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Passing property in trust to a surviving spouse does a better job of making sure that a married couple’s plan stays on track.

Most married couples, particularly in a first marriage, share these basic planning goals: the property of the first spouse to die should pass to the survivor who can use, control and enjoy all of the property until the survivor’s death; then, at the survivor’s death, the remaining property should pass to that couple’s children in equal shares.

The revocable living trust is one of the best tools available to assure that all of the goals of this plan are met. If a trust is not used and property is transferred outright to the surviving spouse, the couple’s goals may be partially or completely defeated, particularly if the surviving spouse remarries. 

A typical married couple has wills that leave everything to the other. Often, married couples own some assets jointly. The survivor “inherits” the marital assets by simply being the surviving spouse. Similarly, each spouse will typically name the other spouse as the primary beneficiary on property that passes by beneficiary designations such as life insurance, annuities, IRAs and qualified benefit programs. Consequently, all the marital assets end up in the name of the survivor.

Upon remarriage, property received by a spouse outright may be lost to a new spouse. This can happen either inadvertently or intentionally. If the surviving spouse remarries after the death of the first spouse, the spouses in this new marriage may, without really thinking about it, title some or all of their property in joint tenancy or create marital property interests.

If the original surviving spouse is the first to die in the remarriage, the property titled with a marital interest in the new marriage will pass automatically to the new spouse who then has no obligation to pass that property to the children of the original couple. 

Although the children of the original marriage were meant to receive the property, it will likely pass to the family of the new spouse. The children of the first marriage are “disinherited” simply because the parents did not understand the impact of spousal transfers. In addition to the possibility of out- right spousal transfers inadvertently causing problems, the surviving spouse who receives his or her property outright may simply give some or all of the property to the new spouse. 

As we can see, transferring property outright leaves the surviving spouse with the ability to transfer the inherited assets, either mistakenly or intentionally, to a new spouse thus preventing the property from ending up in the hands of the children of the original marriage.

This is not what most couples intend. The most effective solution to these problems is for each spouse to leave property to the other in trust, rather than outright.

Property left to the surviving spouse in trust can contain the simple directions that the surviving spouse may control, use and enjoy the property but only for himself or herself and the children. Property in a properly designed trust cannot inadvertently end up as joint tenancy property nor can it be gifted by mistake to a new spouse.

When the surviving spouse dies, the trust provides that any of the property not consumed by the surviving spouse or the children will pass to the couple’s children or other designated beneficiaries based on the terms of the trust. The use of a trust may also prevent the surviving spouse from being free to give the deceased spouse’s property to a new spouse at death. 

With a trust, a couple can establish an estate plan that virtually eliminates the possibility that either through inadvertence or intention his or her property will end up in the hands of a new spouse or the new spouse’s family, rather than the original couple’s family. For most couples, it will be the most effective way to meet this basic estate planning goal.

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Passing property in trust to a surviving spouse provides protection from that spouse’s creditors, including a future spouse.

Married couples have the choice of leaving property outright to each other when the first of them dies. When this is done, either by use of a will, joint tenancy or a beneficiary designation, the surviving spouse becomes the new owner of all the property left to him or her by the deceased spouse.

A person’s own property is subject to the claims of his or her creditors. These creditors can include exposure for liability due to professional or business activities, or inadequate homeowner’s or automobile coverage. 

In addition, if the surviving spouse chooses to remarry, the problem may multiply, as the surviving spouse’s assets may become subject to the new spouse’s creditors. 

What will become of the surviving spouse’s assets in case of divorce after remarriage? The divorce law of most states provides some protection for property brought to the marriage and inherited property. However, that protection is not ironclad and may be very weak. 

It is not uncommon for married couples to commingle their separate and community assets. Figuring out what his, hers, ours, or part community and part separate can become quite costly. 

A trust can be drafted so that property left in trust to a surviving spouse will not be subject to the claims of the surviving spouse’s creditors since trust property, unlike property transferred outright, will not be seen as owned by the surviving spouse. This is true even though the trust allows the spouse to use the property to support his or her existing lifestyle. 

One important part of creditor protection planning is considering the implications of California being a community property state.

The good news is that community property gets a full step up in basis when the first spouse passes away. The take away is that there is very little one acquires during marriage that remains separate property.

The assets a surviving spouse has before he or she chooses to remarry are his or her separate property. In addition, any inheritance he or she receives while married is his or her separate property. 

The problem is that most individuals do not understand the community property presumptions and inadvertently transmute their separate property to community by doing such things as  opening joint accounts. The result is a loss of a level of creditor protection from new spouse’s creditors.

• Revocable Living Trusts:
  Benefits of Passing Property in Trust:
  • Married Couples
    • Plan Stays On Track
    • Protection for Surviving Spouse
  • Avoiding Probate
  • Incapacitation
  • Children
  • Family Values
  • Tax Planning
  • Conclusion
• Wills

Probate

Trust Administration

DISCLAIMER
The information provided here is for informational purposes only. It is not, nor is it intended to be, legal advice. You should consult an attorney for individual advice regarding your own situation.