estate planning

Joint Trusts or Separate Trusts: Advice for Married Couples

Unless you have a specific need for separate trusts, it’s usually best to avoid the headaches they cause and go with a joint trust instead. Here’s why.

A revocable living trust is usually the best way to pass your assets to your heirs after you are gone.

Unlike a will, assets titled in a revocable living trust avoid both the time and expense of going through the probate courts and keep your financial affairs from becoming a matter of public record.

And like any good estate plan it can be used to plan for the possibility of your being incapacitated, reduce or avoid any death tax, make sure the right heirs get your assets after you‘re gone, and it does not change the tax treatment of your assets while you’re alive.

Separate or Joint?

A married couple has a choice of setting up either a joint trust or separate trusts. In situations where both spouses want the surviving spouse to inherit all the assets, which is often the case, a joint trust can be far less complicated to set up and maintain than separate trusts, with less headaches for the surviving spouse. However, there are situations where separate trusts will be a better choice.

Common Advantages of Separate Trusts

  • Separate trusts may offer better protection from creditors, if this is a concern.  For example, at the death of the first spouse, the deceased spouse’s trust becomes irrevocable, which makes it harder to access by creditors. And yet the surviving spouse can still access it for income and other needs.
  • In cases where a spouse wants some or all of their assets to go to other heirs besides the surviving spouse, separate trusts may be a better solution. A common example is when one of the spouses has children from a previous marriage and they want to provide for their spouse, but also make sure their kids eventually receive the funds. They could set up a qualified terminable interest property trust, which would allow them to leave assets for the surviving spouse to provide them with income, while the balance of the funds are held in trust until the surviving spouse’s death, at which point they’re paid out to the children from the previous marriage.
  • Separate trusts can be used to reduce or eliminate death tax. For most married couples federal death tax will not be a problem, because a married couple has a combined estate tax exemption of $23.16 million (going up to $23.4 million in 2021), which means if the value of their estate is under this amount they will have no federal death tax to be concerned with. However, there are 12 states, plus the District of Columbia, that have a state estate tax, and another six states with an inheritance tax. Assuming you live in a state with a death tax, if your net worth is above the state's exemption level — which can be as low as $1 million — your heirs could be subjected to this tax. That’s when separate trusts as part of a credit shelter trust, would allow the spouses to double their estate tax exemption, resulting in reducing or completely eliminating this death tax.

When a Joint Trust May Be Better

Assuming you have no creditor concerns, both spouses want all the assets to go to the surviving spouse, and state death tax will not be an issue, a joint trust may be the way to go, for several reasons:

  • A joint trust is easier to fund and maintain during the couple's lifetime.  They don't need to think about the hassle of equalizing the value of each of their separate trusts or trying to decide what assets to title in one trust or the other, since everything goes into one trust. 
  • A joint trust requires less work at tax time. It does not become irrevocable until both spouses have passed and therefore eliminates the need to file an extra trust tax return. With separate trusts, at the death of the first spouse that spouse’s trust becomes irrevocable and a separate trust tax return must be filed each year, which generates extra cost and can be a nuisance.
  • A joint trust is not subject to the much higher trust tax brackets since it does not become irrevocable at the death of the first spouse.  On the other hand any investment or interest income generated in an account titled in a deceased spouse’s trust, since it is now irrevocable, will be subject to trust tax brackets, which will trigger more tax for the surviving spouse, if the income isn’t taken out by Dec. 31 of each year.  This will make it difficult for the surviving spouse to compound or reinvest the income into the same investment, since if it’s is not pulled out of the account by year end, in most cases, it will trigger a significant amount of extra tax.
  • In a joint trust, after the death of the first spouse, the surviving spouse has complete control of the assets since an irrevocable trust with its restrictions is not created. When separate trusts are used, the deceased spouses trust becomes irrevocable at their death, and the surviving spouse has limited control over these assets, typically restricted to withdrawals for health, education, maintenance and support.
  • It can make real estate transactions easier to deal with. If a piece of real estate, like a house, is titled in a joint trust and a surviving spouse sells the house with the intention of using the sales proceeds as a down payment for another house, any lender would be happy to loan them the money as long as they had reasonably good credit. On the other hand if the house is titled in a deceased spouse’s trust, the surviving spouse may have difficulty finding a lending institution that will make them the loan since the house would  be titled in an irrevocable trust. This is because irrevocable trusts provide very strong protection against creditor claims, which will make it hard for the lender to secure its loan with a lien on the property and foreclose if there’s a default.

What to Do?

In many cases a joint trust may not be appropriate, but on the other hand, if the  advantages of separate trusts are irrelevant to you and you don’t mind the surviving spouse getting the money, don’t volunteer for the unnecessary headaches of separate trusts.

About the Author

Mike Piershale, ChFC

President, Piershale Financial Group

Mike Piershale, ChFC, is president of Piershale Financial Group in Barrington, Illinois. He works directly with clients on retirement and estate planning, portfolio management and insurance needs.

Most Popular

Who Should Return Their Third Stimulus Check to the IRS?
Coronavirus and Your Money

Who Should Return Their Third Stimulus Check to the IRS?

Some people who receive a third stimulus check are required to send it back to the IRS. Others can return it voluntarily.
April 12, 2021
Where's My Stimulus Check? Use the IRS's "Get My Payment" Tool to Get an Answer
Coronavirus and Your Money

Where's My Stimulus Check? Use the IRS's "Get My Payment" Tool to Get an Answer

The IRS has an online tool that lets you track the status of your third stimulus check.
April 4, 2021
6 ‘Retirement Killers’ to Avoid at All Costs
retirement planning

6 ‘Retirement Killers’ to Avoid at All Costs

Financial planners see people making these six money mistakes all the time, and they can endanger your retirement. Here are six surefire ways to kill …
April 1, 2021

Recommended

COVID-19 Super Savers Need to Carefully Navigate in a Post-Pandemic World
personal finance

COVID-19 Super Savers Need to Carefully Navigate in a Post-Pandemic World

The pandemic has turned many people into saving machines, which is great, but that comes with its own set of risks. These frugal folks need to be extr…
April 13, 2021
‘Gray Divorce’ Rates Are Exploding Due to This Perfect Storm
Divorce

‘Gray Divorce’ Rates Are Exploding Due to This Perfect Storm

Here’s why divorce rates among those 50 and older are booming … and what women can do to recover and rebound.
April 12, 2021
How to Pay Off $130,000 in Parent PLUS Loans for Just $33,000
Paying for College

How to Pay Off $130,000 in Parent PLUS Loans for Just $33,000

Meet Nate. He took out $130,000 in Parent PLUS loans for his kids. The standard repayment plan will cost him over $170,000. But some smart strategizin…
April 12, 2021
How to Retire Well During Difficult Times
retirement planning

How to Retire Well During Difficult Times

When the financial environment is challenging (like now) it’s important to plan ahead and avoid some all-too-common retirement mistakes.
April 11, 2021