I believe everyone would agree that surviving your spouse can be a traumatic experience. My mother passed away this year after being married to my father for 54 years. He’s obviously going through a tough time, as I’m sure many readers can commiserate.
But when you lose a spouse who had a revocable trust, remember to visit with your estate planning attorney before moving any of the assets. We recently had a client who had lost a spouse and directed the financial advisor to move all of the assets from his spouse’s trust to his own.
The problem was, this wasn’t what the trust called for.
Instead, the trust continued on in a “Family Trust” that benefited the surviving spouse for the rest of his life, then continued on for the children. Many mistake being a lifetime beneficiary with being the outright beneficiary. Those are two different things.
Why is this important? It depends on the family, tax and financial circumstances.
Let’s say that Matt survives his wife Gina. Gina’s trust is to continue on for Matt’s benefit for the rest of his life, paying him income as well as principal invasions should he need it for his health, maintenance and support. By creating a trust for his benefit, the assets are not included in Matt’s estate for federal estate tax purposes. The trust assets also enjoy asset protection elements.
Let’s say that Matt remarries. If Matt had transferred all of Gina’s trust assets to his own trust, then those assets could be subject to a marital property settlement in a divorce, or they could be subject to a spousal elective share claim in the event Matt predeceases his new wife. Either of those possibilities is mitigated or even eliminated if Matt had followed the provisions of Gina’s trust, retaining those assets in a continuing trust for his benefit. This remains true even if Matt is trustee of the testamentary trust for his benefit.
By improperly transferring all of the assets from Gina’s trust to his own trust, Matt also subjects the trust assets to his creditors. If Matt incurs liability from an automobile accident that exceeds his insurance limits, he may be subjecting the assets that he took from Gina’s trust to his creditors. The same holds true if Matt has any personal liability arising from bad business deals, bankruptcies or foreclosures. If instead he followed Gina’s trust provisions, those assets would be better protected from those types of claims.
Another problem could rest with estate and/or generation skipping transfer taxes. Depending upon the relative value of Matt and Gina’s estates, by transferring the assets from Gina’s trust to his own trust Matt may defeat the federal transfer tax planning. This could result in the imposition of taxes upon his death that otherwise would not have occurred.
Assume another scenario where Gina’s trust and Matt’s trust had different beneficiaries. Suppose, for example, that Matt and Gina were involved in a second marriage and had a blended family. Matt’s trust benefits his children after the death of the survivor of he and Gina while her trust benefits her children. By transferring the assets from Gina’s trust to his own, he effectively and improperly disinherited her children from their estate plan. Matt or his estate could be expected to be on the wrong end of a lawsuit once discovered by Gina’s children.
When I see a Matt and Gina example come across my desk in real life, most of the time the parties had no idea that they violated the terms of the trust. In many cases neither did their financial advisor when he assisted with the transfer. The parties were unaware of the ramifications of their actions.
The long and short of it is that all of these problems could have been avoided had Matt visited with his estate planning attorney to conduct a proper trust administration following his wife’s death. A qualified attorney would understand the proper procedures and processes to follow.
When you find yourself “suddenly single,” before making the transfer of any asset it’s a good idea to sit down with your attorney to discuss these important issues.