The following blog has been transcribed from our podcast Around the Gavel: Episode 2. Look up “Around the Gavel” on Spotify, Soundcloud, Google Play, and iTunes to listen in.
SARAH: Hi, and welcome to our new show Around the Gavel. I’m Sarah Morris and attorney partner, as well as the CEO, of Morris Law Center. Today we are going to be talking about the pitfalls of marital trusts. Estate Planning is one of my favorite areas of practice, so I’m very excited to get going on this. As always, please subscribe and leave us an honest review on your podcast platform.
Today we’re going to talk about the possible pitfalls of marital trusts and generally what a marital trust is in Nevada in particular. Let me say, I am not talking about any other state. If you wanted to dive deeper into this, you can always give us a call.
So marital trusts- sometimes this term is used, and people don’t really know what they’re talking about. It’s not a completely defined term, but what I wanted to talk about today is something that’s come up twice now in the last two months. I’ve had clients bring me old trusts that are marital trusts. When I say marital trusts, I simply mean that the two people who created the trust are married. That, to me, signifies it’s a marital trust of some sort.
So I’ve recently received two marital trusts that were done, you know, 10 to 15 years ago where one of the spouses has already passed away, and now the remaining spouse has come into my office and says, “Okay, a lot has changed since we drafted this thing, and I want to change some stuff.” Well, the problem that has presented itself in both these situations is that because one of the spouses has passed away, we are very limited in what we can do in terms of amending the trust because of the way these particular trusts were written. A lot of times marital trusts in the past were written because they were trying to avoid taxes upon the first spouse’s death. It’s not like that so much anymore because the tax laws have changed, and particularly in Nevada we do not have an estate tax. The federal estate tax exemption is so high that most clients are not going to qualify over and above that anyway, so they don’t have to worry. So that isn’t a reason to do it now. Now, of course, the tax laws are probably going to change and maybe we’ll go back to that, but for the moment it’s not an issue. So a lot of times, historically speaking, people would do it for tax advantages.
One of the things I’ve run into lately with these older trusts is a situation where we’ve got a husband and a wife who’ve set up a trust. Nevada’s a community property state, so they may put in both a separate property and a community property into this trust. So what happens when one of them dies? The trust dictates. The trust says, Okay, when one of the spouses dies, the trust is split into two separate trusts. Within these two separate trusts, there is one for the deceased spouse- his 50% of the community property interest of whatever he put in, plus his separate property interests. That’s the deceased spouse’s trust; it is now unchangeable. You can’t do anything different with it. It’s going to sit there, and the trustee he designated 15 years ago is the trustee for that trust. You can’t change it because he’s gone.
Then the other trust, which is called the survivor’s trust, is for the spouse that is still alive. This trust is for his or her half of the community property interest, plus his or her separate property. Since he or she is still alive, they can amend this trust. This means they can change their trustees, and they can change the beneficiaries of their trust. However, in regards to the other trust, they can’t do anything with it.
So in the latest example, the client actually designated the successor trustee, meaning the trustee that would be in place after both of them passed away, to be Bank of America. Normally in these simpler trusts we don’t see someone designating an actual professional trustee. This is usually because you have to pay a certain fee, which might make it more costly for the heirs and the trust. So usually people will designate a family member, or a friend, or a CPA. However, in this case, they designated the bank, which is fine. It’s just now we’ve got a bank trustee for the husband’s portion, and the wife wants to switch her trustee and her beneficiaries. What I had to tell her was she can absolutely do it for her portion, but she cannot not do it for his portion.
That is one of the major pitfalls in marital trusts. Again, I hesitate to even use that terminology because it’s a certain kind of trust, but there are people who use that term for different things. So I’m not saying every trust is like that. I’m just saying to watch out for it.
A pro for why people use a marital trust is because sometimes we’ve got husbands and wives, and it’s our second or third marriage. They’re coming in with kids from one marriage and then kids from another. In these cases, they usually want to make sure their own children that they didn’t have with their current spouse, simply put, gets their stuff. In that respect, these trusts are good because we can always write in that their portion in the community property does split into two trusts. This is where the two trusts work. So if one spouse dies, we can split it into two trusts now. We don’t want anything to change for the one that died because we want to ensure that their wishes are carried out. It doesn’t mean they don’t necessarily trust the other spouse, but sometimes that is the case. Sometimes it also means that they simply want to make sure their heirs are taken care of. So it can be a pro, and it can be a con. It’s just something to think about when you’re considering a marital trust.
So like I said, if you have any other questions, or if you want to dive deeper into it, or if you’re interested in marital trusts, please feel free to give our Las Vegas estate planning attorney a call and we can discuss it further.