Should I have a Separate Trust or Joint Trust with my Spouse?

Sep 27

If you are married and considering whether a trust makes sense for your family, then you should also consider whether the trust should be joint / combined (so that there is only one trust document or one bucket of assets so to speak), or whether it makes more sense to create two separate truss or two separate buckets for to meet your estate planning goals.

In this article, we will cover the major considerations to determine whether a joint trust or two separate trusts makes the most sense for you and your family.

Consideration #1: Family Dynamics

If you or your spouse have children from a prior relationship, then you may want to consider separate trusts to ensure that your wishes are followed.

For example, if you have a daughter from a prior marriage who may or may not get along with your spouse, but then you also have two or three children with your current spouse, then there is a higher likelihood that your spouse would prefer to leave most (if not all) of your assets to your shared biological children. In other words, there may be a strong temptation for your current spouse to disinherit or reduce your prior relationship child’s inheritance if you predecease your spouse.

In this situation with a joint trust, you could technically structure the trust agreement to have sub-trusts that are created after your death and instruct the trustee to shift a portion of that money into a sub-trust or pay a certain percentage outright to your child from a prior relationship upon your death. But the problem with that approach is that if you predecease your spouse, then you are now giving away money that your surviving spouse may need access to for retirement planning purposes. Put differently, you want your spouse to have the benefit of your assets so long as he or she is still living, and really only want that money to go to your other child after your surviving spouse dies. Otherwise, you may unintentionally be put your surviving spouse in a financial bind if unforeseen circumstances arise later in life.

But, if you structure a joint trust to have the provisions that allow your assets to be used for the benefit of surviving spouse (to avoid the potential problem of the surviving spouse running out of money), then you create the risk that the surviving spouse may simply shift the assets to a new trust with different remainder beneficiary provisions (this would allow him/her to modify your ultimate wishes).

Therefore, with a joint trust, when you try to solve for one problem (ensuring the financial security of your surviving spouse), you create the possibility that the surviving spouse could, in effect, disinherit your child from a different relationship. Even if the joint trust has a sub trust that says otherwise, so long as the surviving spouse has discretionary powers (inherent in a joint trust), there is always going to be wiggle room for a sophisticated surviving spouse to shift assets away from their stepchild(ren).

However, if you have separate trust in place (instead of a joint trust), then you have much better control mechanism in place. The separate trust would be funded and clearly delineate which assets fall onto which bucket, and therefore make it much more transparent in terms of which assets are intended to belong to your children from a separate relationship after your death. Whereas, with a joint trust, the assets are at least temporarily co-mingled to give your surviving spouse a gray area to operate within.

Also, by having separate trust, you can more clearly articulate who are the trustees or successor co-trustees upon your death, which may be different than your spouses separate trust. This will allow you to each pick a successor co-trustee who you believe will act as a good check and balance to make sure your wishes are fulfilled. And your spouse can do the same with her trust. Naturally, there will be overlapping provisions and some reciprocity language within the trust, but there is also plenty of room to customize the management and distribution of your assets that would not impair or have any impact on how your spouse’s trust operates, and vice versa.

By having these two separate trusts you can decide what happens to the property in your trust and your spouse can decide what happens to the property in her trust. Even if you disagree, you both get your own say with respect to the assets that you have earmarked for one another.

Consideration #2: Tax Planning Opportunities

Joint trusts can be structured so that when the first spouse dies, the trust is separated into different sub-trusts to maximize the federal and state estate tax exemption rules, thereby allowing you to pass on the most wealth to your children and grandchildren in the most tax efficient manner possible.

The reason why I’m not a fan of this joint trust to separate sub-trust approach for my wealthier clients is because (similar to what was discussed in #1), in practice, I often see that when the first spouse dies, the surviving spouse fails to make timely tax elections, fails to set up the sub trust, and thereby fails to capture those tax planning opportunities because he or she has either forgot about them, or simply didn’t have the time to deal with administrative side of setting up the trusts.

Whereas, with separate trusts, you would’ve already clearly indicated and split out the assets that were intended to go into separate sub trust buckets. That way, even if the surviving spouse failed to do some administrative work in a timely manner, by having a separate trust already set up, you’ve already earmarked or at least indicated which assets were intended to be treated a certain way for tax purposes. By creating that transparency up front, it allows the children to more quickly identify your intentions and it can remove some of the administrative burden that would have otherwise been placed on your surviving spouse.

Consideration #3: Control

In line with the other two considerations explained above, you may want two separate trusts in order to maintain a certain degree of control over certain assets during your life, after life, or both.

By having separate trusts, you could have separate trustees or specify different powers and authority to each trustee. Such specifications would further clarify your intentions and better ensure your wishes are followed as opposed to a joint trust scenario where the trustees are generally one in the same.

For example, if you did separate trusts, then you could specify that your wife serves trustee, but also appoint a co-trustee (which could be a sibling a family member or a trusted advisor or even your child from the separate relationship), to act as a check and balance on one another with respect to your trust in the event that you become incapacitated or after you die.

Meanwhile, your spouse and his/her own separate trust could have different co-trustee provisions so that your spouse wouldn’t have the same restrictions or requirements on his/her own trust. In other words, you get to design the trust your own way and your spouse can design his/her trust as he/she deems appropriate. And of course, where there is common ground, you can insert the appropriate language within both of your trusts.

Oftentimes, you’ll see this play out in something called a QTIP Trust. QTIP stands for qualified terminal terminable interest property and is specifically designed to allow your family to save on estate taxes in the long run. But it also could be a great way to preserve an asset for the benefit of your children if you predecease your spouse.

Once again, if you have a separate trust, it’s very easy to tell which assets were intended to be funded into the QTIP trust. Whereas if you have a joint trust, it can sometimes be hard to tell which assets were intended to be redirected to the QTIP trust after your death.

On the other hand, with a joint trust, the surviving spouse may simply forget to fund the QTIP sub-trust, which then creates an administrative mess for her children to clean up (which I’ve seen happen in practice more than once).

Now you may be wondering, “well if I have a separate trust, couldn’t my surviving spouse also forget to fund the sub trust within the separate trust?” And the answer is, yes, your surviving spouse might forget to do it, but if you have a co-trustee in place (or activated upon your death or incapacity), then that co-trustee could act as that check and balance to make sure the job gets done. That’s why it’s so important, in certain situations, to have a co-trustee. The co-trustee can create a layer of accountability and authority that protects the remainder beneficiaries interest. Or, the co-trustee could merely act as an assistant or helper.

Either way, if you do have someone you trust completely (other than your spouse), a co-trustee can be an essential tool in blended family situations.

And to be clear, I’m not saying your surviving spouse is out to get you (even if he or she is), I just know that life happens. People get very busy. And things sometimes fall through the cracks. So if you could have different safeguards in place, like having a co-trustee who is well organized and not afraid to speak up, then you put your family in a better situation overall from an estate planning standpoint.

So when should I do a joint trust?

Even though this article may come off as if I generally recommend separate trusts, for many clients (under $5 million in assets, non-blended family) separate trusts are usually too complex for their preferences.

Instead, I really only lean towards the separate trusts approach when you have a blended family situation or when you have at least $5 million in assets. Generally, the wealthier you are, the greater the potential benefit. There are also scenarios that from a liability standpoint (think business owners, doctors, attorneys, etc.), where it may make sense to keep assets separate in case of a lawsuit.

But, I found that in practice having separate trusts below the $5 million threshold (or if the blended family scenario doesn’t apply) often creates more administrative headaches than it’s worth.

Put differently, I highly recommend a joint trust if you want to keep things simple and aren’t afraid of the rest of the stuff we talked about above. Joint trust are usually more affordable and usually have less complications after the death or incapacity of one of the spouses.

Also, as stated above, if you’re not do not have the above concerns, a joint trust can accomplish a lot of the same goals assuming that both you and your spouse are well organized and aligned in your intentions.

For that reason, you will want to discuss all the above with your estate planning attorney to make sure you end up with the right trust structure for your and your family.