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Trust Admin-Survivor’s Trust

Jul 27, 2006

One of the trusts that comes into existence upon the death of the first spouse of a married couple who have an A-B trust arrangement in their estate plan is called the Survivor’s Trust.

WHAT IS THE Survivor’s TRUST?

When a couple has a joint living trust with a typical A-B arrangement, the joint trust usually holds all of the couple’s community property, i.e. what is “theirs”. When one of the spouses dies, what is “theirs” is separated into two shares, which may be thought of as “his” and “hers”. If all of the property in the joint living trust is community property, then “his” and “her” share of the community will be half of what was “theirs” before this death.

If “he”is the deceased spouse, then “his” share is distributed to the Bypass Trust and “her” share is distributed to the Survivor’s Trust. The Survivor’s Trust holds all of the Surviving Spouse’s separate property and the one half of the community property of the couple which belongs to the Surviving Spouse. Separate property may be held in the couple’s joint revocable living trust provided that the separate property is not commingled with the community property and the couple keeps track of the separate property asset apart from the community property assets held in the living trust. Unlike the Bypass Trust, the amount of assets allocated to the Survivor=s Trust is not dependent on the amount available to be sheltered from estate tax. No estate tax calculation is performed on assets held in the Survivor’s Trust until the Surviving Spouse dies.

FUNDING OF THE SURVIVOR’S TRUST

The process for “funding” the Survivor’s Trust, that is, the actual transfer of title to the Survivor’s Trust after the death of the first spouse, is similar to the process for funding the Bypass Trust discussed in the last issue. Once the allocation agreement has been prepared which identifies which assets of the joint trust are allocated to the Bypass Trust and which assets are allocated to the Survivor’s Trust, trust transfer deeds and certificates of trust with letters of instruction to the financial institutions are signed by the Surviving Spouse as the sole successor Trustee. The trust transfer documents are then sent to the appropriate entities for processing. The Surviving Spouse should review carefully the next statements received from such entities to be sure that the re-registration of the assets to the Survivor’s Trust has been completed. Follow-up calls may be necessary.

My law office handles real property transfers in two steps. First, the Surviving Spouse records an Affidavit Death of Trustee with the County Recorder’s office. Once the recorded Affidavit is received by my office, the second step is taken, which involves the recording of a Trust Transfer Deed from the Surviving Spouse as Trustee of the joint revocable living trust to the Surviving Spouse as Trustee of the Survivor’s Trust. In Los Angeles County, the Surviving Spouse may not receive the recorded documents for approximately six(6) to eight (8) weeks. This means that the real property transfer may take four months or so to complete.

WHAT ARE THE SURVIVING SPOUSE’S RIGHTS WITH RESPECT TO THE SURVIVOR’S TRUST?

The Surviving Spouse only has as much right to the Survivor=s Trust as the trust instrument provides. Normally, however, the Surviving Spouse may consider the Survivor’s Trust as his or her own revocable living trust. If the trust so provides, the Surviving Spouse may use as much net income and principal as the Surviving Spouse needs, even if all of the Survivor’s Trust assets are used for care and support during his or her lifetime.

The trust may also provide the Surviving Spouse with the power to revoke it or change the terms of the Survivor’s Trust. This means that the Survivor may change the identity of beneficiaries of the Survivor’s Trust or the manner in which the original beneficiaries receive property from the Survivor’s Trust. Unless otherwise provided in the trust agreement, the Surviving Spouse may leave assets in the Survivor’s Trust to a new spouse upon remarriage.

GENERAL POWER OF APPOINTMENT

The trust may provide that the Surviving Spouse has a general power of appointment over trust assets. A general power of appointment means that the Surviving Spouse can direct where the assets of the Survivor’s Trust pass on the death of the Surviving Spouse. The manner by which a Surviving Spouse may appoint the property of the Survivor=s Trust is usually set forth in the document which gives the power of appointment; it often requires the Surviving Spouse to write a new Will.

If a general power of appointment is given to the Surviving Spouse, the assets of the Survivor’s Trust may be reached by creditors of the Surviving Spouse or be otherwise available to pay the Surviving Spouse’s debts.

ALLOCATION OF PRIMARY RESIDENCE

In allocating property to the Survivor’s Trust and to the Bypass Trust, consideration must be given to the needs of the Surviving Spouse with respect to the couple’s primary residence. In general, the residence is allocated entirely to the Survivor’s Trust. One of the reasons for doing this is to enable the Surviving Spouse to obtain a mortgage on the property, either by refinancing the existing mortgage, or by obtaining a new mortgage on the property. The Surviving Spouse would not be able to do so if all or part of the residence were held in the Bypass Trust.

Another reason to allocate all of the primary residence to the Survivor’s Trust has to do with basis and capital gains tax. Under current law, the Surviving Spouse receives a step-up in basis for the home when the first spouse dies. This means that the new cost basis for the Surviving Spouse is the date of death value of the home which is determined by a formal real property appraisal. If the Surviving Spouse sells the property after the first death, he or she can shelter from capital gains tax $250,000 in appreciation from the date of death value. This savings could be significant. Capital gains taxes currently run 25% (combined federal and State of California) of the value of the property to be taxed which means the tax savings could be significant.

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