry out the instructions in a will until a “probate” proceeding is started and a court appoints an “executor” and formally gives him or her the legal authority to take control of your assets. When you create a revocable trust and transfer assets to it (a process called “funding” the trust), you’re giving the trustees legal control of those assets. If all your assets are in the name of the trustee at the time of your death, then probate is not necessary. Your successor trustees take control of the trust, which means they take control of all the assets held in the name of the trustee, and then they carry out your instructions based on the terms of the trust.
Wills do not contain instructions about what should happen if you become incapacitated. An entirely different court proceeding (a “conservatorship”) may be necessary in that circumstance. The successor trustees of a revocable trust, however, can manage your assets during your incapacity without a court’s involvement if your trust agreement contains appropriate instructions.
As you see, your trust agreement should cover several different time periods – while you are both alive and well, after one of you becomes incapacitated or dies, while only one of you is alive, and after both of you have died. As a result, trust agreements tend to be longer than wills.
While You Both Are Alive & Well
Let’s discuss the instructions that apply while you are both alive and well. During this time, your trust will be transparent. You can add assets to the trust or take them out. You can change the terms of the trust. You can even get rid of the trust completely. Since you have complete control during this time period, there are no special accounting or recordkeeping requirements. You continue to report income tax items under your own social security numbers.
If One of You Becomes Incapacitated
If you become incapacitated, your spouse will continue acting a trustee. However, there may be a time when neither of you serves as a trustee even though you are both alive. For example, you could both become incapacitated. Or, as you get older, you may decide that you want help in paying your bills, investing your assets or managing your affairs. Since this is a possibility, your trust agreement should instruct the trustee about how to use your assets while you both are alive. Generally, those instructions tell your successor trustee to use your assets to pay your living expenses and take care of yourselves and your dependents.
During the Survivor’s Lifetime
Until now, there haven’t been any reasons for complicated instructions to your successor trustee. Death, however, always causes complications. Having a trust can reduce the number of them, but it won’t remove all of them. Practical Plans is meant to produce estate plans in a cost efficient manner. As a result, we have made some basic choices for you. Before we go any further, let’s consider the limitations of this web site.
Keep These Limitations in Mind
This program will not create trusts with estate tax planning provisions. There are many strategies meant to reduce or defer estate taxes, but they cannot be done through online planning. If your estate is a “taxable estate,” consult an attorney in person. Click here for help determining if your estate is taxable.
This program will not create trusts appropriate for blended families. If either of you has children from a previous relationship, you are part of a blended family. Balancing plans for your current relationship with obligations based on prior relationships can be tricky. For example, you may want to provide for your spouse, but you may also want to make sure that your assets eventually pass to a child from a previous relationship. Such complexities cannot be handled through an online planning program, so consult an attorney in person.
This program will not address special needs situations. If any of the people who might benefit under your estate plan (your “beneficiaries”) receive government assistance benefits, such as Medi-Cal or Supplemental Security Income, you should be careful. Benefits from your estate plan may reduce their government benefits. Very complicated rules apply to these special needs situations, so consult an attorney in person.
This program should not be used if you are getting a divorce. As soon as you file for divorce, your right to make estate plans is severely limited. If you are getting divorced or if you are considering a divorce, consult an attorney in person.
This program should not be used unless both of you are U.S. citizens. Planning is complicated when the rules of another country must be considered – even Canada and Mexico. In these circumstances, planning cannot be done through an online program.
Finally, this program should not be used if you are incapacitated. California law restricts the estate planning rights of an incapacitated person. If you are the subject of a conservatorship or if someone is acting on your behalf using a power of attorney, consult an attorney in person.
Now Back to the Program
With these restrictions in mind, let’s discuss the instructions that will apply to your revocable trust after one of you dies. During this time period, the one of you who has died is called the “deceased spouse,” and the other is the “survivor.”
As we’ve mentioned before, this program is limited in scope. Since we are not doing estate tax planning and since we are not dealing with blended families, the instructions that apply at the first death are relatively straightforward. The assets of your trust will remain under the survivor’s control, and he or she will have unlimited access to the assets. The survivor will continue to report all income tax related items under his or her social security number. There will be no additional reporting or recordkeeping requirements.
This is a very simple plan; it imposes the fewest number of procedural restrictions on the survivor. But its simplicity means that you cannot take advantage of some beneficial aspects of trust-based estate planning. For example, if the survivor were subject to restrictions on how he or she may use the deceased spouse’s assets, then we could protect those assets from creditors of the survivor who enter the picture after the deceased spouse’s death.
Suppose that the survivor ran an attorney off the road driving home from her husband’s memorial service. If the estate plan restricted the survivor’s rights to her husband’s assets, then those assets would be shielded from the attorney’s claim for damages.
The price of this post-death creditor protection is pretty high. The survivor would need to keep track of what assets belonged to her husband, she would need to obtain a federal taxpayer identification number to be used in recordkeeping for those assets, and she would need to comply with additional reporting requirements every year, such as filing a separate tax return for the taxpayer identification number. For many people, this price is too high, but if you are interested in this kind of planning, you should talk to an attorney.
After You Both Have Died
Since Practical Plans is limited to creating simple plans, we have made certain choices for you. For example, our documents allow you to leave a handwritten list of gifts of personal effects, such as furniture, furnishings, clothing, and jewelry. If you do not leave a list or if you only direct distribution of certain items, your effects will be distributed to your spouse if he or she lives longer than you do. Otherwise, they will be distributed equally among your children who outlive you. If you do not have any children, these items will be distributed to those recipients you will identify in a few minutes as your “disaster beneficiaries.”
This web site allows you to choose one of three sets of instructions for all your other assets.
First, you can choose for your assets to be divided into equal shares for your children, with each share distributed immediately to your children. This set of instructions says that if a child dies before you, then his or her share will instead be distributed to his or her living children – i.e., your grandchildren from that child. This choice is most appropriate if all of your children are already adults.
Second, you can choose for your assets to be divided in the same way (equal shares for your children with a deceased child’s share being further divided for his or her children) but the shares are not distributed immediately to the beneficiary. Instead, your successor trustee will hold the assets allocated to a beneficiary and use them for the beneficiary’s living expenses. One of the biggest advantages to keeping assets in trust during your beneficiaries’ lives is that the assets in a beneficiary’s trust will be protected from claims of creditors and possible divorces. Although we prefer to keep things simple, we believe the advantages of lifetime trusts outweigh the additional efforts in maintaining the trusts, and we encourage you to make distribution in this manner.
Finally, you can choose to leave your assets outright equally to charities and/or people other than children. This choice is appropriate if you do not have children. It is also appropriate if you have decided not to leave your assets to your descendants.
In addition, you can instruct your successor trustees to make specific gifts of cash to other people and/or charities. These gifts would be made after the survivor’s death.
