KPM

Will

A Married Couple’s Decision: Joint Or Separate Trusts?

Including a revocable trust in your estate plan yields many benefits. This trust type allows you to lower probate expenses, keep your financial affairs private, and provide for the management of your assets in the event you become incapacitated. Most importantly, they offer flexibility – you’re free to amend the terms of the trust or even revoke it altogether at any time.

If you’re married, you and your spouse must decide whether to use joint or separate trusts. The right choice depends on your financial and family circumstances, applicable state law, and other factors.

Maintaining A Joint Trust Is Simpler

If you’re comfortable with your spouse inheriting your combined assets (and vice versa), a joint trust can be less complex to set up and administer than separate trusts. Funding the trust is a simple matter of transferring assets into it and avoids the need to divide assets between two separate trusts.

In addition, during your lifetimes, you and your spouse have equal control over the trust’s assets, which can make it easier to manage and conduct transactions involving the assets. On the other hand, separate trusts may be the way to go for spouses who aren’t comfortable sharing control of their combined assets.

Separate Trusts May Provide Greater Asset Protection

If shielding assets from creditors is a concern, separate trusts usually offer greater protection. With a joint trust, if a creditor obtains a judgment against one spouse, all trust assets may be at risk. A spouse’s trust is generally protected from the other spouse’s creditors.

Also, when one spouse dies, their trust becomes irrevocable, making it more difficult for creditors of either spouse to reach the trust assets. Keep in mind that the degree of asset protection a trust provides depends on the type of debt involved, applicable state law, and the existence of a prenuptial agreement.

Factor In Taxes

For most couples today, federal gift and estate taxes aren’t a concern. This is because they enjoy a combined gift and estate tax exemption of more than $27 million in 2024 and 2025.

However, if a couple’s wealth exceeds the exemption amount, or if they live in a state where an estate or inheritance tax kicks in at lower asset levels, separate trusts offer greater opportunities to avoid or reduce these taxes. For example, some states have exemption amounts as low as $1 million or $2 million. In these states, separate trusts can be used to make the most of each spouse’s exemption amount and decrease exposure to death taxes.

It’s also important to consider income tax. As previously mentioned, when one spouse dies, their trust becomes irrevocable. That means filing tax returns for the trust each year and, to the extent trust income is accumulated in the trust, paying tax at significantly higher trust tax rates.

A joint trust remains revocable after the first spouse’s death (it doesn’t become irrevocable until both spouses have passed). In this case, income is taxed to the surviving spouse at their individual tax rate.

Review The Pros & Cons

Joint and separate trusts each have advantages and disadvantages. Contact us to determine which is right for you. We’d be pleased to review your circumstances and help you make a final decision.

Related Articles

Talk with the pros

Our CPAs and advisors are a great resource if you’re ready to learn even more.