If you are married and considering setting up a trust for estate planning purposes, one of the first things you will need to decide is whether to set up a joint trust or individual trusts. There are advantages and disadvantages to both options—it is not one size fits all. The best option for you will depend on where you live, how much your estate is worth, and your personal preference.
What is a joint trust?
A joint revocable living trust is a trust that is set up by two people (joint grantors) and funded with joint or separate property.
A joint revocable trust can be a good option for couples whose estates are relatively uncomplicated, in a first marriage with the same beneficiaries, distribution, and the same trustee, and whose combined assets do not reach the federal estate tax threshold ($11.4 million per individual or $22.8 million combined in 2019) or state estate tax threshold (if there is a state estate tax).
If you live in a community property state, a joint revocable living trust may be the best or only option, since property that is acquired during the marriage is considered jointly owned. Community property states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
What advantages are there to using a joint trust?
The first advantage may be obvious— joint trust funds are less expensive and less work to set up than two individual trusts, and easier to manage because they are single trusts with a single trustee.
Funding a joint living trust can also be less complicated than funding two separate trusts, because both joint and separate property can be used to fund the trust (and can go to separate beneficiaries), and because a shared piece of property does not have to be divided to be part of the joint trust.
Joint trusts are also better than separate trust from a tax perspective if the trust is funded with community property—the trust property gets a full step-up in basis after the death of the first spouse.
What are the possible disadvantages of a joint trust?
One of the possible disadvantages is in asset protection. If you have creditors that have a judgment on either spouse, the trust assets for both could be at risk when you have a joint trust. There are a few exceptions for states that give tenancy by the entirety protection to joint trust assets.
Another disadvantage is that a joint living revocable trust gives less flexibility to the surviving spouse to be able to adapt the trust after their spouse has passed away. If both spouses had separate revocable trusts, they would each be able to change their trust in response to changing situations while they are still alive.
There are a few other pitfalls that can be avoided if you have a properly drafted joint trust. For instance, if a joint trust is not properly drafted, the trust property could be considered a completed gift of their separate trust property and their share of community property to trust beneficiaries after the death of the first grantor. This can be avoided if both spouses are given the power to withdraw their trust property unilaterally from the trust at any time.
Is there another option for married couples who may not have the same goals?
There is another option in addition to separate trusts or joints trust. If you and your spouse want to have a joint trust but have different asset distribution preferences, you may want to consider a Joint Pour Over Trust. With a Joint Pour Over Trust, the joint trust that you set up would split into separate trusts upon the first spouse’s death. This allows for both spouses to have their preferences fulfilled but gives a little more flexibility and control to the surviving spouse.