Living Trust: California Surviving Spouse's Inheritance

When a husband and wife together establish a living trust, both are trustees. When one spouse dies, the surviving spouse usually becomes the "successor trustee." Occasionally, a child or children will also be named as successor trustees, to serve alongside the surviving spouse. The successor trustee(s) must then take all steps required by law to administer the trust, as explained in the Steps to Inherit a Living Trust section of this website.

For the first six months to one year after administration begins, the assets from the husband and wife's living trust are kept together in a single "administrative trust." This trust continues until all creditors have been paid, values or appraisals of all assets have been obtained, any required estate tax return has been filed, and various other legal steps are completed.

At that point, most living trusts are divided into two new trusts. (Occasionally, by the wording of the original trust, a third and irrevocable trust may also be created.) The assets from the original living trust are then allocated among the new trusts in the way that will provide the greatest income and estate tax benefits, which in turn will maximize the amounts passed on to the surviving spouse and/or other heirs. This allocation requires a complete and highly technical knowledge of tax and trust law.

One of the new trusts will be the surviving spouse's revocable living trust. The same rules apply to it as apply to all living trusts. The assets may be invested in any way the spouse chooses, and the trust itself is not required to file annual income tax returns. Rather, the the trust income is reported on the surviving spouse's income tax return.

However, the other new trust is generally an irrevocable trust holding the deceased spouse's separate property and up to one-half of the community property, up to the federal estate tax limit. The successor trustee must then see to it that the assets of this trust stay prudently invested, that complete records are maintained, and that an annual trust income tax return is filed. The successor trustee must also provide annual accountings to all trust beneficiaries, unless the successor trustee is also the sole beneficiary.

If the original living trust is not properly divided, or the assets are not astutely allocated, immediate tax benefits can be lost. Also, assets that would otherwise be completely exempt from federal estate tax can end up being included as part of the taxable estate of the surviving spouse, potentially causing significant financial losses to the children or other beneficiaries at a later time. For this reason, it is invaluable to have a skilled, experienced attorney, who is knowledgeable about tax law, administer the living trust when one spouse passes away.

Click links below for more living trust administration information:

Other Heirs of Living Trust

Steps to Inherit a Living Trust

How to Contact Us

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