Revocable Joint Trust for Married Couple
(Survivor's Trust, Power of Appointment Trust, and Bypass Trust) (Three-Way Split on Death of First Settlor) (CA)
Summary
This template is a marital deduction formula trust for joint settlors in California, which creates a survivor's trust, power of appointment trust, and bypass trust (or three-way split) on the death of the first settlor. This template includes practical guidance, drafting notes, alternate clauses, and optional clauses. This revocable inter vivos trust is designed for use by joint settlors who are married, have children, want to create a trust for themselves for life and, on the death of the first spouse, to divide the trust assets into a survivor's trust, marital deduction trust, and bypass trust in a manner that will give the surviving settlor maximum control over trust assets during his or her lifetime, while concurrently (1) making use of the trust form to provide financial management of the trust assets, and (2) taking advantage of the marital deduction and the applicable credit amount against federal estate and gift taxes to eliminate death taxes in the estate of the first settlor to die and reduce overall death tax liability in the estates of both settlors. It is assumed that the combined estates of the settlors are large enough to enable them to benefit from this type of planning. This trust is similar to Revocable Joint Trust for Married Couple (Survivor's Trust and Bypass Trust) (Two-Way Split on Death of First Settlor) (CA), except that it makes a three-way division of the trust estate on the death of the first settlor, whereas Revocable Joint Trust for Married Couple (Survivor's Trust and Bypass Trust) (Two-Way Split on Death of First Settlor) (CA) makes a two-way division of the trust estate at that time. On the death of the first settlor, one or more special gifts of money may be made from the trust. Under the provisions in this template, these special gifts will be made only if a specific settlor is the first to die; however, other special gift arrangements may be substituted. The balance of the trust estate is divided into a survivor's share, a marital deduction share, and a nonmarital share. This three-way split allows each of the three shares to be accorded different treatment. For an example of a two-way split in which the survivor's share and the marital deduction share receive identical treatment, see Revocable Joint Trust for Married Couple (Survivor's Trust and Bypass Trust) (Two-Way Split on Death of First Settlor) (CA).Under this trust, the settlors have the right, during their joint lifetimes, to as much of the income and principal of the trust as each of them may request from the community property in the trust, or either individual settlor requests from his or her own separate or quasi-community property trust assets. The survivor's share is placed in a survivor's trust that remains fully revocable by the surviving settlor, and as to which the surviving settlor retains broad powers to receive principal and income. The surviving settlor is given a general power of appointment over the survivor's trust. In default of exercise of the power, the assets of the survivor's trust pass to the bypass trust and are divided into separate shares according to the terms of the bypass trust. The ramifications of this default provision in the event the surviving settlor remarries and has additional children should be considered carefully, as discussed in the Drafting Notes. The marital deduction share and the nonmarital share are funded in accordance with a pecuniary marital deduction formula. Other funding formulas may be substituted if desired. The marital deduction share is placed in a "lifetime income/power of appointment" trust that is irrevocable after the death of the first settlor. (The power of appointment trust may be made revocable by the surviving settlor if desired. Alternately, the marital deduction share and the survivor's share may be combined into a single survivor's trust that qualifies for the marital deduction and remains fully revocable by the surviving spouse—see Revocable Joint Trust for Married Couple (Survivor's Trust and Bypass Trust) (Two-Way Split on Death of First Settlor) (CA).) The surviving settlor receives all the income from this power of appointment trust for life. The trustee is also required to pay the surviving settlor as much of the trust principal as is necessary to maintain the surviving settlor in accordance with a standard specified by the trust drafter. These powers may be expanded, if desired, to give the surviving settlor greater powers over the principal of the power of appointment trust. To grant the surviving settlor the broadest possible powers, he or she may be granted an unlimited right to withdraw trust principal—in effect, this would amount to a power to revoke the trust by removing all its assets. For a trust granting the surviving settlor these broad powers over the assets in the marital deduction share (and combining the survivor's share and the marital deduction share into a single survivor's trust, thereby resulting in creation of two rather than three trusts after the first spouse's death), see Revocable Joint Trust for Married Couple (Survivor's Trust and Bypass Trust) (Two-Way Split on Death of First Settlor) (CA). However, not all clients will be comfortable with granting the surviving settlor such broad powers over the trust assets, and for those clients the power to make distributions may simply be left, as in this trust, in the hands of the trustee. On the death of the surviving settlor, the balance of the power of appointment trust passes to the person or persons designated by the surviving settlor in his or her will or, if the surviving settlor does not exercise his or her power of appointment, to the bypass trust discussed below. The nonmarital share of the deceased settlor's assets is placed in a bypass trust. To achieve the desired tax treatment, the bypass trust must be irrevocable after the death of the first settlor. The terms of the bypass trust are designed to allow the surviving settlor as much flexibility and control over the trust assets as possible without causing the assets to be included in the surviving settlor's estate. The surviving settlor receives all the trust income, plus as much of the principal of the bypass trust as is necessary to support him or her in accordance with an ascertainable standard. By selecting the appropriate alternate provisions, the trust drafter may make the children income beneficiaries of the bypass trust instead of, or in addition to, the surviving settlor. On the death of the surviving settlor, the bypass trust (including any assets of the power of appointment trust not effectively appointed by the spouse) is divided into shares for each of the settlors' children. The share of any child who has reached a specified age (such as 30) is distributed outright, while the share of any child who has not reached the stated age is retained in a separate trust until the child reaches that age. The share of any deceased child is given outright to the issue of that child if those issue have reached a specified age (such as 30) or held in trust for younger issue until they reach that age. (The latter provision creates a remote possibility of a violation of the rule against perpetuities, but under the current "wait and see" rule and the perpetuities savings clause in this instrument, there is no chance of a violation that could disrupt the estate plan.) In this template, the terms of any trust created for issue of a deceased child will be identical to the terms of the trusts for children. This saves some space by permitting the terms of the trusts for children and any trusts for issue to be set out in a single set of distribution provisions. Some drafters may prefer to treat issue differently, such as by specifying a different age or ages for distribution. When the drafter wants to treat issue differently from children, two separate sets of distribution provisions should be included; one for trusts for issue and one for trusts for children. In this template, if the deceased child has no issue, his or her share is divided among the other children and issue of the settlors. A disclaimer trust is also included in case it becomes advantageous for the surviving settlor to disclaim any portion of the property he or she would otherwise receive under the trust. This trust is designed to give the surviving settlor a high degree of control over the parties' assets after the first settlor's death, consistent with use of a marital deduction trust and bypass trust. For an example of a trust giving the spouse an even greater degree of control over the assets in the marital deduction share, see Revocable Joint Trust for Married Couple (Survivor's Trust and Bypass Trust) (Two-Way Split on Death of First Settlor) (CA). It is assumed that the surviving settlor will continue as trustee of all the trusts created by this will, including the bypass trust, following the first settlor's death. However, when the surviving settlor is given maximum use of the bypass trust assets, and is also trustee of the bypass trust, the income and estate tax consequences must be weighed carefully. These consequences are outlined in the Drafting Notes to Revocable Trust for Married Individual (Power of Appointment, Bypass, Disclaimer Trusts) (CA), which discuss provisions substantially identical to those contained in the bypass trust in this template in the context of a one-settlor trust. Those notes should be reviewed, and the tax consequences carefully evaluated, before modifying the provisions of the bypass trust in this template. If the surviving settlor's powers over the marital deduction trust assets are to be significantly more restricted than those included in this template, a QTIP trust should be used instead of a power of appointment trust. See the Revocable Joint Trust for Married Couple with Children from Previous Marriages (Survivor's Trust, QTIP Trust, and Bypass Trust) (CA) for an example of a QTIP trust created by two settlors. In fact, most estate planners prefer to use QTIP trusts whenever possible (consistent with the wishes and goals of the client) due to the additional postmortem planning flexibility offered by the QTIP trust. For additional discussion, see the Drafting Notes to the Revocable Joint Trust for Married Couple with Children from Previous Marriages (Survivor's Trust, QTIP Trust, and Bypass Trust) (CA).. For illustrative purposes, it is assumed that the number of children of the settlors may increase or decrease between the date the trust is executed and the date of the first settlor's death. It is further assumed that all the settlors' children are children of their current marriage. The attorney should be aware, and should specifically caution the clients, regarding the possibility that the surviving settlor may remarry and have additional children after the death of the first settlor. In that situation, if the remainder provisions of the bypass trust require distribution to the children of either settlor, there is a possibility that a person who is not a child of the deceased settlor may end up taking a share of the deceased settlor's part of the estate. On the other hand, if the remainder provisions of the bypass trust are limited to children of the deceased settlor, or to children whose parents are both settlors, the default provision of the survivor's trust (which pours over the assets of the survivor's trust into the bypass trust if the surviving settlor fails to exercise his or her power of appointment over the assets of the survivor's trust), if it becomes operative, may deprive an afterborn child of the surviving settlor of any share of the estate. The solution to this problem may vary from one case to the next, depending on the circumstances and feelings of the clients. One effective solution may be to make the remainder provisions of the bypass trust (which divide the assets of that trust into separate trusts for the children) applicable only to children whose parents are both settlors, and advise the clients (1) of the importance of exercising the power of appointment over the survivor's trust and (2) that in the event the surviving settlor remarries and has additional children by the subsequent marriage, he or she should exercise his or her power to amend the default provision of the survivor's trust to take those children into account. If the settlors have children from previous marriages, the circumstances may argue even more strongly in favor of the use of a QTIP trust. For a two-settlor QTIP trust illustrating a drafting approach when the parties have children from previous marriages, see Revocable Joint Trust for Married Couple with Children from Previous Marriages (Survivor's Trust, QTIP Trust, and Bypass Trust) (CA).It is assumed that the settlors will be co-trustees during their joint lifetimes. Nevertheless, the trust contains a provision permitting the settlors to direct the trustee to make trust investments. This provision is included in case, at some later date, the settlors no longer feel fully capable of handling their own affairs and appoint another trustee as permitted by the trust. This trust uses the trust declaration format. The trust agreement format may be used if desired. This template assumes that both settlors are United States citizens. If either settlor is not a United States citizen, the optional provision establishing a Qualified Domestic Trust (QDT) should be added to this template. For a full listing of key content related to estate plans for married or partnered people in California, see Estate Plan for Individual with Spouse or Partner Resource Kit (CA). For more information on revocable trusts, see Characteristics and Uses of Trusts (CA), Requirements and Restrictions on Trust Purposes and Administration (CA), and Revocation, Amendment, and Termination of Trusts (CA).