Deciding between joint and separate trusts can be quite confusing. Many factors play into which trust is more suitable. These factors include: how the couple’s assets are titled, the relationship of the couple and the state in which the couple resides.
Both joint and separate trusts have pros and cons. Joint trusts are popular for married couples because they are less expensive to set up, simpler to manage, and reflect the fact that the marital estate is a singular unit. However, separate trusts sometimes offer superior benefits for married couples with respect to asset protection, flexible management, and potential cost savings after the death of a spouse.
Below we’ve compared the strengths and weaknesses of each trust in various scenarios.
Depending on state law, whether the couple signed a prenuptial agreement and how the couple’s assets are titled, separating the marital estate into two separate trusts may insulate the assets of one spouse from financial risks brought on by the other spouse. Since the innocent spouse’s assets are in a separate trust they may be out of reach from his or her spouse’s creditors.
Since all marital assets are located in one trust, all assets would be at risk if a creditor obtains judgement over one spouse.
✓ The Winner: Separate trusts may be a better option to protect assets from creditors depending on your state’s laws.
Administration During Couple’s Lifetime
If the couple’s assets are titled jointly, separating the assets into separate trusts requires some thought and additional steps in funding the trusts. Since each spouse is required to manage their own trust, separate trusts require more work. However, one spouse can name the other as a co-trustee so that both spouses can control all assets in the separate trusts.
Joint trusts are easier to manage during a couple’s lifetime. Since all assets are held in one trust, ownership mimics how many couples hold their assets - jointly. Both spouses having equal control of the management of joint assets held by the trust.
✓ The Winner: Joint trusts may be easier to manage during a couple’s lifetime.
Administration After a Spouse Dies
Separate trusts provide more flexibility in the event of a death in the marriage. Since the trust property is already divided, separate trusts preserve the surviving spouse’s ability to amend or revoke assets held within their own trust, while ensuring that the deceased spouse’s trust cannot be amended after death.
Separate trusts also allow spouses to designate how they would like their own assets distributed at death. Each spouse can specify who will inherit and what will be provided to the surviving spouse, while protecting their assets from being inherited from others.
Joint trusts do not work well if the spouses have different ideas about how assets will be distributed upon death. At the death of the first spouse, some joint trusts may need to be separated in to separate trusts and assets divided. This can create additional expense.
✓ The Winner: Separate trusts may be easier to manage following the death of a spouse.
Estate Tax Benefits
Separate trusts provide tax relief for affluent couples with combined estate totaling higher than the federal estate tax exemption (combined $22,400,000 for 2018).
A property drafted joint trust can achieve same estate tax marital deduction planning benefits as separate trusts.
✓ The Winner: This one’s a tie! If properly drafted, both can provide the same estate tax benefits.
Circumstances Where One Trust May be Better Than the Other
Separate trusts are a great option for remarriages or for couples owning individual property prior to the marriage. Separate trusts are also beneficial for couples expecting individual inheritances they wish to keep separate, or for common law marriages or couples with a prenuptial agreement.
Joint trusts are great for first marriages with same beneficiaries, similar distribution patterns, and same trustees. Couples wishing to keep their marital estate as a single unit should consider a joint trust. A joint trust gives the surviving spouse more flexibility to use all of the assets of the trust after the death of the first spouse.
Still not sure whether you and your spouse should go with a joint or separate trust? Feel free to call 405-701-6376 to let our knowledgeable Estate Planning team guide you through every step of your decision. Our highly trained attorneys can help you choose your best option, while also making sure your family’s assets are protected and properly distributed.