When you’re considering setting up a trust to avoid probate, you’ll be “sold” a living revocable trust. A married couple can have individual trusts or joint trusts. Joint trusts will have only one physical trust document. An individual trust for the husband and an individual trust for the wife will usually be created using two separate trust documents. However, a single document could be used to describe two separate trusts.
A joint revocable trust is probably the easiest form of living revocable trusts for a married couple to use. A joint revocable trust merges the estate planning of a couple using a single trust document.
Joint trusts and individual trusts each have advantages and disadvantages. I haven’t seen that one choice is better than the other. It just depends upon what you want. In my book, Protecting Your Financial Future, I am very careful to give you advantages and disadvantages, because I don’t care if you do a living revocable trust or not.
Whether you use a joint revocable living trust or single living trusts, they are one of the basic tools you need to protect your family.
Joint Trusts vs. Separate Trusts
Joint revocable trusts are easier to “manage” during the period where both spouses are alive. The couple doesn’t have to divide up assets into separate trusts. All of the couple’s assets are simply transferred to the one joint revocable living trust, and the couple will continue to “manage” the assets essentially as they did prior to setting up the joint revocable living trust.
Joint revocable living trusts are more difficult to “manage” after the death of the first spouse to die. If the joint trust is set up to take advantage of the marital deduction and the exemption equivalent (estate tax laws), then the joint living trust will have to divide itself into two trusts – a marital trust and a shelter trust – after the death of the first spouse. Making that division of the joint revocable trust is time consuming and costly.
On the other hand, if you don’t have a joint trust and actually have two trusts, the assets have to be divided between the two trusts during your life. The division of assets between the two individual trusts throughout the couple’s lives takes some thought. If the trusts aren’t evenly balanced, there can be big estate tax problems.
It seems to be easier for most couples to use a joint trust and keep the assets together during the couple’s life. Then when the first spouse to die actually dies, the surviving spouse can let the accountants and attorneys divide things up into the two trusts.
You should note that even if you have two separate trusts, the division of the marital trust and the shelter trust still needs to be made when the first spouse dies. The cost is going to be a little less than if you had a joint revocable trust, but not a lot less.
Joint Revocable Living Trust and Asset Protection
If you are worried about asset protection, then individual trusts may be better for you than joint living trusts. It may be window dressing, but single trusts give the illusion of making a clearer separation of assets between spouses than joint trusts do.
Actually, you can draft a living trust so it is a joint trust, but the trust document can be written to also include separate trusts. There is only one document, but it describes a joint revocable trust and then it describes separate trusts for each spouse. So, technically the one trust document creates a joint revocable living trust and then a separate trust for the husband and a separate trust for the wife.
Joint trusts probably shouldn’t be used between couples in a “common law marriage” or alternative lifestyle couples. The option of creating the marital trust at the death of the first member of the couple to die just isn’t there. It turns out to be a real mess to try and divide the assets in a joint trust at the first death of the two individuals who are not legally married. Plus, in this situation the joint revocable trust can be an estate tax disaster. Just use separate trusts and make the division of assets during your lifetimes.
Division of a Joint Trust at Death
This article has talked about the division of a joint trust at the death of the first spouse to die. The division will create a shelter trust and a marital trust.
You should note that whether you have joint trusts or an individual trust, at the death of the first spouse, a shelter trust needs to be created to “shelter” the exemption equivalent amount. The exemption equivalent amount is the value of property that can be passed by an individual at death without actually having an estate tax payable by the individual’s estate. The marital trust will be created to move assets above the exemption equivalent amount to the surviving spouse estate tax free.
In the final analysis, joint trusts are probably the preferred form of living revocable trusts that Mom and Pop America should be using. My book, Protecting Your Financial Future, walks you through all your choices. It’s written in story format and has been a Time Warner Book-of-the-month Club book. It’s a great read.