The Pros and Cons of Joint and Separate Trusts for Married Couples
Trusts are powerful estate planning tools that can protect your family’s privacy, avoid probate, and better structure inheritances. However, trusts should always be designed to accommodate families’ unique characteristics. While many married couples could benefit from establishing a jointly-held trust, others may be better off with separate plans and independent arrangements.
Making a decision about establishing separate or joint trusts isn’t always easy. Read more to learn about the difference, or contact our Texas and Arkansas estate planning lawyers to schedule your initial consultation and begin exploring your best options for peace of mind.
An Overview of Trusts
The Essential Element of a Trust
Fiduciary duty is an essential element of every trust, whether formed to protect an heir’s inheritance or to provide a maintenance fund for a loved one with special needs.
In the context of trusts, a fiduciary relationship exists between each of the following parties:
- The trustor. The trustor is the person who establishes and funds a trust.
- The trustee. The trustee is the person who manages the trust’s assets. Trustors can sometimes serve as their own trustees, but they must appoint a successor if they wish their trust to outlive them.
- The beneficiary. The beneficiary is the person for whose benefits the trust’s assets are being held and managed.
All trustees have a fiduciary duty to manage the trustor’s assets in the best interests of the trust’s beneficiaries. In Texas and in Arkansas, fiduciary duty is binding, leaving trustees who abuse their positions for personal gain open to litigation.
Everyone intent on forming a trust needs to have a basic understanding of fiduciary duty, but this concept can pose particular risks for married couples, who sometimes face unexpected risks if and when each spouse names the other as a trustee.
The Role of Trusts in Estate Planning
If you form a trust, you agree to eventually cede control of your assets to whomever you choose to serve as your trustee or successor trustee. This is a daunting prospect, but it serves a very practical purpose: leaving your assets to a trust removes them from your estate. And when you remove your assets from your estate, they are typically exempt from probate and all of the travails it could entail.
Common Types of Trusts in Texas and Arkansas
Most states have adopted the Uniform Trust Code, a type of “model law” that sets a common standard for how states regulate trusts. Arkansas, for instance, has enacted its own version of the Uniform Trust Code—but Texas hasn’t, meaning that a Texarkana family’s options and rights could be determined by which side of the border they live upon.
However, despite this essential legal difference, families on both sides of the border are typically entitled to form the following types of trusts:
- Revocable living trusts, which can be altered and amended at any point until the grantor’s death. After the grantor passes away, control of the trust passes to a named successor trustee.
- Irrevocable living trusts, which cannot usually be altered or amended after they have been established. Grantors may continue to use certain trust assets for the duration of their lifetime, but trust assets must be under the control of a trustee.
- Education trusts, which let guardians, parents, and grandparents set aside funds for a loved one’s education-related expenses.
- Special needs trusts, which grant additional support to a loved one with special needs without threatening their eligibility for public benefits.
- Pet trusts, which can be formed to ensure that a beloved pet receives the care it deserves after its owner has passed away.
- Medicaid trusts, which are used to protect assets from Medicaid’s strict income and asset eligibility limits.
Deciding Between Joint and Separate Trusts
Married couples can use trusts to keep assets out of probate, condition their heirs’ inheritances, and make informed decisions about how properties and possessions should be distributed after their deaths. However, while many families need but one trust, other couples may need to consider investing in separate protections.
What You Need to Know About Joint Trusts
A joint trust, or joint revocable living trust, names each spouse as a trustee.
In general, joint trusts work best for spouses who:
- Have a stable relationship
- Have never been married to anyone else
- Have no children from previous relationships
Joint trusts can make succession fairly simple. If one spouse becomes hurt, sick, or incapacitated, the other spouse becomes the sole trustee and can continue to manage the family’s trust assets. Similarly, if one spouse dies, the other can continue using and administering the trust’s assets.
The other benefits of a joint trust could include:
- Probate avoidance
- An easier union of joint property, community property, and separate property
- No need to make transfers or retitle assets upon the death of the first spouse
- Minimization of federal estate taxes
However, joint trusts aren’t without downsides. If one or both spouses have vastly different priorities, disagreement is all but guaranteed.
What You Need to Know About Separate Trusts
A separate trust is simply any type of trust that is established and funded by an individual spouse.
Under most circumstances, separate trusts will work to the advantage of:
- Blended families
- Couples who have had previous marriages
- Spouses who have received separate inheritances that they wish to preserve for their biological children
- Situations wherein one spouse has substantially more assets than their partner
Since separate trusts allow each spouse to make independent decisions about asset disposition, they provide far more flexibility. Spouses can set their own priorities without risking conflict and protect their partners from disparities in income and debt—disparities that could become liabilities if creditors try filing a claim against an estate or a trust.
