Dear Kiwi and Mango,
My husband and I are ready to embark on our Estate Planning. This is the second marriage for both of us, and we aren’t sure whether to get a joint trust or separate trusts? I read somewhere that there is a benefit to separate trusts if one or both parties has children. Why else would a married couple have separate trusts vs. a joint trust?
Thanks!
Seppa Writt
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Dear Seppa,
A married couple has a choice of setting up either a joint trust or separate trusts. In situations where both spouses want the surviving spouse to inherit all the assets, which is often the case, a joint trust can be far less complicated, with less headaches for the surviving spouse. However, there are situations where separate trusts are a better choice.
Common Advantages of Separate Trusts
The following are some advantages of separate trusts:
- Protection from creditors: If the deceased spouse’s trust becomes irrevocable at the death of the first spouse, it will be harder to access by creditors. And yet the surviving spouse can still access it for income and other needs, as determined by the terms of the trust.
- Assets going to beneficiaries besides the surviving spouse: In situations where a spouse wants some or all of their assets to go to beneficiaries other than the surviving spouse, separate trusts are often a better solution. A common example is when one of the spouses has children from a previous marriage, and they want to provide for their spouse but also make sure their kids eventually receive the funds. However, if you’re the older spouse, this goal can also often be accomplished with life insurance or retirement accounts that name your children as the death beneficiaries, thus allowing the simplicity of a joint trust while still taking care of your children upon your death.
- To eliminate estate tax: For most married couples, federal estate tax will not be a problem, because a married couple has a combined estate tax exemption of $27.22 million in 2024, which means if the value of their estate is under this amount, they will have no federal estate tax to be concerned with. However, 12 states, plus the District of Columbia, have a state estate tax, and another 6 states have an inheritance tax. Maryland is the only state in the country that has both! Assuming you live in a state with an estate tax, if your net worth is above the state’s exemption level — which can be as low as $1 million — your estate could be subjected to this tax. That’s when separate trusts can be beneficial, to allow both spouses to double their state estate tax exemption to reduce or eliminate the state estate tax.
When a Joint Trust May Be Better
If both spouses wish for all the assets to go to the surviving spouse, you have no creditor concerns, and state estate tax will not be an issue, a joint trust may be the best way to go. Here’s why:
- A joint trust is easier to fund and maintain during your lifetimes.
- You won’t need to worry about equalizing the value of each of your separate trusts or trying to decide what assets to title in one trust or the other, since everything goes into one trust.
- Less work at tax time: A joint revocable living trust typically does not become irrevocable until both spouses have died, eliminating the need to file an extra trust tax return. With separate trusts, at the death of the first spouse, that spouse’s trust becomes irrevocable and a separate trust tax return must be filed each year, which generates extra cost and can be a nuisance.
- It can make real estate transactions easier to deal with: If a home, for example, is titled in a joint trust and a surviving spouse sells the house with the intention of using the sales proceeds as a down payment for another house, a lender would be happy to loan them the money as long as they have good credit. On the other hand, if the house is titled in a deceased spouse’s trust, the surviving spouse may have difficulty finding a traditional lending institution that will make them the loan since the house would be titled in an irrevocable trust. This is because irrevocable trusts provide very strong protection against creditor claims, which will make it hard for the lender to secure its loan with a lien on the property and foreclose if there’s a default. Also, traditional lenders only make loans to individuals with a credit history and earnings.
What Should You Do?
If the advantages of separate trusts are relevant to you, it may be worth it to consider separate trusts. However, if they don’t affect you, and you don’t mind the surviving spouse getting the money, you likely don’t need to worry about the unnecessary headaches of separate trusts.
Hope this is helpful!
Kiwi and Mango
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