A comprehensive estate plan often includes the use of trusts. Married couples may require the power and flexibility of trusts to optimize the protection and reliability of their estate plans. The first thing to consider is whether each of you wants a Separate Trust, or if you want to create a Joint Trust to accomplish your goals.
There is no one-size-fits-all solution when it comes to estate planning. There are advantages and drawbacks to any decision you make. It’s important to get reliable, experienced guidance to make sure you understand how these trusts work and what they can offer you when it comes to protecting your legacy. Once you have a grasp on the workings of Joint and Separate Trusts, you can make better decisions for your future. The following can help you get a basic understanding of Joint and Separate Trusts to decide which you might prefer.
Before we get into the ins and outs of Joint Trust vs Separate Trust, we should first point out that the single most important part of creating any Trust is understanding the concept of revocable and irrevocable. Revocable Trusts can be changed, altered, modified or even dissolved at any time. Irrevocable Trusts, on the other hand, cannot be changed without great difficulty and therefore should be used with an abundance of caution and only in certain very specific circumstances.
For our discussion here, we’ll be assuming we are comparing Revocable Trusts. Let’s look at how each of the following Trust components would differ should they be in a Joint vs a Separate Trust.
- Asset Protection
- Tax Benefits
- During Couple’s Lifetime
- After Death of Spouses
- Pros and Cons
Protecting Your Assets
Asset protection is a common goal for many couples who create an Estate Plan. But whether you do a Separate or a Joint Trust can greatly change how much protection you are actually creating. In general, most experts agree that Separate Trusts can provide more asset protection.
- Joint Trust: Marital assets are all together in a single trust. This means there’s less asset protection, because if there’s ever a judgment over one of the spouses, all of the assets could end up being at risk.
- Separate Trust: Because Trusts are individual, assets inside one Trust can be better protected should one of the spouses take on any financial risks. It’s important to point out that there are many factors to how insulated assets may be. These can include whether or not there’s a prenuptial agreement, how assets are titled and even state law.
Tax Benefits
A key benefit to a well-designed Estate Plan may focus on attempting to minimize estate taxes. Most people’s estate will not be at risk for having to pay federal taxes (currently the individual threshold is $11.58 million before an estate tax would be due). But it’s still important to think about your estate in a logical and proactive manner when it comes to taxes. State taxes could also be a factor.
- Joint Trust: Assets and property in a Joint Trust can earn the same estate tax marital deduction as a Separate Trust would.
- Separate Trust: If you have a very large estate, a separate trust may be beneficial in offering tax relief. Remember that your estate would only be subject to federal estate tax if you are worth a lot of money…to the tune of $11.58 million per individual or $23.16 million per married couple…as of 2020.
During a Couple’s Lifetime
Different types of Trusts can be administered differently during your lifetime. This can be true when it comes to Joint Trusts as well as Separate Trusts, too.
- Joint Trust: Because all assets are inside one trust, sometimes Joint Trusts can make things simpler. While both spouses are living, each has equal control regarding the management of joint assets held in the Joint Trust.
- Separate Trust: Depending on how assets are titled, and if they are held jointly, setting up Separate Trusts may be a bit more complicated. Assets may first need to be separated in title so they can be put into individual Trusts. Because there are two Trusts, and each spouse owns his or her own, in most cases managing Separate Trusts during a couples’ lifetime can be a bit more complicated and more work. That said, it’s fairly common for each spouse to name the other as co-trustee to simplify the process and allow each to work on the others’ behalf.
Upon the Passing of Your Spouse
Joint and Separate Trusts operate differently when a spouse passes away. Trusts vary in the rights and duties they confer on the people involved. Joint Trusts and Separate Trusts treat surviving spouses differently.
Joint Trust: In the best-case scenario, couples will agree about how assets should be distributed after one of them passes. In some cases, upon the death of the first spouse, a Joint Trust may need to be separated into two Trusts, and assets may need to be divided.
- Separate Trust: With Separate Trusts, because there are two Trusts already, there often is much more flexibility and an easier process to navigate after the first spouse’s death. Perhaps the biggest difference here is that the surviving spouse would be unable to amend or revoke any portion of the deceased spouse’s Trust. Upon the first passing, their trust becomes irrevocable. This can protect the deceased spouse’s assets from going to anyone other than who they intended.
Benefits and Drawbacks
Choosing an estate plan involves matching your goals with the possible options. Understanding the benefits and drawbacks of your options can help you pick the plan that best meets your needs.
Separate Trusts Pros: Can be a wise option for couples who own separate property, either from previous marriages or relationships, or even from a family inheritance. They also might be beneficial if you have a prenuptial agreement that already dictates property and earnings should be separate from one another.
Separate Trusts Cons: Can be more expensive and administration can be more complicated. Community property state laws may conflict with the objectives of separate trusts.
Joint Trusts Pros: Might be a better choice if you want flexibility. Even in cases where individual separate property exists, with a Joint Trust, it could be very easy to transfer property to the Trust, even if you still want to name separate beneficiaries. In the event you ever revoke the Trust, the property would just automatically revert to the ownership status it originally was. Another benefit to a Joint Trust is post-death administration. There’s less work to be done upon the passing of the first spouse, and shared property can stay as it is without needing to be retitled.
Joint Trusts Cons: May not offer as much asset protection against judgments. Also in some instances, a Joint Trust may not be quite as easy to manage following the first spouse’s death. It also may not provide as much protection for beneficiaries in cases of blended families, where the surviving spouse has the ability to change who is entitled to what after the first spouse passes.
Options for Couples Beyond Joint and Separate Trusts
The goal of this article is to help you discover whether a Joint Trust or Separate Trust is the better option for you. That said, there are several other trusts that could also be right for you. Here are a few trusts you might consider to protect your legacy.
- Credit Shelter Trust – Typically used by those who have estates with a very large value (also known as an A/B Trust). After the passing of the first spouse, a Credit Shelter Trust would be administratively divided into what’s known as a Survivor’s Trust (A) and a Decedent’s Trust (B).
- QTIP Trusts – Qualified Terminable Interest Property Trusts were, in the past, used when couples thought the combined value of their estate would exceed credit exemptions.
- Marital Deduction Trusts – Used to protect the wishes of spouses. Often a good option for blended families with children from previous relationships. This is a very common Trust Type and has in recent years largely replaced Credit Shelter Trusts and QTIP Trusts.
- Marital Lifetime Revocable Trusts – A clear-cut, simple Trust that can be amended or revoked by either spouse during their lifetime. Also allows for amending and revoking by surviving spouses.
- Marital Disclaimer Trusts – Allows for the deceased spouse’s assets in the Trust to simply transfer to the surviving spouse. The surviving spouse has the right to disclaim assets, in which case the Trust would convert to an A/B trust. This strategy may be tax beneficial in some cases.
Learn More About Trust Options for Married Couples in Estate Planning
Joint and Separate Trusts are powerful tools to consider for couples looking to plan ahead. At the Law Office of Janet L. Brewer, we help clients understand all of their options in order to build a comprehensive plan.
To speak to an experienced estate planning attorney at our Los Altos offices, call 650-325-8276 or contact us online.
