Estate Planning for Couples
Married couples and Registered Domestic Partners have options when creating revocable living trusts. Each has pros and cons and understanding one’s priorities is important in choosing the best option.
While there is no technical name for it, I call the first option the “I Love You Trust”. At the death of the first spouse (or partner), this Trust continues for the benefit of the survivor, becoming irrevocable only at the survivor’s death. This means the survivor has complete control over the disposition of the entire estate at their death, including the ability to exclude the children, heirs, or other intended beneficiaries of the decedent, and careful discussion with one’s partner is warranted to address any concerns.
In this simple Trust, all Trust property passes to the survivor and is included in their estate for estate tax purposes. With Oregon imposing estate taxes on estates over $1,000,000, this affects many of us. However, the simple Trust can be drafted to address this issue, including the use of a Disclaimer Trust written into the main Trust. The main advantage to Disclaimer Trusts is that a decision to utilize it is not necessary until after the first death. However, disclaiming must occur within 9 months of the date of death, and so conversations about whether or not to disclaim must be had sooner rather than later after the first death.
The second option is the A/B Trust. This Trust calls for a mandatory split of the Trust assets into two new Trusts at the first death, one of which (the A Trust) remains fully amendable by the survivor, the other of which (the B Trust) is “born” an irrevocable Trust; the survivor typically has some level of access to the funds in the B Trust, but may not change any of its provisions.
Historically, A/B Trusts were used to address estate tax issues; however, I find that the simple Trust with the Disclaimer Trust language works better for most clients, giving them more flexibility and time to decide if they want (or need) to engage in estate tax planning. As with everything in life, there are many factors to address when deciding if estate tax planning makes sense, some of which we may not be aware until the first death.
I utilize A/B Trusts most often when working with blended families, as a way for the decedent to retain control over their half of the estate after death. Because the B Trust is irrevocable, the decedent knows their estate will ultimately be distributed to their intended beneficiaries. When using an A/B Trust for this purpose, it is important to address the survivor’s access to the B Trust assets and how any limitations may affect the survivor’s lifestyle.
Whichever type of Trust is ultimately chosen, the most important is that the choice is made thoughtfully and in consideration of all the various options and what each option provides.