Separate or Joint Trust.. That is the Question!

In the past, when the estate tax applicable exclusion amount (“AEA”) was $3.5 million or less, attorneys generally drafted 2 separate trusts for our married clients so that each client could take advantage of EACH of their AEA. Now that a spouse has the ability to “carry” over the unused AEA from one spouse to another through portability, individuals have a higher AEA of $5.430 million and beneficiaries can get a step up in basis upon a surviving spouse’s death (thus, reducing the gains that a beneficiary may incur upon sale of the inherited asset), many clients are disenchanted with the complexity of 2 separate trusts and the problems with separate ownership, especially when they are used to owning everything jointly.

Consequently, a lot of clients are considering a joint trust. I used to avoid drafting joint trusts when trying to take advantage of the separate AEA because the drafting is difficult and I have had to “fix” many joint trusts after the death of one party. Now my thinking has changed when it is VERY unlikely that a couple’s assets will ever be over a few million dollars. Of course, this blog can only discuss the very basics of a joint trust. To get specific advice for your situation, you MUST see an experienced trusts and estates attorney.

If you consider preparing a joint trust, then the following are some items to consider (this is NOT an exhaustive list). Generally, these items are addressed to clients who do NOT have estate tax issues now and it is very unlikely that they will have those issues when they die. When your married clients start accumulating wealth in over $3-$5 million mark or if you have very young clients who may have time to accumulate substantial wealth, you should consider the separate trust alternatives:

1. In Florida, the transfer of jointly owned assets into a joint trust will lose the asset protection of tenants by the entirities (TBE). Some of my clients don’t care or some wait to fund the joint trust after the incapacity or death of one spouse. Of course, there is a risk that both parties die at the same time, thus requiring probate for those assets not transferred into a joint trust.

2. Homestead should NOT be transferred into a trust except under VERY unique circumstances.

3. If assets are currently in separate trusts, then the assets have to be retitled into the name of the joint trust. Many clients don’t like going through that process and you have to make sure that any transfers from one trust to another don’t trigger capital gains. Some providers may make you sell the assets before transferring the assets from one account to another. Some will let you you transfer the assets in kind. Be sure you know BEFORE you transfer.

4. You have to be sure that all assets are transferred FROM the separate trust(s) into the joint trust. If you forget even one asset, then that asset is governed by that separate trust and then, after death, your trustees have to administer not only the joint trust but also the separate trust(s) which can create numerous headaches and expense for the beneficiaries.

5. Review the title of real estate to make sure that the deeds transferred the real estate (other than homestead… 2. above) to the proper trust. The administration of real estate in a “rogue” trust can be a nightmare.

6. If you are the attorney drafting a joint trust, DON’T assume that your clients have done what you have advised them. Be sure that you look at the bank statements and other documents of title to be sure that the assets have the correct title.

7. Don’t revoke the separate trust until you are absolutely sure that all assets have been properly retitled.

8. Be sure to review life insurance, annuity and retirement plan beneficiary designations to be sure the designations are correct. You, more likely than not, do not want a joint trust to be the beneficiary of a retirement plan. If, however, the joint trust is a beneficiary of a retirement plan, then be sure that a joint trust meets the “see through” trust requirements.

ADVICE: Now is the time to reconsider your estate planning documents in light of the new AEA. Most of us will not even approach the threshold of the maximum AEA. Of course we don’t know what will happen in the future with the tax changes and if you get rid of the separate trust and Congress LOWERS the AEA you may be back at square one starting all over again. Unfortunately, none of us can predict the future and there is no way to know with certainty what will happen with the AEA. All we can do is advise our clients of the alternatives and let them make the decisions. Hopefully this will help you make that decision.

New word of the week…Pro Bono… Latin term meaning “for the public good”.  In the legal world the term “pro bono” means uncompensated legal services performed for the public good.  Pro bono hours include, not only work for indigent clients, but also participation in bar associations, civic organizations and ideological and political causes.


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