A trust set up for the benefit of your spouse can provide powerful protection for your spouse while at the same time protect your vision for the ultimate distribution of your assets (thus protecting the assets from a separate plan envisioned by your spouse).
In a typical last will and testament, a husband leaves all assets to his wife and vice versa. But, some individuals should consider the option of leaving the assets instead to a trust for the benefit of the surviving spouse.
As a reminder, a trust can be simplistically understood to be an arrangement where restrictions are placed on the use of the assets in the trust for the benefit of the beneficiary. This is contrasted with giving money or property outright to an individual beneficiary who can then do as he or she wishes with the assets.
What can be placed in the trust? Even though Washington is a “community property state” (generally meaning that all assets acquired during marriage are owned one-half by each spouse), the law still allows each spouse to do as he or she wishes with his or her respective half. This means that up to half of the community estate can be placed in the trust, not more.
Who should consider this option? Perhaps you have your own children from a previous relationship (and perhaps your spouse does as well). Perhaps you are concerned about the medical costs that might be incurred for your spouse’s care thus reducing the ultimate inheritance to your children. Perhaps you have a different distribution scheme for your assets than your spouse. Perhaps you have concerns about your spouse’s potential (or actual) creditor liability. Perhaps you are concerned that your spouse will not preserve or handle the assets as you desire. A spousal trust may provide a solution to these scenarios.
The basic premise is that, rather than an outright gift to the spouse at death, the assets would be placed into a trust for the surviving spouse’s benefit. The surviving spouse’s use and control of the assets are limited in accordance with your direction. That same limitation serves several purposes: (1) it can protect the assets in the trust from your spouse’s creditor claims or medical expenses; (2) it can preserve the assets for an actuarily calculable period of time; and (3) it can ensure the assets are managed as you desire.
For example, assume Tom and Betty are married and each have children from a previous marriage. They each have $300,000 in mixed assets including joint ownership of a family home. Betty may direct that all of her assets go into trust for Tom’s life. During Tom’s life, she may allow him to continue to live in the house they jointly own rent-free. She may allow him to access the cash assets earnings (the income off the assets after the trust is established) and even use the principal of the trust’s cash in the event Tom doesn’t have enough money in his own right to sustain his standard of living.
But, at Tom’s death, because he never had complete control, he can’t direct the final distribution of the assets. Instead, Betty’s trust provides that the trust assets go to her children upon Tom’s death. That means (practically) that: (1) the house would be sold, and the proceeds split between Tom’s estate and Betty’s trust; (2) all other assets held by the trust (inducing proceeds from the house) would be distributed to Betty’s named beneficiaries(her own children from her previous relationship). Betty has therefore allowed Tom to live the life that he previously enjoyed while Betty was alive without jeopardizing her children’s inheritance.
This same structure leads to creditor protection as well because the surviving spouse never owns the assets of the trust so a creditor of the surviving spouse can’t seize those assets. Assume again Betty directs all of her assets into trust for Tom. Tom then is in a car accident that he causes. The assets he owns may be subject to seizure by the injured party. Similarly, assume Tom has extensive medical costs. The assets in the trust may be protected from the state’s claim because Tom doesn’t own the assets (and it would be structured in that case as a supplemental needs trust).
If Betty is concerned that Tom either doesn’t know how to handle the assets or is concerned that he will be foolish with the assets (at least in her opinion), the trust offers protection. Tom could otherwise give the inheritance to his favorite needy charity (to which Betty would have objected) or give the assets to a later romantic interest (to which Betty would have certainly objected). The trust prevents these occurrences.
The trust adds more complexity to the plan, and it is simplest to choose to have no trust. But, sometimes complexity is necessary to achieve a desired outcome. If the complexity isn’t overwhelming for you, the spousal trust can provide an effective means of protecting your plan and your assets.
* Licensed, not practicing.
The opinions voiced in this material are for general information only and not intended to provide specific advice or recommendations for any individual or entity. This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
Securities offered through LPL Financial, member FINRA/SIPC. Investment advice offered through Cornerstone Wealth Strategies, Inc., a registered investment advisor and separate entity from LPL Financial.