A Family Trust is a contract between husband and wife (Grantors) that gives instructions to financial institutions and county(s) in which they own real estate as to what to do with the assets if the Grantors are incapacitated for a short/long period of time or are deceased. A Family Trust prepared by the Law Offices of Robert J. Mondo provides the following:
Advantages:
- The Spouses are the Grantors, Co-Trustees and Primary Beneficiaries.
- If funded properly, the Trust assets avoid probate.
- All property, including personal assets are titled in the Trust.
- Provides for Specific Gift giving that allows for changes without amendments.
- Provides instructions for the Grantor’s well being if ever handicapped.
- No decision as to which Trust to title an asset in. There is only one (1) Trust.
- Provides estate exemption portability (in 2018 the Federal estate exemption is $22.2M).
- No setting of basis until the surviving Grantor passes.
- Allows for control over gifts to minors.
- Asset protection with Spendthrift provisions for Secondary Beneficiaries.
- Access to assets for both Spouses with no limits.
- The Secondary Beneficiary designation becomes irrevocable upon the death of the first Spouse.
- Any future Spouse is always considered an “Outsider.”
- Is valid in all U.S. jurisdictions with no need to amend if State and/or Federal law or the Trust domicile changes.
Spousal Trusts
Spousal Trusts are a form of estate planning where each souse has his or her own Trust. Spousal Trusts were all the rage when the Federal Estate Exemption was low ($650,000 per person in 1999 with anything in excess being taxed at 55%) and there was no unified credit (portability of any un-used exemption) that was offered to both spouses. As such, many lawyers (me excluded) prepared Spousal Trusts, which provided the following:
Advantages:
- If funded properly, the assets avoid probate.
- Asset protection for the assets held in a non-at-risk Spouse’s Trust.
Disadvantages:
- You have to choose which assets are titled in which Trust.
- Access to the other Spouse’s Trust assets is limited. Sometime to 5% of income/principal per year.
- If you divorce, the separately held Trust assets will not be available to you.
- Taxes. If a Spouse passes and an appreciated asset is held in the deceased Spouse’s Trust, then a new tax basis will be set, so that upon sale any appreciation since the new tax basis has been set, IS taxable at capital gains rates.
- Additional Lawyer Fees. The creation of additional Trusts upon each Spouse’s passing allows for the lawyer to continue to charge fees.
In my opinion, using Spousal Trusts, except in very few situations, is a wrong approach. A Family Trust provides all of the benefits and protections of Spousal Trusts without the access, titling, tax and fee problems.
In all cases that I have reviewed, I have always recommended revoking the Spousal Trusts and creating a Family Trust