In Part I of this series, we discussed what happens to a joint living trust at the death of the first spouse. In this article, Part II of the series, we will take a look at what happens at the death of the survivor. This will depend on (1) whether there is a credit shelter trust (recall that this is often called the “Family Trust”) that will be created at the death of the first spouse, and (2) whether the surviving spouse exercised any power(s) of appointment over the Family Trust during their lifetime. We will address these differing scenarios in turn.
Scenario 1: The Power to Appoint (or Disappoint)
If the married couple’s estate planning was either a Disclaimer Trust or included a Fractional Funding Clause, a Family Trust was likely created at the death of the first spouse. Depending on the language in the joint living trust, the surviving Trustmaker may have had a power of appointment over the Family Trust, jokingly referred to by some estate planners as the “power of disappointment.” A power of appointment is the ability to dictate who will receive any remaining property in the Family Trust at the death of the survivor. That is to say, if the survivor has a power of appointment, they have the ability to change who will receive the remaining trust assets at their death, within the bounds of the terms of the original joint living trust.
This power can be broad, allowing the survivor to leave it to whomever they choose, or it can be limited, by agreement between the spouses under the terms of the original living trust. For example, a surviving spouse may have a limited power of appointment that allows them only to leave the remaining trust assets to any combination of the Trustmakers’ joint children. This would allow the survivor to disinherit one or more of their children, so long as at least one of the Trustmakers’ joint children was a beneficiary. Alternatively, the original trust may have included a slightly broader (but still limited) power of appointment allowing the surviving Trustmaker to leave the trust assets to any combination of the Trustmakers’ joint descendants at their death.
Typically, the surviving Trustmaker would exercise this power of appointment after the death of the first Trustmaker by executing an updated Will or a Restatement of their Survivor’s Trust. If the surviving spouse did exercise such a power of appointment over the assets in the Family Trust, then the assets pass according to the exercise of the power of appointment. This is likely different than the distribution in the original joint trust plan.
Alternatively, if the surviving Trustmaker never exercised the power of appointment over the Family Trust assets, the Family Trust assets pass according to the terms of the original joint living trust. It is important to note that the surviving Trustmaker could restate their Survivor’s Trust and change the distribution of those assets at their death while electing not to exercise a power of appointment over the Family Trust assets. At the surviving Trustmaker’s death, the Family Trust assets pass according to the original joint trust distribution pattern, while the Survivor’s Trust assets pass according to the terms of the Restated Survivor’s Trust.
Scenario 2: Survivor’s Choice
If there is no credit shelter trust because the original trust was a disclaimer trust, but no property was disclaimed, or because the original trust simply directed all proceeds to a survivor’s trust for the benefit of the survivor, the administration is much more streamlined. Essentially, all property passes into the Survivor’s Trust for the benefit of the surviving Trustmaker.
Just as in the last scenario, the surviving Trustmaker has complete discretion to restate their Survivor’s Trust, and change who will receive the property at their death. The difference is that this applies to all the property that was in the original joint trust. Therefore, the surviving Trustmaker may decide to disinherit the beneficiaries that were named in the original Trust. There is nothing to prevent this in the plan.
In sum, the best way to restrict a spouse’s ability to disinherit heirs is by executing a living trust that includes those restrictions. A plan that distributes all assets to a Survivor’s Trust, or even includes a disclaimer trust, does not result in such restriction. However, such restrictions do result in a much more complex administration, as you can see from the process outlined above. These are considerations to discuss with your attorney, who can provide guidance on the trade-offs of different estate planning options, as well as the implications of exercising one’s power of appointment.
If you have questions about exercising your power of appointment, or making changes to your trust, we encourage you to contact Generations paralegal, Alex Quast, who can get you scheduled to meet with the attorney on your file.