Trusts Used to Protect Children from Earlier Marriages

by KYW's Salil Gutt

Trusts now play a very different role in estate planning. The primary use of trusts was to reduce federal estate taxes. It still is but with the ability to pass along $2 million in assets to heirs ($4 million per couple) only the super rich use that mechanism.

The 99% of Americans unaffected tend to use trusts as a means of protecting the inheritance of children from earlier marriages.

A will typically reads that spouses give each other the money when the first dies and then, on the subsequent death of the surviving spouse, the children share equally. The question is whose children? This triggers the need for a trust.

A type of trust that accomplishes this is called a residuary or a bypass trust. Under the terms of such a trust, the surviving spouse is entitled to about 4% of the value of the trust's principal every year but on death, the remaining money is divided in a manner specified by the person who created the trust.

One additional item. Once such a trust is activated after death the distribution provisions cannot be changed.