The decision about separate or joint trusts is not as straightforward as you might think. Sometimes, there is an obvious need to keep things separate, according to the recent article “Joint Trusts or Separate Trusts: Advice for Married Couples” from Kiplinger. However, it is not always the case.
A revocable living trust is a popular way to pass assets to heirs. Assets titled in a revocable living trust don’t go through probate and information about the trust remains private. It is also a good way to plan for incapacity, avoid or reduce the likelihood of a death tax and make sure the right people inherit the trust.
There are advantages to Separate Trusts:
They offer better protection from creditors. When the first spouse dies, the deceased spouse’s trust becomes irrevocable, which makes it far more difficult for creditors to access, while the surviving spouse can still access funds.
If assets are going to non-spouse heirs, separate is better. If one spouse has children from a previous marriage and wants to provide for their spouse and their children, a qualified terminable interest property trust allows assets to be left for the surviving spouse, while the balance of funds are held in trust until the surviving spouse’s death. Then the funds are paid to the children from the previous marriage.
Reducing or eliminating the death tax with separate trusts. Unless one spouse has an estate over $1 million for Massachusetts estate tax purposes, they do not have to worry about state estate taxes. While the federal estate tax exemption level is much higher (i.e., $23.16 million in 2020 and $23.4 million in 2021 for a couple), there are still a dozen states, including the District of Columbia and Massachusetts, with state estate taxes and half-dozen states with inheritance taxes. These estate tax exemptions are considerably lower than the federal exemption, and heirs could get stuck with the bill. Separate trusts as part of a credit shelter trust would let the couple double their estate tax exemption.
When is a Joint Trust Better?
If there are no creditor issues, both spouses want all assets to go to the surviving spouse and state estate tax and/or inheritance taxes aren’t an issue, then a joint trust could work better because:
Joint trusts are easier to fund and maintain. There is no worrying about having to equalize the trusts, or consider which one should be funded first, etc. Sometimes, however, determining what assets should be funding in each, separate trust at the time the trust are created is easier for a trust administration point of view at the time of the first-to-die spouse’s death.
There is also less work at tax time for income tax purposes. The joint trust doesn’t become irrevocable until both spouses have passed. Therefore, there is no need to file an extra trust income tax return. Because there is no requirement to file a separate income tax return for a joint trust while the surviving spouse is still living, income earned is not subject to the higher trust tax brackets.
Some believe that access to trust assets is more plenary in a joint trust than a separate trust. However, where a couple has created separate trusts, after the death of one of the spouses, the surviving spouse is the trustee to his or her own individual trust, and the deceased trust and subtrusts created after death to minimize estate taxes. The only limitation on the surviving spouse in the separate trust scenario, is where the deceased spouse limited his or her spouse’s to the marital subtrust (that is, the trust that holds excess assets over the exemption level) to income. Most trust, however, are written to provide the surviving spouse with access to both principal and income from this trust, with a mandatory withdrawal of income on a quarterly basis. Other limitations that may affect the surviving spouse’s access to the deceased spouse’s trust may result from optional language that was included at the time the trust was created to require the surviving spouse to use his or her own assets prior to tapping the assets in the deceased spouse’s trust and that includes a limited testatementary power of appointment over trust assets to the descendant’s of the deceased spouse. This latter design element may have been included where there is a blended family and the spouse(s) have children from a prior marriage or relationship.
Your estate planning attorney will be able to help you determine which is best for your situation. This is a complex topic, and this is just a brief introduction.
Reference: Kiplinger (Nov. 20, 2020) “Joint Trusts or Separate Trusts: Advice for Married Couples”