Revocable living trusts are used to grant assets into an entity where the grantors keep control and use of the money during their lifetime. Upon death, the revocable designation changes to irrevocable, meaning the grantors cannot take the asset back out of the trust outside of the trust designations. If a married couple has a revocable living trust and one spouse dies, what happens in continent on the trust designations.
The revocable trust gives grantors control while living and upon death. In many family revocable trusts made when both husband and wife are living, each becomes a co-trustee. The trustees have the right to fund the trust with assets, use the assets and remove assets from the trust. The trust will designate what happens upon the death of one or both of the trustees. In some cases, the surviving spouse continues the trust as a revocable living trust. In other cases, the trust might move into an irrevocable trust, limiting the options of the surviving spouse.
Once a trust becomes irrevocable, the grantor is no longer able to remove assets. There may be limits to how the assets can be used as well. The reason for creating an irrevocable trust is to prevent changes after a grantor dies. Children cannot say that, "Mom really wanted me to have the house"; the trust designates what to do with each and every asset. In the case of a surviving spouse with children, the original revocable trust may move into an irrevocable trust to ensure children from a first marriage get their share of an inheritance. The irrevocable trust might also be put into play with a surviving spouse if the couple wants to preserve assets through estate tax planning.
In an AB trust, both husband and wife are grantors and trustees while living. Upon the death of one spouse, the revocable trust becomes irrevocable. Simply put, the deceased leaves his assets to an irrevocable trust instead of his wife. In most AB trusts, the surviving spouse is still allowed to use income from the trust to live off and utilize any property in the trust. The surviving spouse does not own those assets, though. This allows the estate tax exemption to be used upon the death of the first spouse and again used with the second.
Assume John and Jennifer are married and want to preserve their estate of $5 million. John has a child from is first wife and two with Jennifer. There is a 35 percent federal transfer tax owed on all estates over $3.5 million in 2011. Therefore, if John and Jennifer have a standard revocable trust where Jennifer assumes all assets upon John's death, everything remains in the estate and Jennifer could disinherit John's first child if she wanted to after his death. If the couple establishes an AB trust instead, the estate is preserved as is John's desire to leave an inheritance to his first child. Jennifer can use the assets as income during her life. John's half of the estate, $2.5 million, falls under the estate tax threshold. The same holds true for Jennifer's. The children get the assets upon Jennifer's death.