August 20, 2020
by Joe Price
So you have decided to take the plunge and follow the advice that your estate planner has given you for years – you have committed to establish and title assets in a revocable living trust.
You have been told that since estate tax exemptions have increased so greatly in the last two decades, your family’s greatest expense at a parent’s death is likely to be probate costs rather than taxes.
The decision to establish a trust is to be applauded – for many clients, it is the most cost-effective estate planning action they can take. Now you have one more important decision to make concerning the trust: Will you and your spouse have one joint trust or two separate trusts?
The Starting Point
Let’s begin with the assumption that the joint trust will be the preferred choice unless there exists a good reason to have separate trusts. Why would the joint trust be the preferred choice? One excellent reason is that it makes future decisions easier than if you have two trusts – that is, with one joint trust, you don’t have to argue over whose trust should be the owner of a particular asset.
On the flip side, there are definitely valid reasons for some families to have separate trusts. So let’s discuss the two most important reasons.
Reason #1: You’re Concerned About What Will Happen If You Die First
Part 1: The Blended Family
Let’s say that you are part of a blended family. Both you and your spouse have children by a previous marriage. You have tried to treat the children equally during your marriage but you’re not sure what your spouse will do if you are not around and he/she has control of all of the jointly owned assets.
Part 2: Remarriage?
A similar problem arises if you are concerned that your spouse might remarry after your death and decide that his/her new family is entitled to some or all of the joint assets you accumulated during your marriage.
Now you can insert provisions in the joint trust that segregate a portion of the joint assets from the surviving spouse’s control. Those provisions might say that during the surviving spouse’s lifetime, he/she is entitled to (a) the income from the segregated portion or (b) the income plus principal for health care expenses only, but in either case, the surviving spouse is not entitled to unrestrained access to the segregated portion.
The upshot is that you will need to have an uncomfortable discussion about putting limits on the assets that your spouse is entitled to have access to after your death. That discussion may be especially uncomfortable if putting limits on some of the assets leaves your spouse with an inadequate amount to live on.
There is an old saying in the estate planning community that joint trusts are easier on the front end (at creation) than separate trusts but much more difficult on the back end (at the first spouse’s death).
Let’s compare that situation to having separate trusts. In that situation, it does not seem unusual for the spouse who dies first to restrict the surviving spouse’s access to a portion of his or her separate trust. Trusts of deceased spouses have been divided into marital and nonmarital trusts for decades and it has been accepted as normal.
That conversation is much easier to have if it is even necessary.
Reason #2: You’re Concerned About the Potential Creditor Problems of a Spouse
When we refer to creditor problems, we are not only talking about a spouse being a potential spendthrift; in fact, we are more concerned with a spouse who has an occupation that makes it more likely that he/she will be sued than the other spouse will.
In that situation, owning assets in separate trusts will insulate the assets owned in the “safe” spouse’s trust from the obligations of the “less safe” spouse.
In the state of Missouri, which recognizes the concept of tenants by the entirety, that danger posed by the “less safe” spouse can be alleviated by making the joint trust qualify for “qualified spousal trust” status. The qualified spousal trust insulates assets owned by the trust from the obligations of one but not both of the spouses in the same way that titling the assets as tenants by the entirety does. In other words, if only one of the spouses incurs a liability, that spouse’s creditor cannot seize the assets of the trust in order to satisfy its obligations. If however, both spouses incur a liability (for example, on a contract), the qualified spousal trust assets can be seized to satisfy the obligation.
By contrast, in the state of Kansas, which does not recognize the concept of tenants by the entirety or the qualified spousal trust, there is no protection for assets held in a joint trust if only one of the spouses is liable on an obligation. The creditor will be able to seize one-half of the assets owned by the joint trust.