What Happens after the First Spouse Dies
As soon as practicable after the death of the first spouse the trustee (usually the surviving spouse unless he/she is incompetent or resigns as trustee), must divide the trust into two trusts and transfer assets into each of the trusts. These trusts are the Survivor’s Trust and the Family Trust (aka the A & B trusts). The trustee must value all of the assets of both spouses then allocate to each trust sufficient assets that causes the correct dollar value to be owned by each trust.
What Assets Go into the Survivor’s Trust?
The trustee must transfer to the Survivor’s Trust property that has a value equal to the total value of the Survivor’s separate property and ½ of the community property.
What Assets Go into the Family Trust?
The trustee must transfer to the Family Trust property that has a value equal to the total value of the deceased spouse’s separate property and ½ of the community property.
How Does the Trustee Allocate Assets between the Two Trusts?
Unless the trust agreement specifies that specific property must be transferred to one of the two trusts, the trustee has the discretion to allocate assets to which ever trust the trustee believes is best. The trustee may allocate an asset to each trust and cause the two trusts to own a share of the asset as tenants in common.
Example 1: Total Value of Husband and Wife’s Estate is $250,000
A married couple created an irrevocable living trust that owns a $150,000 home (community property), $50,000 in investment accounts (community property), $30,000 of Apple stock (wife’s separate property inherited from her Mom) & miscellaneous items worth $20,000 (community property). In this example the husband dies first. The table illustrates how the couple’s assets might be allocated to the A & B trusts.
| Survivor's Trust ($140,000) | Family Trust ($110,000) | |
|---|---|---|
| Assets in the Trust | Assets with a dollar value equal to the total of survivor's separate property + 1/2 of the community property. This trust contains the wife's separate property of $30,000 + 1/2 of the community property valued at $110,000. The home would be owned jointly by each trust. | Assets with a dollar value equal to the total of the deceased spouse's separate property + 1/2 of the community property. This trust contains husband's 1/2 of the community property valued at $110,000. The home would be owned jointly by each trust. |
| Revocable or Irrevocable | Revocable. Survivor has total control and may amend or terminate this trust, but the trust will become irrevocable if the survivor becomes incompetent or dies. Survivor may alter who will become a beneficiary after the survivor’s death. | Irrevocable. This trust may not be amended or terminated. The plan of distribution to the deceased spouse's loved ones is "set in stone." |
| Asset Protection | Because this trust is revocable, none of the assets in the Survivor’s Trust are asset protected from the spouse’s creditors. Use the money in this trust first because it is not asset protected. | Because the Family trust is irrevocable, assets in this trust are protected from the beneficiaries' creditors, ex-spouses and predators. This feature is the primary benefit of creating this type of trust. |
| Trustee | Surviving spouse is the trustee unless he/she is incompetent or resigns. Surviving spouse names one or more successor trustees to administer the trust if he/she becomes incompetent or dies. | Determined by the deceased spouse and specified in the trust agreement. Could be the surviving spouse unless he/she is incompetent or resigns, a trusted person or a bank or trust company. |
| Current Beneficiary | Surviving spouse | Surviving spouse, but the deceased could have other beneficiaries such as children who are not the surviving spouse’s kids. |
| Distributions | Trustee may distribute any or all of the assets to the survivor or anyone else at any time. | Determined by the deceased spouse and specified in the trust agreement. The Trustee may have discretion to determine the amount and timing of distributions or distributions may be limited to the survivor’s health, education, maintenance or support.. |
| Future Beneficiaries | Selected by survivor. Usually assets go to children, but if a child is deceased the share of the deceased child goes to that child's living children and if none then equally to surviving siblings. Spouse can disinherit people. | Selected by the deceased spouse. Usually assets go equally to his/her children, but if a child is deceased the share of the deceased child would go to that child's living children and if none then equally to the surviving siblings. |
Example 2: Total Value of Husband and Wife’s Estate = $2,000,000
A married couple created a revocable living trust that owns a $500,000 home, $400,000 in investment accounts, $1,000,000 in the family business and miscellaneous items worth $100,000, all of which is community property.
| Survivor's Trust ($1,000,000) | Family Trust ($1,000,000) | |
|---|---|---|
| Assets in the Trust | Assets with a dollar value equal to the total of survivor's separate property + 1/2 of the community property. This trust owns the home, the investment accounts and the miscellaneous items valued at $1,000,000. | Assets with a dollar value equal to the total of the deceased spouse's separate property + 1/2 of the community property. This trust owns the family business. |
| Revocable or Irrevocable | Revocable. Survivor has total control and may amend or terminate this trust, but the trust will become irrevocable if the survivor becomes incompetent or dies. Survivor may alter who will become a beneficiary after the survivor’s death. | Irrevocable. This trust may not be amended or terminated. The plan of distribution to the deceased spouse's loved ones is "set in stone." |
| Asset Protection | None. Because this trust is revocable, none of the assets in the Survivor’s Trust are asset protected from the spouse’s creditors. Use the money in this trust first because it is not asset protected. | Asset Protected. Because the Family trust is irrevocable, assets in this trust are protected from the beneficiaries' creditors, ex-spouses and predators. This feature is the primary benefit of creating this type of trust. |
| Trustee | Surviving spouse is the trustee unless he/she is incompetent or resigns. Surviving spouse names one or more successor trustees to administer the trust if he/she becomes incompetent or dies. | Determined by the deceased spouse and specified in the trust agreement. Could be the surviving spouse unless he/she is incompetent or resigns, a trusted person or a bank or trust company. |
| Current Beneficiary | Surviving spouse | Surviving spouse, but the deceased could have other beneficiaries such as children who are not the surviving spouse’s kids. |
| Distributions | Trustee may distribute any or all of the assets to the survivor or anyone else at any time.v | Determined by the deceased spouse and specified in the trust agreement. The Trustee may have discretion to determine the amount and timing of distributions or distributions may be limited to the survivor’s health, education, maintenance or support. Don't use this money unless needed because it is asset protected and will not be taxed on the survivor’s death. |
| Future Beneficiaries | Selected by survivor. Usually assets go to children, but if a child is deceased the share of the deceased child goes to that child's living children and if none then equally to surviving siblings. Spouse can disinherit people. | Selected by the deceased spouse. Usually assets go equally to his/her children, but if a child is deceased the share of the deceased child would go to that child's living children and if none then equally to the surviving siblings. |
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