Joint Or Individual Trust

A quandary most estate planning attorneys encounter is whether to use individual or joint trusts when planning for a married couple.  Some argue a joint trust is simpler to administer than doing separate trusts and less paperwork.  Other attorneys contend separate trusts are simpler to track and fund assets.  The answer, I believe, lies within two core issues; the personal planning intentions of the client and whether estate planning asset protection or tax planning is the legal strategy to be utilized.

When estate planning for a couple, the primary distinction to determine whether drafting a joint trust or separate trusts is determined by the personal planning goals of the client.  Most notably, do the husband and wife intend to follow the same plan?  That is, do they intend to have the same beneficiaries, the same distribution patterns, the same trustees, and the same trust protectors?  If yes, then a joint trust holding all of the assets of the husband and wife is probably the simpler approach.  Some may challenge using joint trust when one spouse has assets that are separate property, like an inheritance from a parent.  While this adds an additional element to consider, it is not related to the overall planning strategy, but merely a funding issue.  A joint trust can easily account for separate assets by ensuring there are separate schedules on the joint trust that detail the husband's assets, the wife's assets and the joint assets.  Further, utilizing the individual spouses social security number on all accounts outlined on their separate schedule and on half of the joint schedule accounts, assures their separate assets are properly maintained in a joint trust.

The opposite situation, when clients have different plans also impacts whether an individual or a joint trust is used. This is common in a second marriage.  Typically, clients in second marriages have joint assets, but separate beneficiaries’ distribution patterns, and trustees.  A properly drawn plan will allow for the deceased spouse to provide for their surviving spouse without having to disinherit their separate children or other family members.  While this can become more complicated to administer through a joint trust, it can easily be accomplished if the trust is clear on the separation and management of the assets after death of a spouse.  For example, the LWP™ drafting system allows the attorney to clearly set out the separation of assets and distribution goals specific to each planning strategy.   For most drafting systems that don’t accommodate this level of customization, separate trusts are easier to accomplish the separate goals of the clients when distribution patterns are significantly different. 

The final consideration when deciding on separate trusts or joint trust is whether the client desires asset protection or estate tax planning.  In this distinction, the use of the formula funding clauses becomes important when utilizing joint trusts.  Separate trusts are easily distinguished as they are funded independently of the spouse assets, whereas in a joint trust, if all assets are funded on a joint schedule, you may lose some of the tax benefit by not being able to maximize your federal estate tax exemption.  For example, if one half of the total joint assets in the trust (represents the deceased spouse’s portion) does not exceed the federal exemptions and the spouse does not have other assets (i.e. IRAs) outside the trust, full utilization of the individual credit shelter amount may not be achieved.  Conversely,  if one utilizes a formula that maximizes the exemption at the first death, it may not meet the estate planning needs of the separate planning of the spouse.  The formula clause must account for joint assets and all outside assets of the deceased grantor to maximize the estate exemption on the death of the first spouse, and the planning must consider the separate assets of each spouse and their individual planning goals.  The same is true for the clients who do not have estate tax concerns, but rather, the threat of long term care costs to the surviving spouse.  In this case, the formula finding must be formulated to provide the greatest asset protection from cost of care, not taxes.

So to summarize, whether an attorney does a joint trust or separate trust, there is no legal differential on the outcome if the attorney is diligent, and the document properly instructs the trustee to get the maximum benefit for the client to meet their planning and protection goals. Clients in one long term marriage are generally able to be served efficiently and effectively using a joint trust while clients who are on second marriages or have different distribution ideas may better served separately if the attorneys software is not thorough enough to manage it.  Tax planning and asset protection goals can also be met using joint trusts if the attorney is diligent in allocating the separate assets to the separate schedules (and Social Security numbers where appropriate) of the grantors.  So the good news is there's no wrong answer but it's important you distinguish what the client’s goals are and your software flexibility to adhere them.

If you want to sharpen the saw on your estate and elder law legal technical join us for our Estate Planning Practice Enhancement Week in St. Louis, June 1st – 5th.  Below is just some of what you'll get (and this is just Monday and Tuesday)!  You can look at the full agenda and register here.

Asset Protection

Medicaid

VA Benefits