The First To Die Trust-Confirming the Gift Has Been Made
By: Randall A. Denha, J.D., LL.M.
Children whose parents are remarried may have concerns about whether their inheritance is at risk. They may fear that their father or mother could decide to include the new spouse in his or her will. Or the new spouse could persuade the parent to leave his or her estate to the new spouse’s kids to the detriment of the parent’s own family.
The creation of a ‘‘first-to-die trust’’ is a technique for alleviating these concerns. The parent (i.e. donor), can establish and fund an irrevocable trust created during their lifetime (i.e. inter-vivos trust) for the new spouse and protect his or her children at the same time, by giving the children a share of the trust when the first spouse dies, or in the alternative, the children could have some rights to income or principal, even before the first spouse’s death. Of course, this requires that the parent make an irrevocable gift of assets to the trust which the parent may need in the future. The trust could be set up so the donor could still have direct access to trust property during his or her lifetime, through loans and repurchase of assets from the trust. Indirect access would be available through distributions made to the new spouse.
While there is a reduced likelihood of incurring a federal estate tax for most couples due to increased exclusion amounts (currently $11.58 million per spouse), the first-to-die trust is timely in offering opportunities for the following:
- Reducing liability for both federal and any state estate tax;
- Basis planning with the donor’s assets;
- Using the remaining estate tax exemption of the donor’s first spouse; and
- Removing appreciation from the estate
The first-to-die trust is similar to another strategy sometimes recommended by estate planners: An individual creates a trust that provides his or her spouse with income and distributions of principal in the discretion of the trustees. When the spouse dies, whatever principal remains passes to the children of the individual who created the trust. The donor achieves several goals—he or she provides for family members, transfers wealth out of his or her estate, and creates tax savings. What makes the first-to-die trust different is that the donor’s children don’t have to wait for the spouse to die to benefit from the trust.
Who are good candidates for the plan? A husband or wife in a second marriage whose assets exceed the federal estate tax exemption amount, and who has assets suitable for transfer to an irrevocable trust. That means, for example, a spouse with a large number of retirement accounts may not be the ideal donor.
The donor can be reassured that putting his or her assets in trust doesn’t preclude access, either directly or indirectly. Loans to the donor, if needed, provide direct access. Because the donor is part of the marital couple, funds distributed to the spouse are indirectly available as well, when the spouse uses them for the benefit of both parties. And by directing a portion of remaining principal to his or her children on the death of the first spouse, the donor will know that, regardless of which spouse survives the other, assets won’t be completely exhausted and something will be left for his or her children. In effect, by relinquishing some control now, the donor can actually gain more control throughout his or her lifetime and after death.
