Trusts are excellent vehicles for managing and moving wealth between individuals, both in life and death. But setting up a trust is not quite as simple as drafting and notarizing a will. Continue reading for an in-depth analysis of a joint trust vs. separate trust.
There are several moving parts, agreements, and conditions to consider when writing and authorizing a trust. And if you are married, you will need to ask yourself: do I set up separate trusts for my spouse and myself or create a joint trust agreement?
Trusts are powerful and flexible financial tools and provide excellent utility in estate planning. But their flexibility can also make them confusing. What kind of trust is right for you under your circumstances? While this article will not endeavor to answer that question in particular – it is always best to discuss specifics with a legal professional – we will shed some light on the basics of trust agreements for married couples.
When planning for the distribution or management of their wealth in later life and death, many married couples may be allowed to transfer key assets and investments into a trust for safekeeping and carefully planned asset management. But is it generally better to create a separate trust for each individual or a joint trust agreement that ultimately shares a common goal (distributing all wealth to the next generation)?
Separate trusts are single trust agreements designed for each spouse. Joint trusts are single trusts funded with assets from both spouses. It is more akin to putting all your eggs in one basket, which has pros and cons.
Before we move onto the above-mentioned benefits and drawbacks, it is essential to establish how a trust might work – and why they are so flexible.
A trust is more than a document; it is a legal entity. A trust exists to hold property in its name – a house transferred to a trust will be owned under the trust title, for example, rather than the trustee or grantor's name.
Trusts are generally a three-way agreement: a grantor, a trustee, and a beneficiary must be involved in a trust. These are not necessarily always three separate individuals. Sometimes, grantors act as trustees to their trust, only adding a successor trustee to take over if they pass away.
Certain trusts are even structured to name the grantor as their beneficiary. For example, a trust can be built to remove certain assets and financial interests from a grantor's control and place them in the blind control of a third-party trustee while paying out dividends and monthly income to the grantor as beneficiary. These trusts are common among politicians and non-profit board members who want to eliminate a potential financial conflict of interest without completely divesting themselves from critical industries.
Such creative trust agreements illustrate a trust's flexibility and capability. You can draft a trust document to do nearly anything regarding managing and shuffling assets, so long as it is tax legal.
While there are well over a dozen established ways to write and use a trust, trusts are generally categorized as either revocable or irrevocable. Revocable trusts can be amended. Irrevocable trusts cannot. There are exceptions under which you can eliminate an irrevocable trust. Still, for the most part, they are permanent – and in most cases where they are utilized, irrevocable trusts will permanently split a grantor from their assets. This serves to protect certain assets from liabilities the grantor may incur.
However, most trusts are revocable, including most marital trusts, whether separate or joint.
A joint trust has increased liability because all assets are in a single trust agreement. However, joint trusts can be both cheaper and more straightforward. You do not need to pay two trustees, pay twice the fees, and require twice the legal paperwork. It is much simpler for both spouses to fund a single trust rather than sort their assets and fund into two separate agreements.
If one spouse is financially compromised, only their trust will be affected. On the other hand, it may be wiser to split your assets, even if both trusts share the same set of beneficiaries. Here are a few things you might want to consider.
A joint trust is inherently less safe. If both spouses move their assets into a single spouse, and either is at risk financially, the entire joint trust may be at stake. On the other hand, keeping things separate also separates the risk.
Of course, there are other details to consider which can muddy the comparison, such as how the assets were titled, state law, what kind of debt is being charged, and the contents of the prenup.
Wealthy couples will often look to their estate plan to minimize the tax burden on their estate upon death. Trusts often play a vital role in this. A joint trust would hold a single individual's estate tax exemption limit, while holding two separate trusts would allow for combined benefits between two married individuals.
This is the basis of an A/B trust, which utilizes specialized separate trusts to create a pseudo-joint agreement that maximizes a couple's estate tax exemption.
Simplicity and cost should not be understated when evaluating whether to go with a joint trust vs separate trust. While a complex arrangement such as an A/B trust or two separate trusts may involve less risk and lower potential tax liability, it's important to note that most Americans do not have to worry about federal estate taxes but have to worry about the cost of keeping two trusts running.
Separate trusts may be more valuable if you have more to protect – while a joint trust may be more straightforward and result in a net gain. Ultimately, whether you opt for separate trusts or a joint trust agreement boils down to the circumstances of your marriage, your assets, potential prenuptial agreements, and existing separate assets – from gifts, inheritance, or previous relationships. Discussing these details with an estate planning professional and considering other potential trust options is essential. Consider the probate attorneys at Werner, servicing areas in Bakersfield, Encino, and Lancaster.
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