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.
Terminology is important, and when used incorrectly, it can cause confusion at best, real issues, at worst. Understanding the correct terminology is important, both in the creation of an estate plan and in its administration. My hope in this article is to provide my readers a better understanding of some basic terms and how they fit into the grand scheme of an estate plan.
Heirs are those who receive the estate of someone who dies intestate (with no document spelling out how one’s estate is distributed after death). Oregon statutes define an heir as “any person who is or would be entitled under intestate succession to property of a person upon that person’s death.” Our actual heirs are determined by those alive at our death and the statutes tell us how to figure it out. First are our spouse, children, grandchildren, etc. If there are none at this level, the statute looks to parents, siblings, nieces and nephews. After that, grandparents, aunts and uncles, and then cousins.
A Will or Trust names Beneficiaries, people and/or entities who are to receive the person’s property at their death. Often, heirs and beneficiaries are the same people. However, it is important to understand the distinction between the two terms, because we choose our beneficiaries, but we do not choose our heirs, and beneficiaries can be entities as well as people. In a Will, the beneficiaries receive the estate at the end of the administration (often a probate). In a Trust, the primary beneficiary is typically the Settlor of the Trust (the person who created the Trust); those named to receive the estate at the Settlor’s death are the remainder beneficiaries.
If a person dies (the “decedent”) with an estate is over a certain value, a probate is triggered. This is the court-overseen process for administering a decedent’s estate. Personal Representatives are appointed by the courts to manage that process. We can name our personal representatives in our Wills; if we don’t, the Oregon statutes, once again, give us a priority list of who is appointed.
When a living Trust exists and is properly funded, the need for probate is bypassed. The person in charge of the Trust is the Trustee (initially the Settlor), and unlike a Personal Representative, the Trustee comes into play before death. The Settlor names a Successor Trustee to manage the Trust when the Settlor is no longer able. The circumstances under which the Successor Trustee takes over determines the Successor Trustee’s job. If the Successor Trustee takes over because of the Settlor’s inability to manage their own finances, their main job is to manage the Trust for the benefit of the Settlor. If the Successor Trustee steps in at the Settlor’s death, their main job is to distribute the Trust to the remainder the beneficiaries.
Clear as mud? Join our monthly live webinar here (available online after the fact as well), I’ll give some examples and it should all come together!
Much of my practice is working with clients to create plans that will ensure their estates are distributed according to their desires in the most effective way possible. This often leads to a discussion about how real property is titled and how that effects the overall plan.
Joint Tenancy with Rights of Survivorship (JTROS)
One of the most basic ways of holding title to real property, JTROS results in all “tenants” owning the same interest in the property (two owners = 50/50; three owners = thirds, etc.). When one “tenant” dies, their interest in the property disappears by “operation of law” and the remaining “tenants” own the property in equal shares. There is no testamentary disposition of one’s interest in the property because at the moment of death that interest vanishes. It is my long-held position that neither Trusts nor couples (as a unit) can be “joint tenants” (although I have seen deeds attempting this). JTROS do not avoid probates – they simply delay probate until the last “tenant’s” death, at which time the entire property is subject to that decedent’s estate plan, or lack thereof.
By contrast, TinC is not limited to individual owners, with each “tenant’s” interest in the property different (two owners may = 60/40). Each “tenant” may transfer their ownership interest during life or at death. Trusts and couples (as a unit) may act as a single “tenant”. TinC will not avoid probate (unless that interest is held in a Trust) because a passable interest exists at death.
Tenancy by the Entirety (TbyE) and Community Property (CP)
These both work similarly to JTROS, but are reserved for married couples. TbyE is recognized by 26 states, including Oregon; CP is recognized by 10 states, including California and Washington.
Asset protection advantages may exist by treating the TbyE as separate entity; however, a tax specialist should be consulted to fully understand how this works. In community property states, assets are considered part of the marital unit and when one spouse dies, the remaining spouse automatically owns the entire property. No asset protection exists; however, there may be tax benefits to the ultimate beneficiaries.
Both TbyE and JTROS only delay probate until the death of the surviving spouse and may not ultimately be an effective estate planning tool.
When a Trust owns property, disposition of that property is controlled by the Trust and probate is avoided. Ownership by a Trust should not affect any benefits afforded to married couples, assuming the Trust includes the appropriate language.
Know how you hold title and what that means. Understanding the basics of real property titles and working with an attorney well-versed in the options can go far in ensuring one’s property is protected best for each specific scenario.
NOTE: For current tax or legal advice, consult with an accountant or attorney; the information contained in this article is not tax or legal advice and is not a substitute for either.