Many married couples have turned to a living trust as a way to safeguard the assets they want to pass on to the next generation. As a matter of course, most of these couples create a shared trust that shelters their assets as a joint unit.
But there are also instances in which separate trusts may make more sense. Client couples who are considering establishing a living trust should know what their options are, and to those with existing shared living trusts may also appreciate hearing about the benefits of a shared trust. Some things to keep in mind:
Advantages of a separate trust
- Couples who own mostly separate property acquired before the marriage may want to consider a separate trust. This often applies to couples who have prior marriages and are getting together later in life.
- A shared trust gives both members of the couple equal authority over all the assets contained in the trust. If there is property that one partner or the other wants to maintain sole control over – say, a vacation home that has been on one side of the family for generations – separate trusts might make more sense.
- If the spouses have signed a prenuptial agreement keeping each spouse’s earnings and property separate, then obviously two separate trusts would work better.
- Unmarried couples – for instance, same-sex couples residing in states that do not permit same-sex marriage – can certainly set up a shared trust for the two of them, but there are extra headaches involved with that. For instance, if the two members of the couple are filing separate income taxes, they would need to painstakingly divide each asset in the trust for IRS purposes. Also, such relationships do not qualify for the unlimited marital deduction, so a shared trust could result in gifts between the two members of the couple being taxable.
Advantages of a shared trust
Even people who fall into one of those categories, though, might find a shared trust suits their needs better. Some items to keep in mind:
- Even if the two spouses have some separate property, they can transfer it all to the trust, and still name separate beneficiaries for specific items held by the trust.
- Either spouse may revoke the trust at any time. Once the trust is revoked, the ownership status of the property reverts to the way it was before the trust was created.
- Even one sizable piece of shared property can make separate trusts a real hassle. If a married couple wanted to hold their house in two separate trusts, for instance, they would have to sign a deed transferring a half interest in the house to each spouse as trustee.
- With separate trusts, after the first spouse dies, there can be a fairly lengthy legal process to move property to the surviving spouse’s trust. Property left to the survivor must usually go first from the trust to the survivor, and then to the survivor’s living trust. In a shared trust, that same property would just stay in the living trust when the first spouse dies.
It’s also possible for a married couple to create both a shared living trust for the communally owned property as well as separate trusts for their individual property. That’s going to cost more in legal fees, and could present a great deal more paperwork and decision-making, but for many couples, it may be easier in the long run.
There’s one other complicating factor to all of this: Community property laws. In community property states, all property acquired during the course of a marriage is considered to be jointly owned by both spouses. For advisors in those states, it usually makes sense to offer only shared trusts. Community property states include:
- New Mexico
For advisors in other states, though, separate trusts have their benefits. The key, as always, is to offer options. Even clients who have a shared trust and end up keeping it would probably appreciate knowing what they have to gain from separate trusts – and would appreciate that their estate planner is offering them the choice.