Separate Trust Offer More Benefits

I am occasionally asked why I usually prepare separate trusts for married couples instead of a joint trust. The reason is very simple, it is what most of my clients want. Once I explain all the benefits and burdens of joint trusts versus separate trusts, most all of my clients choose separate trusts.

There is much misinformation and many misconceptions regarding joint trusts versus separate trusts. Many prospective clients have said to me, “I have been told that because we don’t have a taxable estate, we should not have separate trusts.”

It is true that there are enormous benefits with the use of separate trusts for couples who have taxable estates. Your marital estate would have to exceed the IRS exemption amount of $3.5 million in 2009 and $1 million in 2011 and thereafter. There currently is no limit in 2010. With properly drafted separate trusts, you as a couple, could double the amount you leave tax free to your heirs, up to $7 million in 2009 and up to $2 million tax free in 2011 and thereafter.

However, there are lots of other reasons why you may want separate trusts.

Creditor protection during your marriage. If you and your spouse set up separate trusts and allocate approximately one-half of the marital assets into each of your trusts, you can insulate one-half of the marital assets from the creditors of the other spouse. If you had a joint account or a joint trust, the creditors of either spouse can go after the full value of those assets in that joint account or joint trust.

Creditor protection after your spouse’s death. With properly drafted separate trusts, you can have full access to your deceased spouse’s trust assets for your needs. The amounts in your deceased spouse’s separate trust are protected from your creditors. If you get sued and have a huge judgment entered against you, you may lose everything you own and in your trust. In such case, although you still have full access to the assets in your deceased spouse’s trust for your needs, your creditors can not touch them. This is usually not the case with joint trusts. The way most joint trusts are drafted, you have unrestricted access to all assets in the trust after your spouse’s death. If you have unrestricted access, so do your creditors. You can lose everything.

Remarriage protection. Most married couples have a “Honey, I love you” plan, which is “Honey, I love you, I leave it all to you. The kids can get it after we are both gone.” You do not want that gold digging Thor or Bambi to marry your surviving spouse and then make a claim against your assets after your spouse’s death. With separate trusts, you can have remarriage protection. If your surviving spouse marries Thor, her much younger Swedish personal trainer or Bambi, the casino hostess, discretionary distributions from your trust stop unless Thor or Bambi signs a prenuptial agreement. This protects your surviving spouse’s assets from any claims by Thor or Bambi. Your entire marital estate is protected and saved for your children. Most joint trusts I have seen do not allow for remarriage protection.

You can amend your separate trust after your spouse’s death. It is your trust, you can generally revoke it, change it, do what ever you want to your trust at any time, regardless of whether your spouse has survived or not. Many joint trusts I have reviewed become irrevocable after the death of one spouse and are not amendable or changeable at that time. With this provision in a joint trust, you cannot change a thing after your spouse’s death, even if circumstances change with you or your family.

Separate trusts can have less administration after your spouse’s death. Many joint trusts have provisions that require you to create separate trusts after your spouse’s death. This means that you will have to go through a process of itemizing and valuing all of the marital assets and then allocating them to each of the new separate trusts. By having separate trusts at the outset, you separate the assets now while you are alive and well. The assets are then titled in the name of you and your spouse’s separate trusts. After your spouse’s death there is no need to be worrying about how to allocate the assets between trusts because it is already done.

Look at your situation. Do you want creditor protection during your marriage? Do you want creditor protection after the death of your spouse? Do you want Bambi and Thor remarriage protection? Do you want the flexibility to change your trust after your spouse’s death if circumstances change? Do you want to be able to have easier administration after a death? Do you want to double the amount that you can leave to your children estate tax free? If the answer to any of these questions is yes, then you want separate trusts for you and your spouse.

By: Matthew M. Wallace, CPA JD

Published edited November 29, 2009 in The Times Herald, Port Huron, Michigan as: Separate trusts offer big benefits

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