Joint Trust for a Couple

joint trustWhen you marry or enter into a longterm relationship, it may make sense to begin to combine assets. Many couples consider creating a joint estate plan such as a joint trust to manage their financial affairs after death. Consider a few factors before making your decision.

What is a Joint Trust?
A joint trust is different than property with joint ownership. If you and your partner jointly own property, in means you each have a legal interest in that property. There are a few different ways to jointly own property, but the most common way for committed couples is joint tenancy with rights of survivorship. This means that one individual’s share will pass immediately and automatically to the other owner upon that individual’s death.

In a joint living trust, all of the property retains its original character. In other words, individually owned (“personal”) and jointly owned (“community”) property can both be put into the joint trust and the property will remain personal or community. The joint trust provides that when one partner dies, the other may continue to use and enjoy all of the trust’s property.

Joint Trust Advantages
A joint revocable trust allows savvy couples to take a few estate tax advantages. Federal estate tax is assessed only to distributed assets above an annually set threshold. For instance, the 2009 threshold of $3,500,000 meant that estates valued under $3.5 million paid nothing in estate tax, and an estate valued at $4 million would pay tax only on $0.5 million. The estate tax in 2010 was unlimited, and the 2011 and 2012 rates exempt the first $5,000,000 of an estate.

Additionally, assets passed to a spouse are not taxed. This allows some clever estate tax avoidance: Assume a couple owns $8,000,000 in joint property and held all of the property in a joint trust. At the death of the first spouse in 2011, the trust is split into two trusts: Trust A and Trust B. Trust A contains the surviving spouse’s personal property and share of community property. Trust B contains $5,000,000 (the annual exemption amount). The net result is that both Trust A and Trust B are exempt from Federal estate tax in the first parter’s estate.

Joint Trust Disadvantages
The estate tax advantage should not lead you to assume that a joint revocable living trust is always preferable to separate trusts. The decision comes down to a variety of more complex factors, but generally depends a lot on your state. Community property states like California and Washington generally make for easier joint trusts, while separate property states like Oregon and Ohio generally make for easier separate trusts. Your personal circumstances will further modify this generality, however, and so it is always wise to consult an experienced estate planning attorney before deciding on your financial plan.