Although most estate plans begin with the execution of a Last Will and Testament, it is common to add to that initial estate plan over time. One of the most common additions to an estate plan is a trust agreement. The type of trust agreement you include in your estate plan will depend on the purpose or goal of the trust. If you are married, for example, you might include a survivor’s trust in your plan. The Los Angeles attorneys at Schomer Estate & Wealth Advisors discuss whether a survivor’s trust is right for your California estate plan.
Traditional Estate Planning for Spouses
Estate planning typically changes when you get married and become a parent. Although every estate plan should be uniquely tailored to fit the individual creating the plan, the estate plans of a married couple with children (from this marriage) tend to be reciprocal plans. Usually, both spouses create plans that mirror each other and that are coordinated to work together. Specifically, traditional estate planning for spouses with children involves a plan to ensure that all assets are passed down to a surviving spouse upon the death of one spouse, and then on to the children upon the death of the surviving spouse. To achieve these goals, a joint trust is often used. That trust names both spouses as Co-Trustees of the trust as well as beneficiaries of the trust. This allows both spouses to retain legal control over the trust assets while they are alive; however, if one spouse passes away, the surviving spouse automatically becomes the sole Trustee of the trust.
What Is a California Survivor’s Trust?
All taxpayers are subject to the imposition of federal gift and estate taxes in the United States, meaning that the value of taxable assets above the lifetime exemption at the time of death are subject to a 40 percent tax. Understandably, tax avoidance is a common estate planning goal. With that in mind, a joint trust created by married spouses may be split into two “sub-trusts” when one spouse passes away, with assets owned by the decedent being transferred into a bypass trust and the remaining assets that are owned by the surviving spouse being transferred into a survivor’s trust. Typically, a survivor’s trust is a revocable living trust because that allows the surviving spouse to retain control over the trust assets and to make changes to, or even revoke, the trust if he/she needs to in the future.
The other sub-trust (the bypass trust), however, becomes an irrevocable trust. The decedent’s separate assets (if any) along with his/her share of the marital assets are used to fund the bypass trust. Because it is an irrevocable trust, the terms of the bypass trust cannot be changed, and the trust cannot be revoked without a court order. While the surviving spouse does not control assets held in the bypass trust, those assets may be used to provide income to the surviving spouse if the terms dictate. Usually, the terms of a bypass trust direct that assets remaining in the trust upon the death of the surviving spouse are to be passed down to the children of the marriage. In short, a bypass trust can act as a legal mechanism that preserves assets intended for the children.
The other important benefit to creating separate survivor’s bypass trusts from a joint trust is the tax avoidance benefits offered by doing so. Upon the death of the surviving spouse, the assets held in the bypass trust (up to the current lifetime exemption of $12.92 million as of 2023) do just that – they bypass probate and avoid federal gift and estate taxation.
Can We Help You with a California Survivor’s Trust?
For more information, please join us for an upcoming FREE seminar. If you are interested in discussing how a California survivor’s trust might fit into your overall estate plan, contact the experienced Los Angeles trust attorneys at Schomer Estate & Wealth Advisors by calling (310) 337-7696 to schedule an appointment.
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