Can a trust created by two people be changed by the survivor after one of the grantors dies? It depends. Joint trusts, which are trusts created by two people who are usually spouses, can be permissive or restrictive of the behavior allowed by the surviving spouse after the first spouse dies.Our office uses the non-legal term “Sweetheart Trust” as shorthand to describe a joint trust that gives the surviving spouse the absolute discretion to change the terms of a joint trust after the death of the first spouse.
In contrast to a Sweetheart Trust, a restrictive trust contains terms that limit whether and how the surviving spouse can change the trust after the death of the first spouse. The restrictions are typically aimed at preventing the surviving spouse from changing the beneficiaries the two grantors have chosen together during their joint lifetimes. They can also be aimed at preventing future spouses from influencing the actions of the surviving spouse and at tax minimization. These restrictive types of trusts call for the creation of irrevocable subtrusts after the death of the first spouse whose terms cannot be changed by the surviving spouse.
In contrast to a Sweetheart Trust, a restrictive trust contains terms that limit whether and how the surviving spouse can change the trust after the death of the first spouse. The restrictions are typically aimed at preventing the surviving spouse from changing the beneficiaries the two grantors have chosen together during their joint lifetimes. They can also be aimed at preventing future spouses from influencing the actions of the surviving spouse and at tax minimization. These restrictive types of trusts call for the creation of irrevocable subtrusts after the death of the first spouse whose terms cannot be changed by the surviving spouse.
A couple might choose to create a Sweetheart Trust when their primary objective is the convenience of the surviving spouse and they do not have concerns about what would happen if the survivor decided to completely alter or revoke the estate plan. It has a simple structure that is easy to administer and provides maximum flexibility for the surviving spouse. It generally provides no creditor protection or tax planning for the surviving spouse and no protection from disinheritance for those who have been named to succeed the surviving spouse as beneficiary when the surviving spouse dies.
On the other hand, a restrictive trust calls for the creation of at least one irrevocable share whose ultimate beneficiaries cannot be changed by the surviving spouse. It may also call for the creation of subtrusts that shelter assets from future estate taxation while still allowing the surviving spouse access to that subtrust’s income or principal.
The most common restrictions included in restrictive trusts are ones that prevent the surviving spouse from later disinheriting the beneficiaries the two grantor spouses agreed on during their joint lifetimes or that govern how the remainder beneficiaries can use the assets after the surviving spouse dies. You may have heard these types of trusts referred to as AB or ABC trusts.
The most common restrictions included in restrictive trusts are ones that prevent the surviving spouse from later disinheriting the beneficiaries the two grantor spouses agreed on during their joint lifetimes or that govern how the remainder beneficiaries can use the assets after the surviving spouse dies. You may have heard these types of trusts referred to as AB or ABC trusts.
AB or ABC refers to the different subtrusts that must be created at the death of the first spouse. For example, subtrust A might hold the survivor’s share of the trust assets and be completely amendable by the surviving spouse while subtrust B holds the deceased spouse’s assets for the benefit of the surviving spouse during that surviving spouse’s remaining lifetime and is irrevocable to prevent the surviving spouse from changing who receives what is left in that trust upon the surviving spouse’s subsequent death. Sometimes a C subtrust is also created, usually to minimize the chances of assets being subject to estate tax when the surviving spouse dies.
Which type of joint trust is right for you depends largely on whether you expect to have a taxable estate and more commonly on your goals and priorities for the surviving spouse’s ease of administration and the protection of beneficiaries who will inherit after the death of the surviving spouse.