Understanding a Joint Trust vs an Individual Trust

Understanding a Joint Trust vs an Individual Trust

After married clients decide to form a trust, they must choose whether to have one Joint Trust or two Individual Trusts. While many married clients wish to create a Joint Trust that shelters their assets as a unit, there are good reasons to have separate Individual Trusts. Some things to consider:

Joint Revocable Living Trust

This chart shows the way the different trust components work together in a Joint Trust:

All marital property is titled to the trust, either as separate property or as community property. The Joint Trust agreement specifies what should happen to each type of asset when either spouse dies. Upon the death of the first spouse, different trusts are created according to the specifications of the trust agreement. Upon the death of the survivor, all assets are distributed to the beneficiaries.

Individual Revocable Living Trusts

This chart shows the ways an Individual Trust differs from a Joint Trust:

Because each spouse has their own trust, separate property is titled separately and joint property is either held as tenants in common by both trusts, or divided into equal shares and titled separately. Upon the death of the first spouse, that trust becomes irrevocable and separate assets are either transferred to the surviving spouse in trust, or distributed to beneficiaries. Community property is held in trust for the benefit of the surviving spouse, often with that spouse as trustee. Upon the death of the survivor, all assets are distributed to the beneficiaries.

Both types of trust will hold property for the survivor’s benefit, while ultimately protecting it for secondary beneficiaries (usually the children.) Depending on each couple’s situation, one or the other may make more sense.

Advantages of Individual Trusts

  • Separate Property: Couples who own large amounts of separate property may want to consider an individual trust. This often applies to couples who have prior marriages and are getting together later in life, or individuals who have a large portion of their assets in separately held LLCs or real estate, or in IRAs, Annuities, Life Insurance Policies, or 401Ks.
  • Sole Control: Property that passed to someone from an inheritance or through a family trust – for instance, a vacation home that has been on one side of the family for generations – is more easily managed through individual trusts.
  • Prenuptial Agreements: If the spouses have signed a prenuptial agreement keeping each spouse’s earnings and property separate, then two individual trusts may work better.
  • Unmarried couples: If the two members of the couple are filing separate income taxes, they will have a much easier time with individual trusts. Also, since such relationships do not qualify for the unlimited marital deduction, an individual trust can protect gifts from being taxable.

Advantages of a Joint Trust

  • Flexibility: 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. In addition, either spouse may revoke the Joint 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.
  • Funding: Even one sizable piece of shared property can make individual trusts a real hassle. Some financial institutions will not allow an asset to be titled to two trusts, and the asset must be divided. Other institutions require the asset to be held as tenants in common, which changes the asset from a joint asset that transfers automatically to the survivor into a commonly held asset that must be retitled after the first death. None of this is a problem with a Joint Trust.
  • Administration: In a Joint Trust, shared property can remain in the living trust when the first spouse dies. There is no retitling necessary.

What we’ve found is that forming two Individual Trusts adds some complexity and hassle to the funding process. However, it is more difficult to administer a Joint Trust after one spouse has passed away. It’s also possible for a married couple to create both a Joint Trust for the communally owned property as well as Individual Trusts for their separate property. That’s will cost more up front to create, but for some couples, it may be easier in the long run.

Whatever your situation, our role is to explain your options and alert you to possible outcomes of each type of plan. We promise to guide you through all these decisions with a listening ear that prioritizes your values to achieve your goals. Give us a call today!

Tienne McKenzie
Tienne McKenzie
tienne@themckenziefirm.com

Tienne is a paralegal specializing in estate planning.