Why Completing the Trust Split is Important?

Due to the abundant interest in trust splits, we decided to continue the trust split theme and discuss the importance of doing a trust split after your spouse passes away to protect against estate taxes.

What is a Trust Split?

If your document contains a trust split at the first death, either in a Will or a Revocable Living Trust, there is work to be done when your spouse passes away.  A trust split causes your community estate to split into two portions where one portion is typically called the "Family Trust" and the other portion the "Marital Trust."  The Family Trust is an irrevocable Trust that the surviving spouse cannot change the beneficiary provision, while the Marital Trust belongs to the surviving spouse and can be modified or revoked by the survivor.  Typically, the funds in a Family Trust can be used to benefit the surviving spouse but only for maintenance, education, support, and health after the assets in the Marital Trust have been depleted.

How do you do a Trust Split?

If your documents call for a trust split, the typical steps to create it starts with obtaining an Employee Identification Number (EIN) from the IRS for the Family Trust. After the EIN has been obtained a document stating that the trust is being split is usually drafted that lists out which assets go to the Family Trust and which go to the Marital Trust.  Finally, assets are transferred into the Family Trust and financial accounts will be opened in the name of the Family Trust to hold any cash and investments. The Marital Trust will continue under the surviving spouse's Social Security Number. 

How Does a Trust Split Protect Against Estate Taxes?

If you and your spouse together own assets that exceed the Washington estate tax exemption (currently at $3 million) it is likely that your estate planning will call for a trust split.  To understand why, imagine that you and your spouse have a $5 million estate and your spouse passes away.  On your spouse's death one-half of the value of your estate, $2.5 million, is included in your spouse's estate as his or her interest in your community property.  If you inherit all of your spouse's property you now have an estate worth $5 million.  When you pass away your estate will end up paying $250,000.00 in estate taxes because your estate exceeds the $3 million estate tax exemption

A trust split solves this problem by passing your spouse's interest in the community estate into an irrevocable trust instead of to you.  A properly drafted irrevocable trust that is funded by your spouse's estate can shield those assets from the estate tax on your estate.  Thus, when you pass away only $2.5 million is included in your estate and no estate tax is owed because you are below the $3 million threshold.

The problem is, sometimes estate planning documents require a trust split but no one actually does the trust split.  In these cases it can create serious complications when the second spouse passes away and it can end up significantly increasing attorney fees and estate taxes.  For this reason it is important to have an attorney review your documents when your spouse passes away to see if steps need to be taken at that time.  If you have lost a spouse and have not reviewed your documents, the sooner you can get in to speak with an attorney to see if any steps need to be taken, the better.

Are there Protections if you do the Trust Split?

Yes. The Family Trust is a Testamentary Irrevocable Trust, which provides several valuable protections. Assets held within the Family Trust are shielded from the surviving spouse’s creditors and potential claims from future relationships arising from a second marriage. In addition, the trust offers protection from estate taxes and helps ensure that the interests of the beneficiaries of the first spouse that passed away are preserved.