Last week, I attended and was one of the speakers at the three day 55th Annual Probate & Estate Planning Institute sponsored by the State Bar of Michigan and the Institute for Continuing Legal Education. This conference focuses on the matters that Michigan estate planning and elder law attorneys encounter on a regular basis. In addition to experienced Michigan attorneys, the program included nationally known speakers.
The national speakers discussed how the 2013 “permanent” increase in the estate tax exemption amount to $5 million indexed to inflation and the “portability” of the exemption between spouses has changed the way traditional estate planners do planning. Before the exemption increase and the advent of exemption portability, most attorneys who did traditional estate planning focused the planning on estate taxes. With portability and the exemption amount in 2015 at $5.43 million, very few estates will be subject to the estate tax; so these traditional plans no longer will need to be focused on estate taxes.
Because of this, the national speakers explained how traditional planners are moving away from tax driven separate trusts to non-tax driven joint trusts. The new laws really have turned traditional estate planning on its head. Traditional estate planners have to now focus on something other than death and taxes.
However in our office, these new laws have affected how we do planning very little. Although taxes may be an important component of an estate plan, in our office, taxes are rarely the primary focus of a plan. Because of this, once we explain all the benefits and burdens of joint trusts versus separate trusts, most of our married clients still choose separate trusts. There many reasons why you and your spouse may want separate trusts.
Creditor protection during your marriage. With a separate trust for each spouse and marital assets allocated and funded into each of your trusts, you can insulate marital assets from the creditors of the other spouse. For example, if you were sued after injuring someone in a car accident in which you were at fault, with a joint trust or joint accounts, the full value of those assets would be at risk. Your entire marital estate could be lost by a large personal injury judgment.
On the other hand, you can limit such a liability with fully funded separate trusts for you and your spouse. Trust funding is completely and correctly designating your trust and individuals as owners, beneficiaries and insured parties of your assets. Basically, it’s putting your stuff in your trust.
After you and your spouse set up your separate trusts, you would then fund each of your trusts with approximately one-half of the marital assets. A catastrophic creditor of either you or your spouse could only be able to make claims against one spouse’s trust, which contains only one-half of the marital assets.
Creditor protection after a spouse’s death. With properly drafted and funded separate trusts, you or your surviving spouse can have full access to the deceased spouse’s trust assets for any needs. The assets in the deceased spouse’s separate trust are protected from the creditors of the survivor. For example, if the survivor gets sued and has a huge judgment entered against him or her, the survivor could lose everything individually owned by the survivor and in the survivor’s separate trust. However, in such case, although the survivor still has full access to the assets in the deceased spouse’s separate trust for any needs, the survivor’s creditors cannot touch any of those assets in the deceased spouse’s separate trust.
This is usually not the case with the joint trusts I have reviewed. The way most joint trusts are drafted, either spouse has full unrestricted access to all assets in the trust while both spouses are alive and after one spouse’s death. When you have a joint trust, since both you and your spouse have full unrestricted access to the trust assets, so do your creditors. After one death, if the survivor gets sued, the entire marital estate can be lost.
Remarriage protection. Most long-time married couples have some version of a “Honey, I love you” plan, which is “Honey, I love you. I leave it all to you. The kids can have it after we are both gone.” After your death, 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 surviving spouse’s death. With separate trusts, you can have remarriage protection.
With remarriage protection, after your death, if your surviving spouse marries Thor, her much younger Swedish personal trainer or Bambi, his aerobic instructor, discretionary distributions from your trust stop unless Thor or Bambi signs a prenuptial or postnuptial 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 loved ones. Joint trusts generally do not or cannot provide this remarriage protection.
You can amend your separate trusts 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. You and your spouse can also give each other limited powers of appointment over the other’s trust so that after a death, the survivor can change the beneficiary distribution pattern of the deceased spouse’s trust.
Many joint trusts I have reviewed become irrevocable after the death of one spouse and are not amendable or changeable after that time. With this provision in a joint trust, neither you nor your spouse can change a thing in the joint trust after one spouse’s death, even if circumstances change with the survivor or your loved ones.
Separate trusts can have less administration after one spouse’s death. Many joint trusts have provisions that require a surviving spouse to create separate trust funds after one spouse’s death, one in the name of the deceased spouse and one in the name of the survivor. Since the joint trust was never funded, this means that the survivor will have to go through a process of itemizing and valuing all of the marital assets and then allocating and funding them to each of the new separate trust funds.
By having fully funded 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? If the answer to any of these questions is yes, then you want to consider separate trusts for you and your spouse.
By: Matthew M. Wallace, CPA, JD
Published edited May 17, 2015 in The Times Herald newspaper, Port Huron, Michigan as: Separate trusts offer benefits for couples