Simona Ondrejkova, CFP

Apr 29, 2024

Print Share

Survivor’s Trusts: Everything You Need to Know

Of the many different types of trusts out there, some are designed specifically to help married couples transfer their assets according to the wishes and needs of each individual within the marriage. These trusts can be structured to provide for the surviving spouse while also being mindful of estate tax considerations for the surviving spouse and future beneficiaries.

A survivor’s trust is an estate planning tool used by married couples to ensure that after one spouse passes away, the surviving spouse will have access to a portion of the assets to provide for their living needs. There are several benefits and considerations to keep in mind when using a survivor’s trust that we’ll outline here.

What is a survivor’s trust?

One of the most common estate planning strategies used by married couples to manage and preserve their wealth is a joint revocable trust. A joint revocable trust allows two spouses to combine and administer their assets together while they are both alive. Upon the death of the first spouse, the trust can then be divided into sub-trusts. One of these sub-trust options is the survivor’s trust.

For a survivor’s trust to exist, there must have first been a combined trust that is split off for the survivor’s benefit after the death of one of the trust settlors. The combined trust is usually a revocable trust in which the spouses hold the assets within the trust jointly. The survivor’s trust is then used to partition off a portion of the joint trust specifically for the use and control of the surviving spouse, while the remaining assets that may have been owned specifically by the decedent are typically placed in another type of trust – often a bypass trust.

The benefits and drawbacks of a survivor’s trust

Like other trusts, a survivor’s trust allows individuals to pass on wealth without the transfer being subject to the public, and potentially lengthy, process of probate. The benefit of using a survivor’s trust as part of a marital estate planning strategy is that it gives the surviving spouse the ability to access and control the assets within that trust without restriction. The survivor’s trust is revocable, which means that the surviving spouse has the ability to change or terminate the trust as needed.

The advantage of creating sub-trusts such as a survivor’s trust and a decedent’s trust is that it gives each spouse more flexibility as to how to pass on their portion of the assets in the joint trust based on their unique wishes and needs. 

The downside of using a survivor’s trust, however, is that it doesn’t completely shelter the assets of the couple from estate taxes. This is because when the surviving spouse dies, any assets left in the survivor’s trust are included in the surviving spouse’s taxable estate. If the value of their taxable estate is over their estate tax exemption, they may face estate taxes. 

Next, we’ll look at exactly how this works so you can consider how to help clients minimize estate taxes effectively using estate tax strategies that may work in parallel to the survivor’s trust.

Estate tax implications of survivors’ trusts

The transfer of assets from an individual to a beneficiary other than a spouse can have significant estate tax implications if that individual’s wealth exceeds the estate and gift tax exemption. Currently, this exemption is $13.61 million for individuals and $27.22 million for married couples, but this exemption is scheduled to drop significantly at the end of 2025. 

The US tax code, however, includes an unlimited marital deduction for married couples assuming they are U.S. citizens, which allows spouses to transfer assets to the surviving spouse estate tax-free. 

Assets moved into a survivor’s trust for the surviving spouse are generally not subject to estate taxes at first death. Rather, if the survivor’s trust is funded with half of the joint trust assets, those assets are considered part of the surviving spouse’s estate. Those assets don’t receive the unlimited marital deduction, but they won’t be taxed until the surviving spouse dies. 

If more than half of the joint trust assets fund the survivor’s trust, the other half would be considered a spousal gift and would fall within the marital deduction. 

There are estate tax planning strategies that can be used to reduce or potentially eliminate estate taxes upon the death of the second spouse. This includes taking advantage of the portability election to transfer any unused estate tax exemption left from the deceased spouse (called the deceased spousal unused exemption or DSUE) to the surviving spouse. Marital trust planning is often designed with portability in mind so that, at first death, the assets funding the marital trust are covered with the unlimited marital deduction and portability is elected so that the surviving spouse can take advantage of the deceased spouse’s unused exemption.

Marital trust vs survivors trust

One of the things that can be confusing when trying to help married clients decide on which types of trusts to set up is the distinction between marital trusts and survivor’s trusts. The major difference between the two is that a marital trust is irrevocable while a survivor’s trust is revocable.

The marital trust is designed with the idea of taking advantage of the unlimited marital deduction by ensuring that only the surviving spouse is able to receive distributions from the trust. Upon the surviving spouse’s death, the marital trust will then pass onto the other beneficiaries named in the trust and be subject to estate tax based on the remaining value in the trust and the remaining exemption of the second-to-die spouse.

The survivor’s trust, on the other hand, is generally a revocable trust that can be changed by the surviving spouse. For tax purposes, this means that it’s included in the estate of the surviving spouse when the surviving spouse passes away.

Using a survivor’s trust with a bypass trust

Survivor’s trusts are often used along with other sub-trusts that are designed to hold the assets of the deceased spouse. This can include the bypass trust which is irrevocable so that any wishes set forth by the deceased spouse when creating the trust cannot later be changed by the surviving spouse after the first spouse’s death. This can be beneficial, for example, in the case of a couple that has children from a prior marriage.

For purposes of minimizing taxes, the bypass trust is often funded with an amount equal to the deceased spouse’s exemption. The remaining assets are then transferred to the surviving spouse through a survivor’s trust. This allows any assets in the bypass trust to grow and pass onto future beneficiaries without being subject to estate tax upon the death of the second spouse and without needing to make a portability election when the first spouse dies.  

How to set up a survivor’s trust

Setting up a survivor’s trust starts with creating a joint revocable trust. This can be done with the help of an estate planning attorney or by using specialized estate planning software. 

In drafting the joint trust, the spouses will work together to outline the terms of the trust, name the trustee, and select the beneficiaries. They can then specify that a survivor’s trust be created when the first spouse passes away. In this process, they can determine what portion of the assets in the joint revocable trust will be placed in the survivor’s trust and which assets will be placed in another type of trust such as a bypass trust or marital trust.

Should your clients consider establishing a survivor’s trust?

For married clients who have a joint revocable trust or are considering creating one, it may be helpful to discuss the option of adding a survivor’s trust to their estate planning strategy as a sub-trust to be created after the death of either spouse.

Want to make the estate planning conversation more simple and streamlined for your clients? Consider using an estate planning software like Vanilla to help clients visualize the flow of their assets and potential estate tax implications after the death of one or both spouses. Our estate planning checklist can help you find the right questions to ask as you help clients select the best estate planning strategies for their needs.