When a couple engages in foundational estate planning, I often address whether to use a revocable living trust (RLT). If using an RLT makes sense, an important follow-up question to married couples is whether to use a joint RLT or separate RLTs. As an estate planning attorney in Austin, I help clients walk through what might work best for their specific circumstances.
A trust is a legal concept. It allows an individual to transfer ownership of their accounts and property to a trustee. The transferor can be known as the Grantor, Settlor, Trustor, or Trustmaker. For most RLTs, the Trustee is the same person as the grantor. The Trustee has a legal obligation to use that property for the benefit of a beneficiary.
A revocable living trust (RLT) is a trust that an individual (the grantor) creates during their lifetime. The grantor funds the trust by changing the ownership of accounts and property from the grantor as an individual to the grantor as the Trustee. The trustmaker can change the trust at any time until they become incapacitated (unable to make their own decisions) or pass away.
When a married couple (the grantors) uses a joint RLT for estate planning, they typically serve as initial trustees. The grantors transfer their separate and joint properties into the same trust, which typically names both trustees and beneficiaries. However, they can designate which property is truly joint and their individual property on schedules attached to the trust. Grantors of a joint RLT can also define what happens to joint and separate property at first death and second death.
On the other hand, when a married couple uses separate RLTs, they establish two trusts. Each individual transfers their separate property into their trust (one grantor per trust). They typically split their jointly owned property and transfer separate shares into their trusts. As they acquire additional jointly owned property, the couple continues to divide the property following what they agreed upon and transfer their respective shares into separate trusts.
In community property states, such as Texas, most married couples (particularly those couples who have been married for many years and have children from only that marriage) use a joint RLT because of the significant tax benefits that accrue from community property ownership. Keeping community property in a joint trust ensures that the marital property retains these critical tax benefits. Nevertheless, even in community property states, there are circumstances in which married couples may want to consider using separate RLTs.
As explained above, although a joint RLT can preserve tax benefits for those in community property states, there are several good reasons to consider using separate trusts in estate planning regardless of whether the couple lives in a community property state.
Keeping the property in separate RLTs during the marriage can sometimes make it more difficult for one spouse's creditors to access property held in the other spouse's trust. For example, in one Utah case,[1] a lumber supply company sued a husband in an attempt to foreclose on his family home as a result of a personal guarantee he had made to the company to obtain building materials. Because the couple had decided years before to transfer their home into the wife's separate RLT, of which she was the only Trustee, the court held that even though the husband continued to live in the house with her, the home was beyond the reach of his creditors.
Anytime one spouse creates some level of legal separation between themselves and specific property that a court would otherwise treat as marital property, that spouse strengthens the argument that their creditors cannot reach that property in a lawsuit. Of course, this case directly applies only to Utah residents. But many of the legal principles are similarly applicable in other states.
In addition to asset protection during the grantor's life, assets one puts in a separate RLT have even more protection after the grantor of the individual trust dies. At that time, the trust becomes irrevocable, making it even more difficult for other beneficiaries or the surviving spouse's creditors to reach the property held in the now-irrevocable trust.
[1] Lakeside Lumber Prods., Inc. v. Evans, 110 P.3d 154 (Utah Ct. App. 2005).
Administering the property of a joint RLT after one spouse dies requires a certain amount of effort. The administrator must divide the property between the deceased spouse's share and the surviving spouse's share. This process frequently requires careful valuation of the property in the trust. Moreover, the administrator must oversee the execution of new deeds for real property. They would also retitle stock certificates, or establish separate investment accounts to hold the deceased spouse's individual property.
On the other hand, if the spouses properly funded their separate RLTs (transferred or retitled their property into the name of the trust), trust administration after the death of the first spouse can be straightforward. The administrator needs only to notify the financial institutions of the grantor's death and provide them with the trust's new tax identification number to report tax issues in the future correctly.
Couples who have been married before or have children from another relationship may also benefit from using separate RLTs. This is particularly true when each spouse has the property they would like to keep separate for specific reasons. For example, perhaps a newly married spouse has inherited their parents' home, and the couple would like to live there. But, the spouse wants to make sure the family home stays in their own family. That is, at their death, it passes only to their children.
With a prenuptial agreement, keeping the house in a separate RLT would allow this spouse to accomplish this goal. They could specify precisely how that home should be used and passed on when they die. Using a joint RLT to achieve the same result requires much more careful drafting. It also introduces the much greater potential for confusion. There's also the potential for mistakes in administering the trust after the death of the spouse who owns the house.
As you can see, using separate RLTs in a marriage can make perfect sense in some situations:
If you feel that using separate RLTs might be appropriate in your situation, please call us. We can schedule a consultation to discuss the pros and cons of using individual or joint trusts. We can thereby help you design an estate plan tailored to your unique situation.
(By Appointment Only)
14425 Falcon Head Blvd
Bldg E-100
Austin, TX 78738
