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What Happens to a Revocable Trust When One Spouse Dies

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What Happens to a Revocable Trust When One Spouse Dies

When a married couple has established a revocable living trust to hold their assets, the death of one spouse inevitably raises questions about what will happen to the trust. In this blog post, we will provide an in-depth overview of the typical process and considerations when one spouse passes away.

Revocable Trust Basics

Before getting into the specifics of what occurs after a death, it’s helpful to review some basic concepts about revocable living trusts.

A revocable trust is a legal document established by a grantor, or trustor, during their lifetime to manage assets. The grantor transfers ownership of designated property like a home, bank accounts, investment accounts, and more into the name of the trust.

Despite the change in ownership, the grantor maintains full control over the assets as both the trustee who manages the trust and as a beneficiary who can access the funds.

This allows the trust assets to avoid probate upon the grantor’s death. The trust also becomes irrevocable, or permanent, upon the grantor’s passing. At that point, the terms of the trust dictate how the remaining assets will be distributed.

In a marriage, the spouses typically establish the trust together and name each other as successor trustees. This allows seamless management of their affairs should one spouse become incapacitated during their joint lifetimes. It’s also common for married couples to make each other the primary beneficiaries upon the second spouse’s death.

Death of the First Spouse

When the first spouse passes away, a few key things will occur with the revocable living trust:

The deceased spouse is removed as a trustee: Since they are no longer living, the deceased spouse can no longer act in a trustee capacity to manage the trust. The surviving spouse then becomes the sole trustee.

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Trust becomes irrevocable for the deceased spouse: Upon death, the deceased spouse loses the ability to make any changes to the trust terms. The trust is now permanently fixed for their share based on the original document.

Remainder passes to surviving beneficiaries: The share of trust assets tied to the deceased spouse will pass according to the beneficiary designations in the trust. In a typical married couple trust, the surviving spouse is named to receive everything.

Surviving spouse maintains control: As the remaining trustee and main beneficiary, the surviving spouse retains full access and discretion over the entirety of the trust’s assets. They can manage investments, make distributions, and amend the trust terms going forward.

So in summary, while the deceased spouse is removed from their roles with the trust, the trust structure remains intact to benefit the surviving spouse. They retain unilateral control over both their original share plus what was tied to their late partner.

Taxes and the Deceased Spouse’s Share

When analyzing what occurs with a revocable trust at the first death, taxes are an important consideration. Even though the trust assets avoid the time and expenses of probate, they do not escape potential estate and inheritance taxes.

For the deceased spouse’s share of trust holdings, the value of those assets on the date of death will be subject to federal and possibly state estate taxes.

The deceased spouse’s applicable exclusion amount (estate and gift tax exemption) will determine how much of the value escapes taxation. Any amount over the exemption limit in the year of death may incur a 40% federal estate tax.

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Additionally, if the deceased spouse designates non-spousal beneficiaries such as children to inherit part of their share, those beneficiaries may owe federal and state inheritance taxes on the amounts received from the deceased parent. However, spousal heirs are exempt from inheritance taxes on amounts passing from one spouse to another.

Updating Trust Terms After the First Death

With the deceased spouse removed as a trustee and beneficiary, the revocable trust will likely need some adjustments by the surviving spouse who remains in control. Common updates include:

Removing deceased spouse: Formally indicating the first spouse has passed away in an amendment.

Reflecting current beneficiary designations: Since the original trust assumed both spouses would eventually pass, the surviving spouse may want to modify beneficiaries for their share upon their future death.

Accounting for changed circumstances: Issues like divorces, births or any other family changes should be updated in the trust terms.

Reflecting estate planning changes: The survivor may have revised their wishes through a new will or other documentation, necessitating trust amendments.

Changing successor trustees if desired: The surviving spouse can appoint new trustees of their choosing to step in if they become incapacitated in the future.

By making these types of revisions, the surviving grantor ensures the revocable trust continues to properly distribute their assets upon their eventual death according to their current intent. An estate planning attorney can assist with any needed amendments.

Managing the Trust as Sole Remaining Beneficiary

Once adjustments are complete, the surviving spouse settles into their role as the sole trustee-beneficiary running the trust. As the only current beneficiary, they have absolute authority over distributions and management decisions.

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Some actions they may take in overseeing the trust as its sole living beneficiary include:

  • Selling trust assets or real estate
  • Moving funds between investment accounts
  • Collecting income from rental properties
  • Making discretionary payments to other beneficiaries
  • Paying taxes, insurance and maintenance on trust holdings
  • Keeping accurate trustee and financial records

As long as they live, the survivor has unilateral control over every aspect of the trust. Only upon their subsequent death will the assets permanently pass to the next generation of beneficiaries according to the trust terms.

Conclusion

 

While the death of a spouse is never an easy transition, using a revocable living trust provides an orderly process for handling jointly held assets.

Although the deceased is removed from the trust, the structure stays intact for the surviving beneficiary. With some document amendments, the trust continues benefitting the surviving spouse during their lifetime and protects their wishes upon their eventual passing as well.

Understanding these basics can help married couples feel more secure knowing their estate plan is positioned to smoothly distribute their hard-earned assets to those they designate.

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