A revocable living trust is a special type of trust formed while its creator is still alive. The person who creates a trust is known as the “settlor.” Revocable living trusts allow the settlor to revoke or amend the trust per their desires.
For example, if the settlor places certain assets in their trust 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 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. Avoiding probate can help surviving beneficiaries retain more of their inheritance, as opposed to having it reduced during the probate process, and offers greater protection over the assets their surviving spouse should inherit.
How Do Joint Trusts Differ From 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 a separate trust that they will have set up and maintained with their own funds. There will be two individual trusts in these cases, and each spouse will be responsible for managing their separate trust.
A married couple can also form a joint trust. Both spouses manage a joint trust while they are still alive and competent. Both spouses will have full access and control over the trust and can change the instructions to the trust at any time.
All of the couple’s assets will be transferred into a single joint revocable living trust. Couples often need to assess the condition of their marriage and what each party feels comfortable with before deciding which trusts they should select.
Do Married Couples Have Different Revocable Living Trust Options?
Married couples have several 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 state law, each trust may have different requirements. 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. Simple trusts are managed by both spouses until one of them passes away. After one dies, the surviving spouse will become solely responsible for managing the trust.
When the surviving spouse dies, the trust will be distributed to their named heirs or beneficiaries.
What is an AB Revocable Living Trust?
An AB trust divides into two separate trusts after the death of a spouse. Assets can then be distributed to the named beneficiaries and the surviving spouse once the spouse dies.
The main reason 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 trust. The difference between the two trusts is that a QTIP trust is more restrictive and complicated to administer than other trusts.
Many couples use a QTIP trust 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 they want to be distributed to former spouses or children from a 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. The surviving spouse will not be required to put any assets back in the trust.
What Are Marital Deduction Trusts?
Marital deduction trusts are used to protect the wishes of spouses. Marital deduction trusts are often an option for blended families with children from previous relationships.
What Are Marital Lifetime Revocable Trusts?
Marital lifetime revocable trusts are simple trusts that can be amended or revoked by either spouse during their lifetime. Marital lifetime revocable trusts also allow for amending and revoking by surviving spouses.
What Are Marital Disclaimer Trusts?
Marital disclaimer trusts allow for a deceased spouse’s assets in the trust to simply transfer to the surviving spouse. The surviving spouse has the right to disclaim assets, in which case the trust would convert to an A/B trust. This strategy may be tax beneficial in some scenarios.
Trust Plans for Remarriage
Most couples refuse or fail to contemplate the possibility of remarriage after the death of one spouse. Remarriage is usually the most difficult subject to discuss. Remarriage, however, is a real possibility that can have important, unintended consequences for any couple to consider. Without proper planning, a second marriage can result in the unintentional disinheritance of children from the first marriage.
To illustrate, let’s use the example of Tim and Alice. Tim and Alice are married and have one daughter named Janet. Tim and Alice have no estate plan when Tim unexpectedly dies. Most of their assets were jointly titled, and Alice inherits all of Tim’s property. Five years later, Alice meets Mike, and Mike proposes. Alice and Mike marry and later have a child named Carl. Alice and Mike meet with an attorney and draft an estate plan saying if Alice dies, everything is transferred to Mike if he is alive. Or, if Mike predeceases Alice, everything is transferred to Janet and Carl in equal shares.
Unfortunately, Alice gets sick and dies. According to Alice’s will, Mike inherits all of her property. Mike has a great relationship with Janet but never adopts her. As much as Mike loves Janet, Mike loves Carl more and updates his will leaving everything to Carl. As a result, everything that Tim presumably wanted Janet to inherit after Alice’s death ultimately will now be inherited by Carl through Mike’s will. All of the parties in this scenario acted with the best intentions, yet Janet still ended up being unintentionally disinherited.
Tim and Alice likely never considered this scenario. This example demonstrates why remarriage is an important factor to consider, especially among young couples. Alice can, through the use of a revocable living trust, ensure Mike inherits her property while also ensuring Janet is protected if Mike remarries.
Should My Spouse and I Discuss Making a Revocable Living Trust with an Attorney?
Trusts can be complicated to set up because of the legal documents that have to be drafted specially and tailored to the selected type of trust. Revocable living trusts happen to be even more complicated than your average trust due to the revocation requirements.
If you need information about your options and which trust is best suited for you and your spouse’s needs, contact a local living trust attorney who can provide further legal assistance,