A revocable living trust is a special type of trust that is formed while its creator is still alive. The person who creates a trust is known as the “settlor.” This type of trust allows the settlor to revoke or amend the trust in accordance with their desires.
For example, if the settlor places certain assets in their trust that are meant to be given to their spouse, but then the couple divorces, the settlor may revoke the instructions provided by the trust regarding what assets their spouse receives.
In general, a trust typically covers three phases of the settlor’s life:
- While the settlor is alive and well;
- After a settlor has become physically or mentally incapacitated; and
- When the settlor dies.
The primary reason that a person may set-up a revocable living trust is to avoid probate. This can help their surviving beneficiaries to retain more of their inheritance (as opposed to having it reduced during the probate process), and offers greater protection over the assets that their surviving spouse should inherit.
What are Joint Trusts versus Separate Trusts for a Married Couple?
Married couples have an option to form a joint or separate trust. Typically, when a married couple chooses to create a revocable living trust, they each possess their own separate trust that they will have to set-up and maintain with their own funds. This means that there will be two individual trusts and each spouse will be responsible for managing their own separate trust.
On the other hand, a married couple can also decide to form a joint trust. A joint trust is one that is managed by both spouses while they are still alive and considered to be competent (mentally able to manage it, like not suffering from something like dementia). This means that both of them will have full access and control over the trust, and can change the instructions to the trust at any time they wish.
Additionally, for it to work, all of the couple’s assets will be transferred into a single joint revocable living trust. Thus, it is often the case that couples will need to assess the condition of their marriage or what each party feels comfortable with before deciding which of these trusts they should select.
Do Married Couples Have Different Revocable Living Trust Options?
Married couples do have several different revocable living trust options available to them. The three primary trusts that couples can choose from include:
- A basic or simple trust;
- An AB trust; and
- A QTIP trust.
Depending on the laws of the state, each of these trusts may have different requirements. Therefore, a married couple should consider consulting an estate attorney to see which one will work best as a solution for their particular situation.
What is a Basic Living Revocable Trust?
A basic, or simple trust, operates similarly to a joint trust. This type of trust is managed by both spouses until one of them passes away. After one of them dies, the surviving spouse will become solely responsible for managing that trust.
When the surviving spouse also dies, then the trust will then be distributed to their named heirs and/or beneficiaries.
What is an AB Revocable Living Trust?
An AB trust is a type of trust that divides into two separate trusts after the death of a spouse. Those assets can then be distributed to the named beneficiaries as well as the surviving spouse once that person dies.
The main reason that married couples opt to form an AB trust is to reduce the amount of taxes that the surviving beneficiaries will have to pay on an estate.
Is a QTIP Trust a Revocable Living Trust Option?
A qualified terminable interest property (“QTIP”) trust is similar to the AB type of trust that was discussed in the above section. The difference between the two trusts is that a QTIP trust is a bit more restrictive and complicated to administer than other kinds of trusts.
Many couples use a QTIP trust because it can be used as protection against subsequent marriages. For example, instead of leaving certain assets to a current spouse, a person may use a QTIP trust to secure assets that they want distributed to their former spouses and/or children from their prior marriage.
After the settlor of a QTIP trust dies, the surviving spouse can decide how much of their spouse’s assets should continue to be held in the trust. This allows the living spouse to maximize savings on their estate tax. Also, the surviving spouse will not be required to put any of the assets back in the trust.
Should My Spouse and I Discuss Making a Revocable Living Trust with an Attorney?
In general, trusts can be complicated to set-up because of the legal documents that have to be drafted in a special way and tailored to the type of trust that is selected. Revocable living trusts happen to be even more complicated than your average trust due to the revocation requirements.
Thus, if you need information about your options and which trust is best suited for you and your spouse’s needs, then you should contact a local estate attorney who can provide further legal assistance regarding trusts.