Trusts are valuable tools for financial management and estate planning. Trusts come in numerous varieties and serve various purposes. Whether a spouse can override a trust is not a simple question because it depends on the circumstances. So, let's look at some of the variables and how each would influence the answer.
Trusts can be revocable (living) or irrevocable. A grantor creates a revocable trust during their lifetime in order to direct the distribution of their assets after their death. The designated recipients of the assets are the beneficiaries, and the grantor can manage the trust or delegate that management to a trustee. Whether the grantor manages the trust or names a trustee, the grantor can change the terms of a revocable trust as long as they are alive and competent.
In contrast, an irrevocable trust can only be changed with the beneficiary's agreement. For example, suppose you create an irrevocable trust that leaves specified assets to an heir. Later, while you are still living and competent, you decide to change the beneficiary to another person. The original beneficiary would need to agree to relinquish their inheritance for the change to be effective.
Why create an irrevocable trust?
The main incentive for creating an irrevocable trust is that the grantor can reduce taxes by placing assets in the trust, since the grantor is no longer the asset owner. The trust can still provide income to the grantor or designated beneficiaries during the grantor's lifetime, but the grantor does not have tax liability for the assets. Also, an irrevocable trust can streamline asset distribution following the grantor’s death.
What if the spouse is not the beneficiary?
If the spouse is not the trust beneficiary, they have no control over the distribution of the trust’s assets. However, trust grantors may not transfer community property to a trust (if the married couple lives in a community property state). The following are community property states:
- Arizona
- California
- Idaho
- Louisiana
- Nevada
- New Mexico
- Texas
- Washington
- Wisconsin
Community property would be excluded from the trust in these jurisdictions if the spouse is not the beneficiary. Community property includes income earned by either spouse during the marriage, property acquired by either spouse during the marriage, the portion of a retirement plan earned during the marriage, stock options granted, or capital gains made during the marriage, and gains in the value of a business funded with community property if the increase in value is due to the efforts of either spouse. In the remaining states that divide property according to the equitable distribution system, the court can decide what property belongs to each spouse.
There are exclusions to community property for assets acquired during the marriage by inheritance rather than the effort of one or both spouses. A spouse can place inherited property or funds in a trust for a beneficiary who is not the spouse. In this case, the spouse would not have any ability to override the trust.
In most cases, if one spouse creates a trust using separate property and names someone other than the spouse as the beneficiary, that designation is valid.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.
