If you’ve explored estate planning at all, you may have heard about joint trusts. Essentially, they are a way for spouses to share assets and also simplify the process of administering and distributing those assets.
Yes and no. For some couples, joint trusts can be very beneficial. However, depending on the circumstances, there are other options that should be considered.
Read on to learn what a joint trust is, the advantages and disadvantages, who should create a joint trust, and how to get the process started.
What is a Joint Trust?
A joint trust is a legal agreement between two people (typically spouses), with both people serving as co-trustees. When one person dies, the surviving individual becomes the sole trustee over the trust. When the second individual dies, the trust becomes irrevocable. A specified successor trustee becomes the manager of the trust and is responsible for distributing the assets to the beneficiaries according to the terms of the trust document.
The assets in the joint trust are co-owned by both trustees. Regardless of which individual dies first, the assets are handled the same way. In other words, the assets will be distributed to the beneficiaries the same way, no matter which individual dies first.
Advantages of a Joint Trust
There are several key advantages to having a joint trust. First, it allows couples to pass assets to one another without having to go through the probate process. Additionally, if the joint trust is revocable, assets can be added or removed from the joint trust and the terms can be modified while both individuals are still alive.
Another advantage of joint trusts is that they offer estate tax planning opportunities. In some cases, the couple may be able to reduce or avoid estate taxes by placing assets in a joint trust, as opposed to two separate trusts.
For couples that live in community property states, joint trusts can be especially helpful. As of writing, community property states include: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Alaska and Tennessee also have opt-in community property laws.
A community property state is a state where all property and assets acquired during the marriage are considered to be jointly owned by both spouses. This includes income, assets, and even debts. Creating an individual trust and then moving joint property into that trust can be a complex process. Establishing a joint trust greatly simplifies the process.
Another key advantage is that joint trusts are easier to administrate and less costly to maintain than two individual trusts.
Disadvantages of a Joint Trust
It should be noted that there are some disadvantages to a joint trust.
One of the primary disadvantages of joint trusts is that they lack the flexibility offered by individual trusts. If one of the individuals wants to change the terms of the trust or the assets included, they need the consent of the other individual. This has the potential to create relational friction. For example, if one person wants to add a beneficiary but the other doesn’t.
Another disadvantage is that the assets in a joint trust are not protected from creditors. If one of the individuals becomes bankrupt or sued, the creditors can go after the assets in the joint trust, even though the assets are owned by both individuals.
For those in blended families who want to transfer assets to children from a previous marriage, a joint trust probably isn’t the best option. When one spouse dies, all the assets in the trust are transferred to the remaining spouse to do with as they please. This has the potential to result in some beneficiaries being unhappy with the amount they will inherit.
A final disadvantage is that if a couple divorces, separating the assets in the joint trust can be logistically complex since both individuals co-own them. While no one can know exactly what the future holds, joint trusts are best for couples in stable relationships.
Who Should Create A Joint Trust?
A joint trust is best for couples who:
- In the event of one spouse dying, want to transfer assets to the surviving spouse tax-free
- Want to avoid the probate process
- Live in a community property state
- Are in a stable relationship
- Want a simpler, less expensive option than maintaining two individual trusts
Joint trusts are not as beneficial for couples who:
- Are in the midst of a divorce
- Have financial problems that could lead to bankruptcy or being sued
- Have children from a previous marriage and want to leave assets to them
- Cannot agree on trust terms or asset changes
At the risk of oversimplifying things, joint trusts are a good option for couples in relatively uncomplicated circumstances. No foreseeable big problems on the horizon, full agreement regarding the terms of the trust, and no major relational issues.
How to Create a Joint Trust
To create a joint trust, the couple should meet with an estate planning attorney. The attorney will help them create a trust document that outlines how the trust will be managed and what assets it will include. The couple must both sign the document for it to be legally binding.
It’s important to note that just because a joint trust is created, doesn’t mean that all assets need to be placed in it. Couples can choose to place specific assets in the trust while leaving others out. This can be a helpful way to ensure that everyone is on board with the trust and understands what’s included.
Once the joint trust is created, it should be funded by transferring assets into it. As noted above, joint trusts are revocable until both spouses die. This means that neither the terms nor the assets in the trust are locked in place while at least one spouse is still alive. If circumstances require it, changes can be made.