Restricting The Surviving Spouse: The Implications

If Preserving Testamentary Intent Is A High Priority Consider The AC Approach:
Some of you do worry about what your spouse is going to do with your share after you are gone. You may be a “blended family” or have other valid reasons to be concerned about this issue (referred to as “preserving your testamentary intent”). This is where it gets tricky, because in making your choice, you have to ask yourself just how worried you are. That is because preserving your testamentary intent might be great in theory, but doing so requires you to impose many conditions, responsibilities, inflexibility, bookwork, accountings, tax filings, accountability and liability to others, reporting requirements, and other hassles on the surviving spouse for life. The legal community is often guilty of glossing over this, and as a result, many couples choose the ABC approach without truly grasping these repercussions. Making clients highly aware of the significant bookkeeping, irrevocability, and other requirements that the AC trusts impose on the surviving spouse is a major point of this write up. Once clearly understood, it in fact gives major pause for many to force these conditions on their spouse.

With an AC Trust All Assets of The Deceased Spouse Are Held In Irrevocable Trusts After The First Death: 
As a testamentary intent preserving tool, rather than giving any assets outright to the surviving spouse, the AC trust structure calls for all of the deceased spouse’s assets to be held in trust regardless of net worth. Leaving the deceased spouse’s assets in trust prevents the surviving spouse from changing the ultimate beneficiaries and puts definite limitations on the use of the assets by the surviving spouse. The C trust becomes irrevocable and non-amendable at the first spouse’s death and that means: 1) the surviving spouse is at minimum entitled to all income from the C trust and the C trust can also be written to allow the surviving spouse to also use principal if defined by an ascertainable standard and 2) The surviving spouse cannot change the beneficiaries who will ultimately inherit the balance of the C trusts (at the surviving spouse’s death). In legal circles this concept is called “preserving your testamentary intent”. This is the sometimes perceived good side of the AC trust but there are other issues you should consider before you decide that is the approach you want.

Responsibilities & Burdens of an AC Trust:
Some strong things to consider when contemplating an ABC trust are the fact that:

1) The C trust becomes irrevocable and non-amendable upon the first spouse’s death (meaning the surviving spouse cannot alter those trusts, or add, change, or remove beneficiaries or gifts from those trusts).  2)  The surviving spouse’s use of the principal in the C trust must be limited to an ascertainable standard.  3) The surviving spouse is almost always the successor and as such the surviving spouse is responsible and answerable to the future “inheritors” of the C trust for appropriately using the assets and at certain points must render accountings as well as provide a copy of the trust to the heirs and future beneficiaries.  4) The surviving spouse must properly allocate, title assets in, obtain tax ID numbers for, and maintain the C trust after the first spouse’s death. 5) During the surviving spouse’s entire remaining lifetime they must continue to accurately track and keep records of the assets and transactions of each trust and complete separate tax filings for the A & C trusts each year.

We Have Seen Children Make The Survivors Life Very Difficult & Expensive:
Using the AC trust terms as legal leverage, we have seen more than one case where the surviving spouse has been harassed and taken to court by their own children. Despite having essentially done nothing wrong these surviving spouses were forced by our courts and the legal standing that ABC trusts gave their children to spend countless thousands of dollars in legal fees and having to appear in court responding to demands for accountings or other matters. There is no time to fully tell these sad stories but just suffice it to say there was a great deal of regret having ever signed up for an ABC trust! Just so you know!

Choose What Makes You Comfortable and Suits Your Situation
On the surface, a married couple with a long marriage and 100% common children and community property don’t generally fit the profile of a couple who are worried about testamentary intent as much as a couple with a short marriage, blended family, separate property and different kids from different marriages. Yet we have couples with one marriage and common children who vehemently want the AC and couples with different children who in no way want to bind their spouse with the hassles of an AC, even knowing the survivor has the power to later disinherit their separate children. Again, this is a very individual choice and depends on your own worry, trust, value, and comfort levels. It is worth noting however, that if you have common children, most surviving spouses seem internally motivated to continue to leave their estate to their own children.

Profiles, Issues & General Guiding Principles For Deciding on an AC
You each must carefully weigh just how much preserving testamentary intent concerns you. If it is just a small concern you may want to think twice before you impose such requirements. If it is a large and genuine concern to you then these measures may well be justified and appropriate for your situation. This is an individual choice. In weighing whether you desire to structure your trust to guard against this issue, remember – never lose sight of the fact that you may be the spouse who was worried about this issue, only to be the one left behind with your own self-created quagmire. There is no right or wrong in this decision, just philosophies and varying approaches to these issues. In the end you should always choose together what makes you comfortable and suits your situation.

Surviving Spouses Retain Separate Property Rights Even Upon Re-Marriage
If a surviving spouse remarries you should be aware that there is no legal obligation to leave any property to the new spouse. It surprises many people to learn that by law, property brought into the marriage remains the sole and separate property of the surviving spouse. Stated again, property that you bring into a marriage does not automatically become community property. Though we advise a pre or post-nuptial agreement in such cases, even without one, any good family law attorney can instruct a surviving spouse how to properly track and manage such assets so they will remain entirely the separate property of the surviving spouse. Such a strategy will allow any spouse who remarries the continued unfettered and uncontested right to leave this property to their own children.

Potential Income Tax Disadvantages
A residence in the C trust does not qualify for the $250,000 capital gains exclusion for a residence.

The Temptation to Rule from the Grave:
Most of you have worked very hard for your assets and gained much wisdom and insight just as a result of living. This often gives rise to a natural temptation and inclination to “rule from the grave”. That is, to try to manage, direct, and control the use and consumption of assets, and to whatever degree, people’s lives and destinies – long after their dear departed souls have left this world. Lawyers, clients, and others differ in their opinions about this. There is no right or wrong in this regard, there is only a philosophy about it. We find attempts to manage and control things past death often causes more problems than they will solve. Further, you will eventually lose control no matter what you do – and any amount of time you are able to exercise it, usually a generation at best, will not even amount to a blink in the cosmic sense of things. Something to consider anyway!

In The End, Do What Makes You Comfortable
There is no right or wrong in this decision, just philosophies and attempts to address these issues on what is surely less than full information about the future. That is why in the end you should always choose together what makes you comfortable and suits your situation. Just be sure it is a choice made with your eyes open.