Joint trusts are an integral component of the estate planning process, especially for married couples. Unfortunately, however, Joint Trusts are inevitably short for this world. One of the trustors (or settlors) in a Joint Trust will pass away before the other, leaving a Survivor's Trust in its wake.
Instead of assuming you know what a Survivor's Trust is, it's imperative to your financial legacy that you mind due diligence. By understanding the ins and outs of Survivor's trusts, you can make informed decisions about your estate planning and ensure that your assets get distributed according to your wishes. Consequently, this article will tell you everything you need to know about Survivor's Trusts, including:
What is a Survivor's Trust?
A Survivor's Trust is a sub-trust created when one spouse in a Joint Trust passes away. For context, married couples typically create joint revocable living trusts to preserve their assets and financial legacies. They can help combine assets into a single Trust and pass them on to beneficiaries without going through the costly probate process (among other benefits).
Per the terms of the Joint Trust, both trustors simultaneously become the trustees and beneficiaries. That way, the other spouse will maintain control of the Trust. The extent of the control will be spelled out in the original Joint Trust.
This is where Survivor Trust rights come into play. Suppose the original Trust calls for creating a Survivor's Trust after one spouse dies. In that case, all of the assets belonging to the surviving spouse will transfer to the Survivor's Trust (the assets belonging to the spouse who died will go to a Bypass Trust).
What is the purpose of a Survivor's Trust?
The purpose of a Survivor's Trust is to give the surviving spouse more control over the assets in the account. As a result, the surviving spouse has every right to change, alter, or terminate the newly created Trust. While there can be exceptions, Survivor's Trusts are typically revocable and amendable by the surviving spouse.
Why have a Survivor's Trust?
Survivor's Trusts give the surviving spouse more control over their interest in the estate while sheltering more of the decedent's assets from taxes. In other words, the Survivor's Trust acts as the middle ground between too little and too much access.
By granting some access to the assets, the Survivor's Trust allows the surviving spouse to tap into their interest as needed. Whether that means making changes, pulling out assets, or terminating the account altogether, the Survivor's Trust is the perfect vehicle for offering optionality without subjecting the entire estate to steep taxes (the assets in the Bypass Trust will bypass estate taxes when the second spouse dies).
Survivor's Trust example
Let's say, for example, that a couple creates a Joint Trust to consolidate their assets into a single account and shelter them from a rather lengthy and expensive probate process. That way, their beneficiaries may receive the assets sooner and with fewer taxes incurred.
When the Joint Trust is created, each spouse agrees to the terms that will govern the account. Those terms include the creation of sub-trusts when one spouse eventually passes away before the other. In our example, the couple agrees to create a Survivor's Trust and a Bypass Trust when one passes away.
When the unthinkable happens, the Joint Trust will be split into a Survivor's Trust and a Bypass Trust. The surviving spouse will typically receive equitable interest in the estate's assets (usually half). Since Survivor's Trusts are revocable, the surviving spouse is free to do whatever they like with their share of the estate. That means they can do anything from changing beneficiaries to terminating the account.
The other half of the estate (the decedent's share) is sent to a Bypass Trust — up to the maximum estate tax exclusion amount. Since the Bypass Trust is irrevocable, the surviving spouse has little control over it. That said, the assets in the Bypass account will bypass estate taxes when the second spouse dies).
In this Survivor's Trust example, the surviving spouse retains control over their half of the estate, allowing them to do whatever makes the most sense. However, the assets in the Bypass Trust are still being sheltered from costly taxes and preserving capital for future beneficiaries.
Survivor's Trust vs. Bypass Trust
Survivor's Trusts and Bypass Trusts are sub-trusts created when one person in a Joint Trust passes away. While they are both the result of the unfortunate passing of one person in a Joint Trust, the two sub-trusts serve two different purposes.
As its name suggests, the Survivor's Trust receives the surviving spouse's interest in the estate. As a revocable Trust, the Survivor's Trust grants the surviving spouse complete control over the assets in the account.
A Bypass Trust, on the other hand, is irrevocable — significantly limiting the surviving spouse's control over the account. Outside of collecting income from the Bypass Trust, the surviving spouse can't do much with the decedent's share. The surviving spouse can't do anything with the assets in the Bypass Trust.
In exchange for less control, however, the Bypass Trust allows the couple to take advantage of estate tax exemptions and minimize tax liabilities.
To learn more about the differences between Survivor’s Trusts and Bypass Trusts, be sure to check out our full guide here.
What is the difference between a Marital Trust and a Survivor's Trust?
A Marital Trust is another irrevocable account created once a spouse passes away. The Marital Trust allows the surviving spouse to transfer the decedent's assets into the new account without incurring unnecessary taxes. Additionally, the new Marital Trust will continue to provide financial support for the surviving spouse.
After the surviving spouse passes away, the assets in the account are not included in the estate's value. The absence of the assets in the estate's value will ultimately shelter them from taxes and maximize the financial gain of impending beneficiaries.
A Survivor's Trust, on the other hand, is revocable. The revocable nature of a Survivor's Trust allows the surviving spouse to make any changes they deem necessary, including terminating the Trust altogether.
Does a Survivor's Trust file a tax return?
Filing a tax return for a Survivor's Trust is unnecessary. Instead, the surviving spouse is responsible for filing and reporting all gains, losses, and deductions resulting from the Survivor's Trust on their tax return. Since there is no need to report the gains or losses in income twice, there is no need to file a tax return for a Survivor's Trust.
How to set up a Survivor's Trust
Setting up a Survivor's Trust isn't all that different from creating a Trust Fund. It is as simple as following the steps outlined below:
Enlist the help of a qualified attorney: Trusts are complicated financial vehicles that can dictate your legacy for generations. As a result, it's a good idea to seek professional help when setting up a Trust. Proven attorneys, like those at Trust & Will, can simultaneously provide you with peace of mind and ensure your financial matters are taken care of the way you intended.
Identify the assets: Select and identify the assets you intend to place in the Trust for your spouse and eventual beneficiaries.
Confirm who the trustee is: Typically, the trustee of a Survivor's Trust is identified in terms of the original Joint Trust and includes both spouses.
Agree on the terms of the Trust: Each spouse will need to agree on the terms of the Trust before it is finalized. Terms include everything from how the assets are distributed to who will eventually wide up with them.
Draft the Trust Document: Once the terms are agreed upon, draft a finalized legal document that puts everything in writing.
Place the assets in the Trust: Put the assets in an account designated for a Trust at a financial institution. At this time, the trustee(s) will have sole control over the account.
Review and update as needed: Provided the Trust is revocable, update it whenever necessary.
These steps provide a brief explanation of how to set up a Survivor's Trust. To ensure things are done correctly and per the appropriate laws, please be sure to enlist the help of a qualified professional.
How to access a Survivor's Trust
Accessing a Survivor's Trust depends entirely on the specific terms and conditions outlined in the trust document. That said, gaining access to a Usually, a Survivor's Trust requires the following steps:
As the trustee of the account, the surviving spouse should already have access to the Trust
To control the assets in the Trust, the surviving spouse needs to provide documentation of their spouse's death.
After proving their spouse has passed away, the surviving spouse must meet the terms and conditions outlined in the trust documents.
Once all of the qualifications are met, the surviving spouse should be able to access the assets through the financial institution the Trust is at.
Should you set up a Survivor's Trust?
A Survivor's Trust is a proven and effective way for spouses to protect their assets, for themselves and their beneficiaries. By creating a trust, couples can provide for the surviving spouse and minimize the risk of their assets being tied up in probate court. However, setting up a survivor's Trust can be complex and involves significant legal and financial considerations.
Here at Trust & Will, we'll make sure your Survivors Trust complements your overall estate plan. You can create a fully customizable, state-specific estate plan from the comfort of your own home in just 20 minutes. Take our free quiz to see where you should get started, or compare our other estate planning and settlement options today!
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