Marital Trusts: Pros and Cons

In estate planning for a married couple, it isn’t always as simple as “give it all to my spouse.”  Blended families, concerns about creditors and predators, new spouses and taxes are all reasons to make money available for your spouse when you are gone, but not simply leave it to them.  Clients often use marital trusts in these situations to protect the inheritance they leave to their spouse.  Forbes’ recent article, “Guide To Marital Trusts,” explains the pros and cons of using a marital trust.

As a quick explanation before the pros and cons, a marital trust leaves an inheritance in trust to the surviving spouse.  The trust pays all of the income it generates (e.g. dividends) and the principal it holds can be use for certain reasons.  When the surviving spouse dies, remaining property goes to whomever the first spouse named.  There are variations, but you can assume these trust terms for now.

The main benefits are the following:

  1. Tax Planning.  Depending on the tax elections you make, the marital trust can be considered the same as leaving the inheritance to your spouse for estate and gift tax purposes.  This allows you to use the marital tax deduction and not have estate tax apply to that inheritance.  Separately, you can elect the opposite, which might be wiser in substantial estates as it keeps money out of the estate of the survivor.  Either way, the trust gives flexibility you don’t get from leaving the inheritance directly to spouse.
  2. Provide for Spouse.  The marital trust distributes its income directly to the spouse.  Meaning, there is a stream of money that goes to the spouse to provide for their needs, and they may have the power to use more of the marital trust if they need it.
  3. Remainder Beneficiary Planning.  When the surviving spouse dies, the remaining assets go to the beneficiaries set by the first spouse.  This is helpful in blended families when the first spouse wants the remaining assets to go to their children as opposed to surviving spouse’s family.  You can change this to provide options to the surviving spouse of who to leave it to, even if it is limited to a group of people.  Similarly, because the trust holds the property, it tends to stay there and provide financial security to the future beneficiaries.
  4. Protect Assets from Creditors, Predators and Potential New Spouses.  Because the assets are held in trust with restrictions on it, there is an aspect of asset protection planning.  It is very difficult for creditors of the surviving spouse to get at the assets held by the trust, although the income might be in jeopardy.  Depending on who is in charge of the trust, it can also prevent a spouse who is suffering from cognitive decline misuse or waste the trust assets.  It can also prevent assets being paid to a new spouse because they are not the beneficiary.  Depending on how it is structured, you can also make it so that remarriage affects the distributions.

However, there are also downsides to using a marital trust. Those downsides include:

  1. This is the number one reason people don’t use a marital trust.  It is an irrevocable trust, so once the first spouse dies, it is difficult to undo or change.  That is also a pro to the first spouse (if you want to make sure left over money goes to your kids, you can’t let the survivor change that), but can make things cumbersome.
  2. Requires attention. To get the benefit of the marital trust, you need to make sure the assets are properly titled to the trust and that the income is distributed as appropriate.  Many financial institutions set up the accounts held by the marital trust to automatically distribute the income, so this is very doable, but does require more administration and attention.

I would add, as sort of a pro and a con, trusts for spouse can greatly assist with Medicaid planning for the surviving spouse if done as part of the first spouse’s will.  The marital trust can protect assets so that they are disregarded for Medicaid eligibility, although the income must be used.  If you want to build a trust for the surviving spouse for any of the above pros while incorporating Medicaid planning, there may different styles of trusts that can accomplish it better.

Reference: Forbes (June 30, 2022) “Guide To Marital Trusts”

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Four Overlooked Elements in Estate Plans

When creating an estate plan, there are details which seem minor but are actually very important.  It is helpful, when creating an estate plan or reviewing your existing one, to check for these key estate plan elements, says a recent article from mondaq, “Four Provisions People Often Forget To Include In Their Estate Plan.”

Don’t forget to name alternative beneficiaries and fiduciaries. If the estate plan names a beneficiary, but they are unable to take possession of the property, or they are deceased, the asset may go to someone untended, or even as though you have no estate plan at all. In other words, the state will determine who receives the property, which may not be in accordance with your wishes. If there’s an alternate beneficiary, the property will go to someone of your choosing. Back-up fiduciaries (executors, trustees, agents under a power of attorney and so on) are also critical. If your primary choice can’t or won’t serve, someone unintended, or undesirable, may have to do it.

I find in initial consultations this is one of the biggest issues to discuss.  Clients consider their estate plan based upon present circumstances, but real life doesn’t always go the way we expect, so it is important to plan for contingencies.

Personal possessions, including family heirlooms. In the past, many families had items with great sentimental value, whether or not they have any financial value. Although this tends to be less common now, it is important to consider who would get those types of items.  It’s often best to have a personal property memorandum, which our firm routinely creates in our client’s estate plans.  This is a separate document providing details about what items you want to give to family and friends. These work differently in different states, so a local estate planning attorney will know the law for your state and can advise appropriately.  Even if this document is not legally binding, it gives your heirs clear instructions for what you want and may avoid family arguments.

I ask about important, sentimental possession in consultations, and clients often respond by saying these items aren’t financially valuable, as though that means they shouldn’t be consider.  But, these are the items that lead to fights in estates because they have an emotional impact on who receives them, and more significantly, who doesn’t.  I had an estate litigation case years ago that didn’t settle over a $600 wardrobe.  The financial value of planning was proven.

As a final thought, please don’t use the personal property memorandum to make any financial bequests or real estate gifts or use it as use it to try to amend the estate plan.  It never works well, and can break your estate plan.

Digital assets. Much of our lives is now online. However, many people have slowly incorporated digital assets into their estate plans. You’ll want to  consider all online accounts, including email, financial, social media, gaming, shopping, etc. In addition, your fiduciaries will need appropriate access to your phone, accounts and devices. The agent named by your Power of Attorney needs to be given authority to handle online accounts with a specific provision in these documents, which we do. Ensure the information, including the accounts, account number, username, password and other access information, is kept safe, and tell your fiduciaries where it can be found.

This is a growing need in today’s digital society.  So, you can learn more in this article:  https://galligan-law.com/does-your-estate-plan-include-digital-property/

Animals. Today’s pet is a family member but is often left unprotected when its owners die or become incapacitated. Pets cannot inherit property, but you can name a caretaker and set aside funds for maintenance. Many states now permit pet owners to have a pet trust, a legally enforceable trust so the trustee may pay the pet’s caregiver for your pet’s needs, including veterinarian care, training, boarding, food and whatever the pet needs. Creating a document providing details or speaking to the caretaker concerning the pet’s needs, health conditions, habits and quirks is advised. Make sure the person you are naming as a caretaker is able and willing to serve in this capacity, and as always, when naming a person for any role, have at least one backup person named.

Checking for these four key estate plan elements will help ensure your estate plan works as intended and to the benefit of your loved ones.

Reference: mondaq (March 16, 2023) “Four Provisions People Often Forget To Include In Their Estate Plan”

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Why Don’t Most Americans have an Estate Plan?

Just one of every three Americans has an estate plan in place, mostly because they don’t believe they have the assets to merit it.  However, everyone should consider having an estate plan.

Investment News’ recent article entitled “Procrastinating Americans putting off estate plans, says D.A. Davidson survey” says 34% of adults in the U.S. have an estate plan, according to a survey released recently by D.A. Davidson & Co. 37% of respondents also said they didn’t have a plan at the ready because they felt they didn’t have a large enough estate to warrant one. Procrastination came in second place, with 32% of those surveyed saying they simply “haven’t gotten around to it.”

The survey also showed that 20% of respondents who actually created estate plans haven’t updated them in the last five years.

Procrastination is a human, and understandable, reason for people not to have an estate plan.  However, lack of assets isn’t.  Estate plans aren’t just for the wealthy.  Estate plans quite critically help with incapacity planning, such as when you need someone to access your money for you, or to make medical decisions on your behalf.

Estate planning helps ensure what you have, whether a lot or a little, goes to the loved ones you intended.  It also can appoint guardians for minors.

I’ve often to put it to clients that a lack of assets makes estate planning even more critical.  You can’t afford to go through a costly or inefficient estate process when you don’t own much.  The process will quickly eat up what you have.  You need to plan to preserve as much as you can.

See here for more basics to estate planning and why they are essential.  https://galligan-law.com/the-basics-of-estate-planning/

Consulting an experienced estate planning attorney has a positive effect when it comes to creating an estate plan. The survey said that the number of those having a plan jumped from 18% to 56%, if they worked with a professional at some point.

The survey showed those who have worked with a professional also feel more confident and prepared discussing their estate plan and end-of-life wishes than those who have never worked with one.

In terms of gender differences, 72% of the women surveyed don’t have an estate plan compared to 59% of men. This spread should narrow as the wage gap closes between male and females.

A married couple will typically pass their full estate to the surviving spouse. Statistics show that the surviving spouse is likely a woman, and she will then need to pass her remaining estate to the next generation. That can be complicated, with things like family dynamics playing a major part which underscores the importance of estate planning at that stage.

Regardless of gender, it is extremely important for everyone to have an estate plan.  If you are interested in starting or aren’t sure how to begin, we’ve prepared an article on preparing for an estate planning meeting which you can find here:  https://galligan-law.com/preparing-for-an-estate-planning-meeting/

Reference: Investment News (Oct. 11, 2022) “Procrastinating Americans putting off estate plans, says D.A. Davidson survey”

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