A living trust is meant to provide a comprehensive solution to the needs of the settlor(s) and subsequent beneficiaries. During the settlor(s)’ lifetime(s), assets are held in the “Settlors Trust” for the benefit of the settlor(s) and their dependents. When the settlor(s) die, different beneficiaries, purposes and priorities come into play. Not surprisingly, additional trusts may for various reasons then become necessary. Assets in the original “Settlors Trust” are then transferred into these subsequent trusts. Let us examine how the same trust instrument used to establish the original Settlors Trust can create further trusts.
Multiple trusts are more commonly found in a married couple’s joint trust instrument, but can also be created in a sole settlor’s trust. At the death of the first spouse, the couple’s joint trust estate may be divided according to California’s Community Property laws. That is, the “Settlors Trust” is divided according to each spouse’s own one half shares of the community property assets and all of his or her own separate property assets. Each share may then be transferred into different trusts, typically for the lifetime benefit of the surviving spouse. Sometimes, however, the joint trust provides that it does not terminate at the death of the first spouse but continues for the surviving spouse’s lifetime.
Often when the “Settlors Trust” terminates, the assets of each spouse, minus any gifts by the deceased spouse, are transferred into a so-called “Survivor’s Trust”, which is another revocable trust but under the sole control of the surviving spouse. With blended families and large estates, however, the deceased spouse’s share of the “Settlor’s Trust” may be transferred into one or more irrevocable trusts, such as the “Bypass Trust” and the “Marital Trust” (if necessary for Estate Tax purposes), for the lifetime benefit of the surviving spouse and perhaps also for their descendants.
When the sole settlor, or surviving spouse, dies, any existing trusts that had been established for the benefit of the settlors terminate. Distributions are then made to the remainder beneficiaries (often to the settlor(s)’s family). Some, or all, of these distributions may be held in further trusts within the original trust document. Such trusts, for example, might include a minor’s trust for dependent minors; a special needs trusts for beneficiaries with special needs; and discretionary trusts for beneficiaries with creditors, marital problems or an inability to manage funds.
Having all these trusts within the same document reduces the legal costs associated with drafting the instrument. Nonetheless, when assets are transferred from one trust to another administration expenses are incurred. Appraisals and legal documents are involved in the process of transferring assets.
Sometimes having multiple trusts contained within one trust is not appropriate. If, for example, a married settlor wants to keep his or her substantial separate property assets discrete from those of his or her spouse, particularly in a second marriage, then a sole settlor trust contain that spouse’s separate property. Also, if several family members plan to contribute to a special needs trust for a person with disabilities, then a standalone special needs trust may be preferable. Moreover, a standalone special needs trust will be better suited to the trust’s particular purpose. Provisions that are either not relevant or not suitable to its sole purpose will be omitted.
Thus, the living trust, like an onion, can have multiple layers, each layer dealing with a separate phase within the settlor(s)’ estate plan. Consult a qualified estate planning and Lake County trust attorney to see what works best for your family’s circumstances.