Joint revocable trusts often seem like a natural planning solution for couples with “stable” marriages, or whose total net worth is less than the combined federal estate tax exemption ($5.45 million per individual in 2016). However, separate revocable trusts could be preferable if a couple does not reside in a so-called community property state, since the administration of a joint trust during a couple’s joint lifetime, and upon the first spouse’s passing, may result in unintended income and transfer tax consequences, and practical complexities.
Joint trusts tend to be popular for married couples, especially if their existing assets are jointly-titled. Practically speaking, joint revocable trusts are easy to understand and provide many of the same benefits as separate revocable trusts, without the inconvenience of splitting asset ownership. Without careful design and implementation of the joint trust, however, various difficulties may result.
Some Possible Tax Issues. There can be several tax complexities associated with joint revocable trusts in common law (as opposed to community property) states. For example, the ability to identify which portion of a joint trust is includible in the estate of the first spouse to pass is critical. In some cases, the joint trust may fund the predeceasing’s spouse’s assets into a credit shelter trust designed to preserve his or her estate tax exemption. The surviving spouse is typically the primary beneficiary. If the surviving spouse’s assets (or interests in certain assets) are unintentionally funded into that shelter trust, it could cause inclusion of the trust in the surviving spouse’s taxable estate at his or her passing. Even if estate taxes are not a concern, tracing assets is essential to identifying which trust assets are eligible to receive a step-up in income tax basis to their fair market value at the first spouse’s passing.
A Few Practical Considerations. For practical purposes, tracing asset ownership also determines which part of a joint trust will remain revocable by the surviving spouse. But tracing assets can be extremely difficult unless the couple has kept detailed records. Further, for couples with significant separately-owned property, joint trusts may expose the assets to equitable distribution for divorce purposes. Depending on applicable state law, joint trusts also may allow creditors of one spouse to reach the property of the other.
Separate revocable trusts generally provide a clear division of assets and likely present fewer administrative complexities than joint revocable trusts. So while joint revocable trusts may be an alternative for certain married couples in common law states, their use should not be automatic. The best option will depend on the couple’s current assets (value and titling), previous and current residences (including residency in any community property states), and current goals.
Community Property States in USA