Joint vs. Separate Revocable Trusts

The Case for a Joint Trust

Joint trusts often simplify estate administration. They are typically easier to establish and manage compared to separate trusts, as assets can be transferred directly into a single account. This eliminates the need to divide assets between two separate trusts, streamlining the process.

Furthermore, a joint trust grants both spouses equal control over the trust assets, facilitating joint decision-making and simplifying transactions. For instance, selling a jointly owned home held within a joint trust is generally less cumbersome than selling property held in separate trusts or in the name of only one spouse.

The Advantages of Separate Trusts

Separate trusts offer greater flexibility and control, particularly when specific asset distribution preferences exist. For example, if one spouse has children from a previous marriage, separate trusts can be structured to provide income to the surviving spouse while preserving assets for their children.

Separate trusts also offer enhanced creditor protection. If one spouse faces creditor claims, assets held in their separate trust are generally shielded from those claims. Conversely, in a joint trust, assets could be at risk if one spouse faces significant debt.

Additionally, separate trusts can be more effective in minimizing estate and inheritance taxes, especially in states with lower exemption amounts. By utilizing each spouse’s individual exemption amount, separate trusts can help reduce the overall tax burden.

Income Tax Considerations

Income tax considerations also play a significant role. Upon the death of one spouse in a separate trust arrangement, the trust becomes irrevocable. This necessitates the filing of annual tax returns for the trust and the payment of taxes on any generated income. Irrevocable trusts, with the exception of grantor trusts, are subject to a significantly higher income tax rate on undistributed income.

The 24%, 35% and 37% tax brackets for individuals (other than joint filers, for whom the amounts are higher) don’t kick in until taxable income reaches $100,525, $243,725 and $609,350, respectively. So unless a trust distributes all or most of its income each year, a significant portion of its earnings may be eroded by income taxes.

In contrast, a joint trust generally remains revocable during the lifetime of the surviving spouse. This allows the surviving spouse to include trust income in their personal tax return, potentially resulting in lower tax liabilities.

Making the Right Choice

Ultimately, the decision between a joint trust and separate trusts depends on various factors, including the couple’s individual circumstances, financial goals, and estate planning objectives.

Key Considerations

Asset Distribution Preferences: How do you envision your assets being distributed to your spouse, children, and other beneficiaries?

Creditor Protection: What level of creditor protection is desired for each spouse?

Estate Tax Considerations: What are the estate and inheritance tax implications in your state?

Income Tax Implications: How will the tax implications of each trust structure impact your overall estate plan?

Consulting with an experienced estate planning professional is crucial to determine the most suitable trust structure for your specific needs and circumstances. They can provide personalized guidance and help you navigate the complexities of estate planning to ensure your wishes are effectively executed.

Disclaimer: This article provides general information and should not be considered professional financial or tax advice. Please consult with a qualified CPA or financial advisor for guidance specific to your individual business needs.