If you look at a Trust document created by a husband and wife, you will often see there are various sub-Trusts created after the first spouse dies. The purpose of these sub-Trusts is to divide up the assets, sometimes for tax purposes and sometimes for protection purposes. For example, when families have children from different marriages, the spouse who dies first may want his or her share of the Trust held for the surviving spouse’s benefit, but then have those assets pass to their children after the surviving spouse dies. That’s where something like a Bypass Trust comes into play.
What is a Bypass Trust?
A Bypass Trust is a sub-Trust that becomes irrevocable after the first spouse dies. A Bypass Trust is sometimes called a Residual Trust, a Family Trust, or a Tax Avoidance Trust. Typically, the entire estate is divided in half (provided the entire estate is community property) and the decedent’s half goes into a Bypass Trust. The assets in the Bypass Trust will be locked up in the sense that it cannot be amended or revoked. The assets in the Bypass Trust do not go to the children right away, but are held and used to support the surviving spouse. Once the surviving spouse dies, the assets in the Bypass Trust go to the ultimate beneficiaries (which are usually the children of the first spouse to die).
A Survivor’s Trust, on the other hand, is often revocable. The Survivor’s Trust is the surviving spouse’s share of the estate. The survivor’s portion of the Trust can typically be revoked or amended while the surviving spouse is still alive. A Survivor’s Trust is different from a Bypass Trust because a Bypass Trust cannot be changed. Like the Bypass Trust, the assets from the Survivor’s Trust will be distributed to the ultimate beneficiaries upon the second spouse’s death in accordance with the Trust terms.
The bottom line: when two spouses create a Trust, there is often a split in assets through sub-Trusts. The share of the first spouse to die is typically irrevocable and not distributed to the children until the surviving spouse dies, although there are exceptions depending on the Trust terms. Whereas the share of the surviving spouse is typically revocable and can be held and changed by the surviving spouse at any time. In most cases, the children will not receive their share of the assets from either sub-Trust until both spouses are deceased. The terms of each Trust can be written as the Trustor decides. In most cases, most assets are distributed according to the trustor’s wishes and instructions. The terms of the Trust are typically written in the Trust documents.
A common misconception is that if you create a Trust, then all your assets will be held in trust. This is incorrect. Most assets, when you die, are distributed according to the Trustor’s instructions, and the assets are never held in a Trust.
The only exception to this is a Testamentary Trust. The Trust is a legal fiction that makes assets you own but can’t yet pass on to your beneficiaries, “safe.” Your assets are held and controlled by a Trustee until you designate who is to inherit them. There are different types of Trusts, and the Testamentary Trust, and any Trust you establish while you’re alive, are different from a Testamentary Trust.
Learn more about survivors’ trust and bypass trust from the experienced lawyers of Albertson & Davidson. Contact our office today!
