Revocable trusts offer many estate planning advantages for individuals — and married couples. But if you're married, you'll need to make a critical decision: Joint trust or separate trusts? Both options involve benefits and drawbacks. Let's take a look.
Among other advantages, revocable trusts allow you to minimize the cost of probate, keep financial details private and provide for asset management in the event you become incapacitated. You can also amend the terms of your revocable trust or revoke it altogether.
If you're married and both you and your spouse are comfortable with the other partner inheriting all of your combined assets, you may want to choose a joint trust. In general, joint trusts are less complex to set up and administer than separate trusts. You can fund a joint trust simply by transferring assets into it, thus avoiding the need to divide assets between two separate accounts.
With a joint trust, each spouse has equal control over the assets, which can make it simpler to manage and conduct transactions involving trust assets. Another potential advantage is that they simplify real estate transactions. If, for example, your home is held in a joint trust, it's easy for the surviving spouse to sell it. However, if the home is titled in the trust of the deceased spouse or is split between separate trusts (as tenants in common), selling the home may be more challenging.
If, on the other hand, one or both of you want to ensure a portion of your assets go to someone other than the surviving spouse, separate trusts may be a better option. For instance, if a spouse has children from a previous marriage, a separate trust makes it possible to provide income to the surviving spouse for life, while preserving remaining funds for his or her children.
Separate trusts may also be preferable if you're uncomfortable handing over complete control of your combined assets to the other spouse. This could come into play when one spouse isn't knowledgeable about money management and the other spouse prefers to have a separate trust overseen by a knowledgeable independent trustee.
Separate trusts also usually offer greater protection when you're concerned about creditors. If you have a joint trust with your spouse and a creditor obtains a judgment against one of you, all trust assets could be at risk. Separate trusts are generally protected from the other spouse's creditors.
Another advantage: When one spouse with a separate trust dies, his or her trust becomes irrevocable, making it more difficult for creditors of either spouse to touch its assets. Just keep in mind that the degree of asset protection a trust provides depends on the type of debt involved, applicable state law, the existence of a prenuptial agreement and other factors.
For most couples today, federal gift and estate taxes aren't a concern because they enjoy a combined gift and estate tax exemption of more than $27 million for 2024. However, this exemption amount is scheduled to drop to around $14 million in 2026 if Congress doesn't act.
Also, if your wealth exceeds the exemption amount, or you live in a state where an estate or inheritance tax kicks in at lower asset levels, separate trusts offer greater opportunities to avoid or minimize these taxes. For example, some states have exemption amounts as low as $1 million or $2 million. In these states, separate trusts can be used to make the most of each spouse's exemption amount and minimize exposure to estate taxes.
Income tax exposure is another factor to consider when choosing between joint and separate trusts. When one spouse with a separate trust dies, his or her trust becomes irrevocable. That means filing tax returns for the trust each year and paying tax on any income it has produced. Irrevocable trusts (other than grantor trusts, which aren't relevant here) are subject to a high tax rate on undistributed income:
The 24%, 35% and 37% tax brackets for individuals (other than joint filers, for whom the amounts are higher) don't kick in until taxable income reaches $100,525, $243,725 and $609,350, respectively. So unless a trust distributes all or most of its income each year, a significant portion of its earnings may be eroded by income taxes.
By contrast, a joint trust remains revocable after the first spouse's death and income is taxed to the surviving spouse at his or her individual tax rate. Joint trusts don't become irrevocable until after both spouses have died.
Whether a joint trust or separate trusts makes better sense for your estate plan will depend on the personal, financial and tax complexity of your situation — as well as the amount of assets you and your spouse own. Be sure to discuss the matter with an experienced estate planning professional, who can help you establish a revocable trust — or trusts.
Get in touch today and find out how we can help you meet your objectives.
