Married people have several different options for providing for their surviving spouse in estate planning, we’ll outline the options below:
What is a spousal trust?
A spousal trust is created to pass assets to a surviving spouse tax-free (no federal estate taxes). The surviving spouse can receive income from the trust and withdraw the principal in some cases.
Types of spousal trusts
There are a few different types of spousal trusts to consider.
Spousal Lifetime Access Trust
A Spousal Lifetime Access Trust (SLAT) is an irrevocable trust set up by one spouse for the benefit of the other spouse (and possibly other family members) during your lifetime. A properly structured SLAT will help you avoid federal estate taxes while still providing limited access to the trust assets.
When you create a SLAT, you are making a gift to your spouse into the trust, which removes the assets from your taxable estate. You can also include other relatives (such as children or grandchildren) as beneficiaries in a SLAT. It's not taxable because you're using the federal gift and estate tax exclusion.
Spousal lifetime access trust pros and cons
- Asset protection
- Helps minimize federal estate taxes and state income taxes
- Provides income or principal to the surviving spouse and other beneficiaries
- Assets are kept separate from the surviving spouse's subsequent spouse
- Assets transferred into the trust cannot be taken back by the grantor
- If there is a divorce, SLAT assets are for the beneficiary spouse (but you can add language into the trust to mitigate this risk)
- SLAT laws can change anytime
Qualified Terminable Interest Property
A Qualified Terminable Interest Property (QTIP) trust is another spousal trust commonly used when the grantor has children from different marriages. The surviving spouse must be the sole beneficiary of this type of trust; you can name no other heirs.
You name a lifetime beneficiary, typically your spouse, who receives income from the trust for their lifetime. Whatever is left once the spouse dies goes to the "remainder beneficiary." Your spouse will have limited access to the principal but will receive steady income at least quarterly.
Because the trust must generate income for the surviving spouse, a QTIP trust must contain income-generating assets such as investments (stocks, bonds) or rental properties. You can specify an amount for your spouse to receive, either a percentage or a fixed amount.
The income payments will stop when the spouse dies since they are not transferable, then the remainder goes to the other beneficiaries.
Qualified terminable interest property trust pros and cons
- Provides income for surviving spouse
- Allows you to leave an inheritance for beneficiaries other than your spouse
- Helps defer or possibly avoid federal estate taxes
- Offers protection from creditors
- Highly complex legal instrument that requires ongoing management
- Spouse will have limited access to the principal except under exceptions for certain health, education, maintenance, and support (HEMS) related expenses
- Surviving spouse does not own the property within the trust
- The remainder beneficiary can't access the assets until the surviving spouse dies
Leave assets directly to your spouse (no trust)
The advantage to this is that it's the most straightforward option. If you pass away, your surviving spouse directly inherits your estate. The surviving spouse can do whatever they wish with the inherited estate, and when they die, can leave the assets to whomever they want. Due to this, there is the risk that the children or heirs of the first spouse that dies will inherit nothing.
Leave nothing to your spouse
Another option in some situations is to leave nothing to your spouse. For example, sometimes couples get married later in life, and each spouse has their own estate, children, or heirs.
As a result, the surviving spouse may not need the assets. This is an example of when it may be appropriate for a married person to bypass their surviving spouse and leave their estate directly to children or other non-spouse beneficiaries.
Leave your estate in trust for your spouse
Many married people want to provide for their surviving spouse from their estate but also wish to protect the inheritance rights of the children or other non-spouse beneficiaries. This is why many people choose to leave their assets to their spouse in a trust.
With this method, your spouse gets distributions from the trust as described in the trust instrument. It is common for a trust to receive all trust income. It is also common for a surviving spouse to be entitled to distributions for their health, education, maintenance, and support.
When your spouse dies, the trust assets automatically revert to your children or other desired beneficiaries. This prevents your surviving spouse from leaving your estate to their next spouse.
Trusts can help prevent your surviving spouse from being adversely influenced by mistakenly signing a document depriving your children or heirs of their inheritance.