Married couples should weigh pros and cons of joint trusts and separate trusts.
Perhaps you have been married for just a short time.
Maybe you are celebrating another decade of life together.
Either way, you are wanting to include trust planning in your estate plan.
You must now answer whether you want joint trusts or separate trusts.
According to a recent Kiplinger article titled “Joint Trusts or Separate Trusts: Advice for Married Couples,” the choice will depend on several factors.
Any revocable trust will allow you to pass assets to your heirs.
Those assets titled to a trust will bypass probate and thus allow you to keep this part of your estate plan private.
Revocable trusts can benefit your incapacity planning and tax planning.
What are the advantage of using separate trusts?
You can better protect assets from creditors.
After the death of the first spouse, the trust of this spouse becomes irrevocable.
What does this mean?
The creditors will have a more challenging time accessing these funds.
The surviving spouse will still be able to access the funds according to the instructions outlined in the trust.
It is easier to distribute to non-spouse heirs.
Let us say one or both of you have children from a previous marriage.
You want to provide for your current spouse and those children when you die.
One option is to create a qualified terminal interest property trust (QTIP).
Assets can be left for the surviving spouse and the balance of funds can be paid to the your children from your prior marriage after the death of the surviving spouse.
You could reduce or eliminate the death tax with separate trusts.
The estate tax exemption level is $23.16 million for married couples in 2020, although this may be decreased significantly under a new federal administration.
In addition to the federal estate tax, a dozen states and the District of Columbia have a state estate tax.
A half dozen states have an inheritance tax.
In most cases, these states exemption levels are far lower than the current federal estate tax exemption threshold.
Using separate trusts as part of a creditor shelter trust could help you maximize your estate tax exemptions as a couple.
All that noted, with the advent of “portability” under IRC Section 2010(c), a surviving spouse may make use of a deceased spouse’s unused exclusion (DSUE) amount by making an election to transfer such amount to the surviving spouse on a timely filed federal estate tax return.
Yes, this stuff can get complicated in a hurry.
Although there are plenty of reasons to use separate trusts, there are times when joint trusts can be better options.
When might joint trusts be a good option?
You have straightforward estate and family dynamics.
Neither you nor your spouse carry significant debt or owe creditors.
You also want your assets to pass directly to the surviving spouse, and your estate size or state of residence will not trigger estate taxes or inheritance taxes.
In cases like these, joint trusts are great options.
Joint trusts are typically simpler to maintain and fund.
As a couple, you can avoid having arguments about the order and amount of funding for each trust.
Also, there is less effort and work each tax season.
Because the trust commonly does not become irrevocable until the death of both spouses, you will not need to file a separate tax return.
With separate trusts, the one trust will become irrevocable after the death of the first spouse.
This irrevocable trust will require a separate tax return (Form 1041) to be filed each subsequent year.
Another difference involves tax brackets.
The joint trusts do not become irrevocable after the death of the first spouse and so they do not enter the higher trust tax bracket.
With an irrevocable trust, the interest income generated in the account triggers higher taxes for the surviving spouse if income is not withdrawn each year.
With joint trusts, the surviving spouse will have full control of the assets.
With separate trusts, the surviving spouse will have limited control over the assets in the irrevocable trust of the decedent spouse.
This has been a basic introduction to a rather complex estate planning decision.
Work with an experienced estate planning attorney to determine whether a joint trust or a separate trust is better for your situation.
Reference: Kiplinger (Nov. 20, 2020) “Joint Trusts or Separate Trusts: Advice for Married Couples”