What is a Sweetheart Trust?
As you and your estate planning attorney are discussing the wide variety of options available to you, he will most likely discuss a variety of revocable living trusts. If you are married, one he is likely to mention is a structure known as a “Sweetheart Trust.” Here's an explanation of that concept.
First of all, the Sweetheart Trust grants a significant level of control and discretion to the surviving spouse when the other spouse passes away. While both spouses are alive and competent, either one of them is able to revoke their share of the trust. Also, at any time, the terms of the trust can be modified, as long as both spouses consent.
It's called a Sweetheart Trust because it is essentially an unconditional gift. When the first spouse dies, all assets remain in the same revocable trust for the surviving spouse's lifetime. The surviving spouse has complete control of every aspect of the trust. They can modify the terms of the trust, add or remove beneficiaries, or even terminate the trust. To enter into this, you have to have complete trust in your spouse.
A great many couples find the Sweetheart Trust appealing because its structure is fairly simple and easy to understand, while functioning as an excellent method for avoiding probate. Because all assets in the revocable trust remain there after the first spouse's death, administration of a Sweetheart Trust is generally extremely easy and far cheaper. There is no red tape when it comes to dividing a Sweetheart Trust, and it does not require separate income tax returns. And since the surviving spouse complete discretion over managing trust assets, it is much like they just inherited the property outright. If that is your aim, this is a great way to manage that.
Recent changes in estate tax law has made the Sweetheart Trust more popular lately. For example, the unified credit amount is well over $5 million. That is the amount that can be passed to another person tax-free. Because 99 percent of people will not have to pay taxes on their estate, there is little need for a complicated structure. Also, the concept of "portability“ has been introduced, meaning a married couple can leave twice the unified credit, which is nearly $11 million to their heirs without incurring an estate tax.
Of course, as is the case with all such instruments, a Sweetheart Trust is not right for everyone. While it's a fantastic way to avoid probate, it's not perfect. In a blended family situation, for example, such a structure may not be ideal because the surviving spouse has total control, and would have the option of cutting the decedent's children out of the picture and favoring their children instead. Likewise, if the surviving spouse was to remarry, they may decide to leave more to their new spouse than was intended.
Always discuss all options available, and consider all aspects of any Trust structure carefully. Weigh the pros and cons of all trust structures an decide which one is best for you. Sweetheart Trusts are neither all good or all bad. Couples need to understand the up side and the down side of giving the surviving spouse so much control, and decide accordingly.