Trusts are generally a good idea if you want a comprehensive, complete and concrete Estate Plan that offers as much protection as possible. But when you’re married, sometimes you need to look at things a bit differently to make sure you’re setting up the right plan for your family and for your legacy. The first thing you need to decide is whether you want to do one Joint Trust, or if you’ll each create your own individual Separate Trusts.
There are pros and cons to both options, especially when you’re looking at the purpose of each of the specific components of a Trust. Understanding the nuances and differences between Joint Trusts vs Separate Trusts is the first step. Keep reading to learn more about whether you should create a Joint or Separate Trust to protect your estate.
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Joint Trusts vs Separate Trusts for Couples - 5 Factors to Consider
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 circ*mstances.
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
Asset Protection
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 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.
After Death of Spouse
There are also differences in how Trusts are handled after the death of one spouse. The surviving spouse may have very different responsibilities, control and access depending on whether or not you have Joint or Separate Trusts.
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.
Pros and Cons
As with most things in Estate Planning, you should fully understand the options you have and weigh the pros and cons before deciding what the best course of action may be.
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.
Other Trust Options for Married Couples
Keep in mind, there are many options out there for you to create the perfect Trust for your needs. Before you decide on whether a Separate Trust or a Joint Trust is the right solution for you and your spouse, you might want to consider any of these Trusts.
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.
Trusts may seem complicated, and in some cases they can be. But the reality is, the protection they offer you and your family is well-worth the time it takes to explore all your options. Deciding on whether a Joint or Separate Trust would be best doesn’t have to be hard. Ready to get started on your Trust today?
