A common question is whether a husband and wife should have separate trusts or a joint trust. The decision about separate or joint trusts is not as straightforward as one might think. Sometimes, there is an obvious need to keep things separate, according to the recent article “Joint Trusts or Separate Trusts: Advice for Married Couples” from Kiplinger. One example is of a so-called “blended family” where the marriage involves children from prior relationships. There are technical reasons for having separate trusts, especially for larger estates that involve the Massachusetts estate tax.
Trusts almost always provide a superior means of passing assets between a husband and wife, as well as among children. Assets titled in properly drafted trusts avoid the probate process and information about the trusts remain private. Well-planned estates are almost certain to involve trusts that hold the bulk of that family’s assets. Trusts are also a good way to plan for incapacity, avoid or reduce the likelihood of estate taxes [so-called “death taxes”] and make sure the right people inherit the trust.
There are advantages to Separate Trusts:
They offer better protection from creditors. When the first spouse dies, the deceased spouse’s trust becomes irrevocable, which makes it far more difficult for creditors to access. Regardless of whether the husband and wife have active creditors, it is still important for the surviving spouse to access funds and enjoy this additional protection and privacy.
If assets are going to non-spouse heirs, separate is better. If one spouse has children from a previous marriage and wants to provide for their spouse and their children, a qualified terminable interest property trust allows assets to be left for the surviving spouse, while the balance of funds are held in trust until the surviving spouse’s death. Then the funds are paid to the children from the previous marriage.
Reducing or eliminating the death tax with separate trusts. Unless the couple has an estate valued at more than $23.16 million in 2020 (or $23.4 million in 2021), they won’t have to worry about federal estate taxes. However, there is still the burdensome Massachusetts estate tax as well as nearly a dozen other states, plus the District of Columbia, with state estate taxes and a half-dozen states with inheritance taxes. These estate tax exemptions are considerably lower than the federal exemption, and heirs could be surprised by this often overlooked tax exposure. Separate trusts as part of a credit shelter trust would let the couple double their estate tax exemptions and take other tax advantages.
When is a Joint Trust Better?
If there are no creditor issues, both spouses want all assets to go to the surviving spouse and state estate tax and/or inheritance taxes aren’t an issue, then a joint trust could provide a simpler option. Joint trusts are easier to fund and maintain. There is no worrying about having to equalize the trusts, or consider which one should be funded first. There is less work at tax time. The joint trust doesn’t become irrevocable, until both spouses have passed. Therefore, there is no need to file an extra trust tax return upon the first spouse’s death. With separate trusts, when the first spouse dies, their trust becomes irrevocable and a separate tax return must be filed every year. Joint trusts are not subject to higher trust tax brackets, because they do not become irrevocable until the first spouse dies. However, any investment or interest income generated in an account titled in a deceased spouse’s trust, now irrevocable, will be subject to trust tax brackets. This will trigger higher taxes for the surviving spouse, if the income is not withdrawn by December 31 of each year. In a joint trust, after the death of the first spouse, the surviving spouse has complete control of the assets. When separate trusts are used, the deceased spouses’ trust becomes irrevocable and the surviving spouse has limited control over assets.
Your estate planning attorney at McManus Estate Planning will be able to help you determine which is best for your situation. This is a complex topic, and this article is just a brief introduction.
Reference: Kiplinger (Nov. 20, 2020) “Joint Trusts or Separate Trusts: Advice for Married Couples”