Myth #5 - Should I have a joint trust with my spouse?
Married couples often consider themselves one unit with their spouse. It doesn’t seem to make sense that separate revocable trusts would be set up as part of an estate plan. But what most people don’t really understand or want to consider is that the real benefit to having a revocable trust happens after death. After the death of the first spouse one spouse still remains. There is no longer a marital unit and any trusts you have must reflect that. A portion of the assets that are attributed to the deceased spouse must become irrevocable and a portion must stay revocable. This is where things get confusing, time consuming, and potentially very costly if the assets were not split into separate trusts while both spouses were alive. Ultimately, the surviving spouse will be stuck dealing with the mess and cost.
Here is a my quick “pro and con” list running down the differences between having a joint revocable trust and having separate revocable trusts:
Separate Revocable Trusts – “Cons”
- With separate revocable trusts, each spouse will have their own trust and would essentially be responsible for the management of their own trust. But spouses can share this responsibility by making each other co-trustees of their respective trusts.
- Formation and proper funding of separate revocable trusts require slightly more upfront cost and a bit more work to fund separately.
Separate Revocable Trusts – “Pros”
- Flexibility is retained within the second trust after the first spouse has passed.
- With separate revocable trusts each spouse can designate who gets to inherit what. This will provide protection from a new spouse and kids of a future marriage or kids from a prior marriage if applicable. The surviving spouse can still get the benefit of the funds in the deceased spouses’ trust, but the dispositive provisions stating where those funds will go at the death of the second spouse cannot be changed from what the deceased spouse intended.
- Separate revocable trusts provide superior advantages in relation to Estate Tax. Currently very few people will even be subject to the Estate Tax, but the estate tax has varied wildly just in the last ten years and you never know what the future holds in this area.
- Having separate revocable trusts provide asset protection from creditors of your spouse. Creditors come in all forms and when something unexpected happens, having separate revocable trusts could help shelter assets from creditors that may otherwise have access to them.
- Separate revocable trusts provide flexibility in management. Each spouse retains complete control over their own trust.
- After the death of the first spouse there is no confusion about separation or management of assets and it is very clear what assets are irrevocable and what assets are still revocable. The trust of the deceased spouse and the assets inside becomes irrevocable. The trust of the surviving spouse and the assets inside stays exactly the same. This greatly reduces fees and confusion after the death of the first spouse since everything is already separate.
- There is a clear ability to amend, or not amend, at all times. This leaves no room for confusion about unintended completed gifts and no need to make changes to how the property is held once it has been placed in the trust.
- Depending on the health of the individuals involved, separate revocable trusts can provide an extremely valuable tax planning tool by strategic placement of low-basis assets.
Joint Revocable Trust – “Cons”
- A joint revocable trust will at some point have to deal with the death of one of the joint owners. It can become confusing and costly to draft a trust that will identify the irrevocable portion at the death of the first spouse, versus what remains revocable. It’s difficult to identify which assets become irrevocable and drafting how to grant an election for tax purposes is cumbersome and confusing both in drafting and actual implementation. The surviving spouse is left to sort all this out with attorneys or accountants which can quickly become time-consuming and expensive.
- Despite a portion of the joint revocable trust still being revocable after the death of the first spouse, it is difficult and confusing to draft language allowing a surviving spouse to make amendments to their part of the trust after the first spouse is gone.
- The language needed to allow amendments while both are still living is also cumbersome and hard to draft with clarity. Exercising the right to amend the trust while both are still living is also almost impossible without complete spousal agreement to all changes.
- It is easy to make a mistake with improper drafting or improper management especially after the death of the first spouse. This could easily result in an unintended completed gift to the remainder beneficiaries. To avoid this result, each spouse must retain the right to revoke their portion of the trust without the consent of the other spouse. Which is confusing and difficult both before the death of the first spouse and after.
- Because both spouses each must have the ability to revoke their portion of the trust, everything placed in the trust must be held as tenants in common so it can be treated as each spouse’s separate property, either by the terms of the trust or the actual deed or title to the property. This is not the way marital property is generally held.
- It is very hard and confusing to draft different distributions at the death of each spouse, especially if each spouse may want something different than the other.
- Having a joint revocable trust leaves all assets vulnerable to both spouse’s financial risks and burdens. All assets within this trust would be available to any creditor who gains a judgment against either spouse.
Joint Revocable Trusts – “Pros”
- These are cheaper to establish and fund than separate revocable trusts, but this is because the difficult part of separating the assets comes after the death of the first spouse.
- These are easy to manage while both spouses are still alive as long as both spouses always agree.
- This gives off the image of a traditional marriage view where marriage equals one unit.
- These are extremely useful when they are funded with community property in a community property state. The tax consequences in that situation can be valuable. South Dakota does allow for the formation of a community property trust which can be beneficial in certain low-basis situations, but are not a “one-size-fits-all” solution.