We Did Our Trusts When Estate Taxes Were an Issue, Do We Still Need Separate Trusts?
New clients came in to review and update an estate plan they had set up several years ago. The estate plan included separate trusts for each spouse, which contained provisions to lessen the potential impact of federal estate taxes on their estates after their deaths. The trusts were drafted at a time when the federal estate tax exemption limit was much lower than it is today. In light of this they wondered if they still needed to keep the separate trusts or could they shift to a joint trust, combining all of their assets into one trust that they would both manage as co-trustees.
As with most legal questions, it depends. Most married couples assume the sole reason to use separate trusts in their estate plan is to reduce or eliminate estate tax liability after they die. But taxes are just one of many reasons for married couples to use separate trusts. Let’s look at a few of them:
These assets are mine, not ours. Let’s consider property intended to “stay in the family.” In other words, is meant to be passed down to lineal descendants, or it’s inherited cash or other property that you just want to keep separate from your spouse. This is often the case with family hunting land that has been passed down from generation to generation. Clients may want to keep these assets separate so they don’t end up in the hands of a new spouse should the survivor remarry. Separate trusts can be handy to ensure that property stays within a bloodline.
It’s a second marriage. Each spouse has children from a previous union and they want to make sure that their children will not be disinherited upon their deaths. The concern is that when the first spouse dies, all of their assets end up in the hands of the surviving spouse and when the surviving spouse dies, all of the assets will go the children of the surviving spouse, leaving the children of the first spouse who died with nothing. This happens more often than one may think. Separate trusts can be a great way to provide financial support to a surviving spouse (especially where the bulk of the financial assets belong to the spouse likely to die first) during his or her remaining lifetime, while guarantying that any remaining assets will pass to the children of the first spouse upon the death of the survivor.
One spouse has trouble managing money. Separate trusts can be of benefit to ensure competent asset management, stable cash flow, and asset protection from the claims of the surviving spouse’s creditors should he or she have trouble managing money or credit.
Tax laws are complex and subject to change. If a joint trust is used, property of the trust may need to be allocated between the deceased spouse and the surviving spouse for various tax reasons. Understanding the terms of the joint trust dealing with post death property allocations, and determining what assets go where, when, and with what tax consequence, can be very difficult. Many times these provisions and issues are ignored, creating serious tax problems. Presented as being simple and convenient, joint trusts can become anything but. Most clients I see will escape federal estate taxes upon their deaths under current exemption limits. However, future tax law changes may reduce the exemption limit. And if the limits are reduced, it will be easier to address the problem if spouses have separate trusts than if they had a joint trust.
These are just a few of the factors to consider in determining whether joint or separate trusts should be used in an estate plan. Every situation is different, which is why you must carefully consider your own circumstances with your attorney to determine the best way to go.
