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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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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6 Things Seniors Should Consider Before Marrying

Seniors in particular think about marrying with an understandable degree of concern. Maybe your last relationship ended in a divorce, or it’s been a long time since they were married. However, according to a recent article from MSN, “Planning to remarry after a divorce? 6 tips to protect your financial future,” there are some steps to take to make relationships easier to navigate and protect your financial future.

Not all of them are easy, but all are worthwhile.

1.No marrying without a prenup. Everyone thinks of prenups as pertaining to divorce.  They can address divorce, but prenups do much more.  They clarify property in the marriage, such as whether it will belong to one spouse or to the other or both.  Prenups clarify many issues: full financial clarity, financial expectations, the marital rights of the couple and clear details on what would happen in the worst case scenario. This is especially important to putting each of the couples’ respective families at ease as they marry.  Getting all this out in the open before you say “I do” makes it much easier to go forward.

2.Trust…but verify. Estate planning ensures that assets pass as you want. A revocable living trust set up during your lifetime can be used to ensure your assets pass to your offspring. Unlike a will, the provisions of a revocable trust are effective not just when you die but in the event of incapacity. A living trust can provide for the trust creator and their children during any period of incapacity prior to death. At death, the trust ensures that beneficiaries receive assets without going through probate.

3.Estate planning. While you are planning to marry is a good time to check on account titles, beneficiary designations and powers of attorney, both medical and financial. Couples should review their estate plans to be sure planning reflects current wishes. This will go a long way to avoiding fights between the respective families who just recently joined together.

4.Check beneficiaries. Especially after divorce and before a remarriage, check beneficiaries on 401(k)s, pensions, retirement accounts and life insurance policies. If you marry, state law may require you to give some portion of your estate to your spouse or otherwise affect your ownership of property.  In many cases, this can be addressed by a prenup, but you still want to consult an estate planning attorney to guide you through any changes to beneficiaries.

5.Medicaid Planning.    On the negative side, you should consider the likelihood that either party will need help paying for long term care BEFORE marrying.  Medicaid, which is a government benefit that helps pay for long term care, has different eligibility based upon the marital status of the applicant.  Medicaid also expects both spouse’s assets to be used for care which has nothing to do with the prenup.  So, for some individuals, it doesn’t make sense financial to marry where one party will need long term care.

6.Choose fiduciaries wisely. The fiduciaries named in your estate plan are the people who have tasks to fulfill.  This could be a trustee, an executor, an agent and so on.  Consider carefully who should fill these roles as they may have to be between the two families.  Consider the advantages of a corporate trustee, who will be neutral and may prevent tensions with a newly blended family. If an outsider is named as an executor, or to act as a trustee, they may be able to minimize conflict. They’ll also have the professional knowledge and expertise with legal, tax and administrative complexities of administering estates and trusts.

Reference: MSN (Feb. 11, 2023) “Planning to remarry after a divorce? 6 tips to protect your financial future”

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