When a trust is established, the person or entity who provides the money or property to establish the trust is called the grantor. Some trusts are set up by one grantor. However, when it is both a husband and wife establishing the trust, each of them is considered a grantor. In this case, the trust is called a joint trust because of the two grantors.
Many trusts will start out as revocable, meaning that the grantor may change the terms of the trust. However, at some point a revocable trust can become irrevocable, meaning that the terms are immutable unless the beneficiaries agree to change the terms. When there is one grantee, the trust is transformed from revocable to irrevocable when the grantor dies. When there is a joint trust, the question arises as to what needs to happen for the trust to become irrevocable.
In most cases, when there is a joint trust, one of the grantors will die before the other. This presents various issues depending on the makeup of the family. For example, the surviving spouse could have different wishes than the deceased one had. Alternatively, the surviving spouse could have their own children not with the deceased. Additionally, the surviving spouse may have less than their full capacity and may not be able to make sound decisions. When one spouse does pass away before the other, there are questions whether the trust is still revocable.
The general rule of thumb is that both grantors must die before the terms of the trust become irrevocable. This is the default, but, as with many things legal, there are ways to change this. The terms of the trust are governed by the instrument that establishes the trust. In other words, those who establish the trust have the ability to set the operating ground rules so long as they are not contrary to law.
There are a couple of different solutions to these issues that can be incorporated into the trust at the outset. First, the estate planning attorney can put in specific language to overcome the general rule that both spouses need to die before the trust becomes irrevocable. If there is a provision that says that the trust becomes irrevocable when one grantor dies, this will become the rule of the trust. Couples often do this when there is a concern about undue influence as both spouses age. Seniors are often subjected to pressure both by their families as well as from other outside sources that may have nefarious intentions. However, there are large possible estate tax ramifications if the trust is made irrevocable on the death of one spouse. An estate planning attorney can help with measures that can mitigate or remove any possible income tax liability. Alternatively, the trust can remain as a revocable instrument with a host of other protections in the document to safeguard the trust after one grantor dies.
There is another option that can be used in order to provide some protections to trust beneficiaries in the event that one grantor dies first. The trust can remain in effect, but a successor trustee can assume responsibility for making the decisions regarding the trust. This successor trustee would be someone other than the surviving spouse. While this is ordinarily accompanied by language limiting a successor trustee to instances in which the surviving spouse is incapacitated, if there is concern over what the surviving spouse may do, then there could be language requiring a successor trustee regardless.
There is nothing that says that couple must use a joint revocable trust. It does have benefits both in terms of convenience and administration. However, couples can also establish their own individual trusts. If there is a blended family, this may be an option if there is any concern as to how the money will be divided once one spouse dies. In some families, there may be a worry that the surviving spouse would either on their own or due to pressure from children, change the trust to cut out the interests of the children of the deceased spouse.
This is something that should be addressed when both spouses are alive and in control of all of their faculties. Since the usual rule is that both spouses must die before the trust becomes irrevocable, there is another type of trust that is suitable for blended families. An AB trust is a special type of trust that will protect the beneficiaries when one spouse dies and the trust is still revocable. What happens in this type of trust is that the trust is a joint revocable trust when both spouses are alive. When one of the spouses dies, the trust will then split into two trusts automatically. Each trust will have half the assets of the trust along with the separate property of the spouse. The surviving spouse is the trustee over both trusts. However, they cannot amend the terms of the trust with the deceased spouse’s assets to remove that person’s children as beneficiaries of the trust. There may still be issues with this type of trust arrangement if the surviving spouse uses the assets of the trust in a way that diminishes the beneficiaries’ inheritance. The beneficiaries will be keeping a close watch over the spending so it does not diminish what they will receive.
Given the high divorce rate and the number of people who remarry, each having their own children, families must be creative and proactive when it comes to devising solutions that can protect all of the parties, including the beneficiaries. An estate planning attorney can help devise trusts and insert language into their creating document that can make the trust work for you. When it comes to issues of money and inheritance, even people who had previously gotten along well can turn against each other in a hurry. Therefore, you should plan ahead of time to leave as little as possible to be decided after you can no longer control the situation.
Whether you need a revocable or an irrevocable trust, or if you would like to learn more about what would work best for your particular situation, Mile High Estate Planning can help. We have helped thousands of clients over the years use trusts to plan for their succession, protect their assets, apply for Medicaid, and more.