Should You Create a Joint Trust?

If you're married, perhaps you and your spouse are thinking about setting up living trusts. If so, you might ask, "Can't we have just one living trust for the two of us?" Is a joint trust a good idea?

How a Joint Trust Works
First, don't confuse a joint living trust with jointly owned property. A joint trust is created by a single document that manifests your and your spouse's respective wishes about the disposition of your respective property placed in the trust. As to joint ownership, there are various forms, but the most familiar is joint tenancy with rights of survivorship, by which the share of the deceased joint owner passes automatically and outright to the surviving joint owner.

With a joint trust, community property and separate property of both spouses may be transferred into the trust and retain their character as community or separate property. Both spouses benefit from the trust during their joint lifetime. When one spouse dies, the entire trust continues for the benefit of the surviving spouse.

Estate Tax Advantages
A joint trust is most commonly used in community property states, where most of the property in the trust is characterized as community property.¹ In some cases, there can be significant estate tax advantages to this type of arrangement.

Typically, the terms of such a joint trust are somewhat like this: When the first of the couple dies, the trust splits into Trusts A and B. The assets allocated to Trust A qualify for the federal estate tax marital deduction and include the survivor's share of the community property and the survivor's separate property, if any.

Example: Fred and his wife, Jean, have $5 million of community property in a joint trust. When Fred dies, normally one-half, or $2.5 million, would be allocated to Trust B, intended eventually to bypass Jean's taxable estate. However, this would generate estate tax in Fred's estate on the excess over a tax-free allowance $2 million in 2008. So, assuming Fred made no prior gifts, the excess of $500,000 will be allocated to Trust A. Result: Trust A will wind up with $3 million and Trust B with $2 million, both fully exempt from federal estate tax in Fred's estate.

However, the potential estate tax advantages must be weighed against many other factors and issues created by joint trusts.

Which Is Better?
Needless to say, arriving at a decision between a joint trust versus separate trusts is relatively complex. If you reside in a community property state, you and your advisor may wish to seriously consider a joint living trust. (One cautionary note: You may live in a community property law state, but perhaps the majority of the property you plan to place in the trust is characterized as separate property. In this case, separate trusts should be considered.)

If you reside in a noncommunity property state, each spouse's wishes and property usually are dealt with more efficiently by separate trust agreements. Ultimately, the right answer depends on your state laws and your personal circumstances. Whichever course you choose, it is imperative that your selected executor and trustee are experienced in dealing with separate and community property, and that they take all the necessary steps to maintain the original character of the property.

Your living trust will have legal and tax consequences. Equally as important, the structure of that document will have an impact on you and your beneficiaries in many other ways. Seek the counsel of an attorney who specializes in estate planning. And, of course, our organization's trust and estate planning professionals are available to assist you in exploring your options in developing this very important financial planning document.

¹ Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.

SOURCE: University of Georgia in an article written by Mary L. McCormack