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Levy Zavet – What is a spousal trust for your will?

A spousal trust is an important aspect of the estate planning process that is often overlooked. Sometimes called a testamentary spousal trust, this important tool is generally included in your will in order to secure funds for your surviving spouse. It allows you to roll your assets directly into a trust for the benefit of your spouse, which shelters the funds from taxes and prevents the funds from being used for unintended purposes.

What is a spousal trust? 

Creating a spousal trust allows you to assign assets to your spouse while you are still alive in order to avoid probate and other expenses that your spouse would otherwise incur when you pass away.

The surviving spouse, sometimes called a beneficiary, will not own the assets in the trust but may use the assets to maintain his or her quality of life. For example, you may decide to include your house in your spousal trust, so your spouse may live in the house after you pass away. However, the surviving spouse may not sell the house. When your spouse passes away, another family member may be entitled to live in the house, based on the terms you establish for the trust, to make sure the asset stays within the family. 

Benefits of a spousal trust 

Establishing a spousal trust is one of the best ways to ensure your spouse benefits from your assets over the long-run, and it can help ensure that your assets are around to benefit your children for generations to come. 

  • Protect your family assets. Funds that are maintained in a trust are generally protected from claims of liability. For example, a spousal trust can help shield your assets from creditors and unexpected lawsuits.
  • Decide who will receive the funds. The beneficiary of the trust will be your spouse, but you can specify how your funds will be used once your spouse passes away. For example, you may decide that your funds should go to your children rather than to your surviving spouse’s new wife or husband.
  • Direct how the funds will be used.  For example, you can place restrictions such that your spouse can only use the funds to pay expenses necessary to maintain his or her quality of life in order to help preserve the assets for future generations. 
  • Protect your surviving spouse from financial abuse. Financial abuse can occur when someone tries to take advantage of another person financially. For example, a predatory stranger, less-than-honorable family member, or unethical lender may coerce your surviving spouse into entering a disadvantageous financial arrangement. A spousal trust will limit another person’s ability to obtain your assets through unethical means. 
  • Avoid unnecessary tax liability.  For example, if you jointly own a privately-held business with your spouse, a spousal trust will prevent your surviving spouse from having to pay a capital gains tax when you pass away. Additionally, spousal trusts are only responsible to pay taxes on its earnings each year. If your spouse already has significant income and acquiring your assets would substantially increase his or her tax liability when you pass away, diverting the funds to a trust will help protect your spouse from additional personal tax liability.

Establishing a spousal trust can be one of your most important tools in protecting your assets for your loved ones. However, in order for your spousal trust to be effective, you will need to make sure that it includes certain specific information, such as language regarding the spouse’s entitlement to the income from the trust, the appointment of a trustee, and restrictions on the distribution of benefits from the trust.

Contact us today to get started on your estate planning and establishment of a spousal trust to protect your family’s assets.