Steps to Establish a Spousal Protection Trust, i.e., Supplemental Needs Trust

Darol October 22, 2021

Steps to Establish a Spousal Protection Trust, i.e., Supplemental Needs Trust

The Spousal Protection Trust can be found in the deceased spouse’s Last Will and Testament. The Spousal Protection Trust must be established in a probate.

Probate is a court procedure that requires a filing fee and certain actions to be taken. In most cases, hiring an attorney to handle the probate is wise because he or she will know what steps to take to complete it.

PLEASE NOTE: The Spousal Protection Trust is only set up if the surviving spouse is ill. Thus, the Personal Representative is not the person who will be responsible for settling the estate of the deceased spouse and setting up the Spousal Protection Trust.

When the estate plan was signed, a person was designated as Personal Representatives of the estate in the Last Will and Testament.

If the surviving spouse is healthy, then read the directions in the Living Trust and Last Will and Testament. When this estate plan was established, it was thought that there was at least a possibility that the deceased spouse would have an estate over the taxable amount for either Washington State or Federal estate taxes. When the estate plan was signed, the amount was roughly two million for Washington State estate tax and five million for federal estate taxes.

Thus, it is very important that all assets are counted and the total gross estate is determined. If the gross estate is over two million, then determine whether you should fund a different kind of trust. This trust is called a “Credit Shelter Trust” but referred to as a “Spousal Support Trust.” The purpose of the trust is to preserve the deceased spouse’s estate tax credit by re-directing the deceased spouse’s estate to an irrevocable trust that does not count as the asset of the surviving spouse. If all goes well, the estate of both the deceased spouse and the surviving spouse is below the state and federal credit amounts.

To make this happen, however, the surviving spouse will need to “disclaim” the amount. You should check with my office or another attorney on the amount to disclaim and the steps to properly fund this Credit Shelter Trust. However, the idea of a disclaimer is to give the surviving spouse the ability to decide what he or she wants to do. Is the estate taxable? If it is, does the survivor want to decide to take all of the deceased spouse’s estate or designate all or a portion of it to redirect to a tax-saving trust. To do this, the survivor simply signs the disclaimer which means she is in essence saying she does not want the inheritance outright. The deceased spouse’s estate plan already has a provision in it to create this Credit Shelter Trust and, upon disclaimer, is funded. Voila!

Setting up a Credit Shelter or Spousal Protection Trust at a bank or financial institution is another matter. Each bank or financial institution is different and they all seem to have their own rules about these types of accounts.

List of items to bring to the financial instutition

The pages describing the Trust, including the formal name of the Trust, Grantors and Trustees

The notarized signature page with Grantor and Trustee signatures – in some states, there may be a separate page completed by the notary

Any amendments to the original Trust

Pages with Trustee powers and provisions related to incapacity or death of a Trustee

Page listing the beneficiaries who will receive the funds if the Grantor of the Trust passes away

Also include the following documents if anyone named as a Trustee or beneficiary is deceased:

A copy of the death certificate

For Testamentary Trusts, provide the cover page of the Will, any portions describing the Trust, signature page and notary page along with the probate court’s order appointing the Personal Representative and the “Letters Testamentary” that the Court issued. Letters Testamentary authorize the Personal Representative to act on behalf of the estate of the deceased spouse.

How to Decide the Next Step

This Plan is based upon the premise that long-term care costs can erode wealth unnecessarily. When the first spouse dies, there is an opportunity to protect the assets of the spouse who has just died from these costs. That opportunity is to fund a Spousal Protection Trust, also commonly referred to as a “Supplemental Needs Trust.” The purpose of the trust is to hold the assets of the deceased spouse so these assets are not subject to spend down or government recovery in the event the surviving spouse needs expensive care.

Documents Relevant to this Step

The following documents are necessary to implement this section:

Last Will and Testament
The Last Will and Testament of the deceased spouse. The original can be found in the box.

The Certificate of Trust
This document is a summary of the Trust and is presented to financial institutions or other parties to establish the trust without need of the original trust document. The Certification of Trust can be found in the box.

Living Trust and Addendums, if any

The Living Trust Agreement and any addendums if addendums were included. These documents are located in this section.

Funding Instructions

These instructions describe the steps to take to fund the Revocable Living Trust.

Identify the Decision Makers

The Plan is complex in certain ways because it is flexible. Depending on the situation at the time of the first death, the assets of the decedent will go in different possible directions. There is some complexity because different legal devices will govern how the assets are passed along. One possibility is that the surviving spouse needs long-term care and the Personal Representative of the estate of the deceased spouse will open a probate and establish a Spousal Protection Trust for the benefit of the surviving spouse.

If the surviving spouse is well, i.e., healthy and there is no likelihood of imminent medical costs that are unreimbursed, then the Last Will and Testament will sit in its box, the Personal Representative will have no role, and the assets of the deceased spouse will pass by two additional types of legal documents. The first is a community property agreement and the second is a living trust agreement. The decision maker in such a case will be the surviving spouse.

Please remember and let me emphasize, if the surviving spouse is in need of care and a Spousal Protection Trust will be funded, the surviving spouse is not allowed to be the Personal Representative. The Last Will and Testament says as much and the law is clear on this point.

There are actually two agreements. One is called “Agreement as to Disposition and Status of Property Upon Death of First Spouse” and the other is “Community Property Agreement.” Both of these agreements, under Washington Law, allow the assets of the deceased spouse to vest in the name of the well spouse. However, these constitute legally binding contracts that require the surviving spouse to then transfer assets of the deceased spouse to a Living Trust and to follow the rules laid out for the management of the assets. Each case is different and so it is important to understand the Plan as it exists within the Living Trust. For example, if the estate of the couple is large, the Living Trust may provide the option or the requirement to fund an irrevocable tax savings trust.

In summary, the decision makers vary depending upon the facts at the first death. In many cases, the Personal Representative, usually a child, has been helping for a long time prior and he or she knows the situation of the parents well. In such a case, the choices are easier. However, in any case, just identify and contact the Personal Representative first if there is a question as to the status of the surviving spouse. This brings me to the next issue.

Determine Status of Surviving Spouse

Is the surviving spouse currently receiving home care or resides in a care community such as an Assisted Living Facility, Adult Family Home or Nursing Home? If so, then it is highly advisable to choose the Spousal Protection Trust option. Under these circumstances, the surviving spouse is already spending money on care and, likely it will only get worse.

Has surviving spouse been determined to be disabled by Social Security Administration? Many disabled people do not incur high medical expenses. However, make a realistic determination of the possibility of care costs in the future. Factor in the surviving spouse’s age and overall medical picture. If he or she is having difficulty and needs assistance with performing common activities of daily living, then it is likely care will soon be necessary and funding a spousal protection trust is advisable.

Even if the surviving spouse is independent and doing well, are there sufficient assets owned by the surviving spouse to make funding a Spousal Protection Trust a smart move? Often, the surviving spouse is over the age of eighty (80). There is no debt in the estate and the surviving spouse has very little recurring expenses. If a Spousal Protection Trust was funded, trust assets are available to pay for the surviving spouse’s expenses to the extent that these payments do not jeopardize existing or future long-term care benefits. If the assets owned by the surviving spouse are adequate to pay his or her reasonable expenses, then it is often prudent to fund a Spousal Protection Trust because the assets held by the Trust constitute a nest egg, i.e., a protected pot of money that is not considered the assets of the surviving spouse and, therefore, protected from creditors and Medicaid spend down rules.

Categories: Free Article

Darol

Attorney. Podcster.

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A swarm is what geologists call the grouping of earthquakes that have hit Guanica, Puerto Rico. Swarm is as good a name as any to describe over a thousand earthquakes in such a small area, many above 5.0 and at least two above 6.0. While there has not been a “big one”, a single massive quake to bring sudden and dramatic devastation, the constant month-long shaking of the homes, road, stores and spirits of Guanica has been even more cruel if not as renowned.

This tragedy is also headquartered in the one place on earth I intended to call home. I had spent impactful moments there. Playa Santa, just outside of Guanica, was the location of a lovely apartment with a view of the Caribbean. The landlord had my deposit in escrow and only my signature on a lease awaited. I had gone to a remote beach every other day to clean the plastic from it. I yelled at Playa Santan roosters that just had to wake at the playful satanic hour of 4 am. A lot had happened in such a short-time in Guanica and Playa Santa, the launch of this very podcast as one example, that I just had to tell the story of my time there and the friends who still struggle there.

As if on cue, however, the episode does succeed in laying out an investment idea. Really, this idea is an investment method. I first heard of it from a client about a year ago. I keep this method tucked away until the very last moments of the podcast.

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The 2020 Secure Act and the Three Money Models To Help You Work Around It

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On December 20, 2019, President Trump signed the Setting Every Community Up for Retirement Enhancement Act (SECURE Act). The SECURE Act, which is effective January 1, 2020. The SECURE Act has several positive changes: It increases the required beginning date (RBD) for required minimum distributions (RMDs) from your individual retirement accounts from 70 ½ to 72 years of age, and it eliminates the age restriction for contributions to qualified retirement accounts. However, one provision of SECURE nullifies all of the benefits of the act and is a threat to your family’s generational wealth. That is a bold statement, I realize. I stand by it.

The SECURE Act does provide a few exceptions to this new mandatory ten-year withdrawal rule: spouses, beneficiaries who are not more than ten years younger than the account owner, the account owner’s children who have not reached the “age of majority,” disabled individuals, and chronically ill individuals. However, proper analysis of your estate planning goals and planning for your intended beneficiaries’ circumstances are imperative to ensure your goals are accomplished and your beneficiaries are properly planned for.

Most people do not care enough to spend time let alone money on taking specific actions to adjust their plan, if they have one, to account for the changes brought to us courtesy of SECURE. Perhaps, there is nothing wrong with this attitude. If you view SECURE from the perspective of the government, it makes sense. Too much money is being protected for the benefit of families and not taxed. The government and even the economy is better off to get that money back into circulation.

However, I doubt that people decide to pay unnecessary taxes, fees and stand idly by as wealth is lost because they are on the government’s side. During most of my career, I thought this attitude, that action should not be taken to avoid a financial loss, was just a mental hiccup, a cognitive bias that prevents some people from making correct decisions about wealth. However, as I have grown in my profession, I now see that it is more related to one, of three, philosophies about wealth. Unfortunately, the attitude that is passive about protecting wealth is the traditional and, therefore, prevalent model. The reasons it is traditional is all about human longevity. Throughout all of human history, humans have lived short lives. In the Middle Ages, when probate and trust law invented, men lived, on average, to be just twenty-five years. That average age was not doubled until the early 1900s, over a thousand years later. However, in the last century, the average life expectancy of an American male has almost doubled again. Biologically, there are more opportunities and different challenges than the current perspective of the Law even realizes.

The law is reactive, not proactive. As such, the traditional model has only sought to pass wealth from an asset owner to the next generation because the asset owner would live a short life as would the next generation. Life has been so difficult in terms of survival, the Law has simply left it at that. As such,

There are three models in planning, the traditional model is estate planning and views life and, therefore, wealth, as short. The other two models do not. I will refer to these models often and you should always think in their terms because the model you choose will require actions specific to that planning model. If you view the purpose of your money as a simple, outright transfer to the next generation, then estate planning is your swim lane. SECURE Act is not a threat because the estate planning model is not focused on the protection of wealth beyond just your lifetime. However, if you view wealth as the means by which you plan to empower your family for more than your life plus ten years, then one of the two other models are applicable to you.

THE THREE MODELS OF PLANNING

Estate Planning

The objective of estate planning is estate transfer. The word “estate” is a legal term that refers only to the assets once owned by a now deceased person. The Law is reactive, not proactive. Therefore, traditional estate planning limits its objective to the transfer of assets of a person to either a spouse or the next generation in a limited way.

Asset Protection

The objective of asset protection is different. Asset protection, as I define it, includes all of estate planning but has the focus is on the protection of assets while the assert owner, his or her spouse are still alive. The trigger event for estate planning is the death of the asset owner. The trigger event of asset protection is now!

Generational Family Wealth Planning

The objective of family wealth is to strengthen a family around a set of core values and a vision for the future. The assets of a successful family finances the family using all of the tools of estate planning and asset protection but the time horizon is seven generations. There is an entire course dedicated to the devices you used to this model.

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