For various reasons related to tax issues and drafting challenges, joint trusts have not historically been popular with Ohio estate planning attorneys. Due to changes in tax law in the past several years (most notably an increase in the amount couples can exclude from estate tax), joint trusts have become a more attractive option for many couples. What is a joint trust, and should you consider having one?
All trusts have three roles: the grantor or trustmaker who creates the trust; the trustee who manages trust assets and makes distributions, and one or more beneficiaries, who receive distributions from the trust. A trust may be revocable during the grantor's lifetime, or irrevocable, meaning that the grantor gives up all control of assets once they are in the trust, and the grantor cannot revoke or amend the trust without the permission of all beneficiaries.
A joint trust is a revocable trust. Both parties to the trust are grantors of the trust, as well as both trustees and beneficiaries. In short, they have complete control over all trust assets, just as they did when those assets were in their own name before they were placed in the trust. That means that both parties have the authority to act independently of the other person, and either party can withdraw any or all assets from the trust. To avoid potential issues regarding gifts, each party also has the ability to completely revoke the trust during their lifetime. The trust instrument that creates and governs the trust may provide that the right to amend or revoke the trust is contingent upon notice being provided to some third party.
When the first of the two parties to the trust dies, what had been a joint trust simply becomes a revocable trust for the single survivor. Upon the survivor's death, a successor trustee manages and distributes trust assets for the benefit of the beneficiaries named by the grantors in the trust instrument.
As with most trusts, joint trusts offer the advantage of keeping assets out of probate, so that they pass seamlessly to one spouse on the death of the other without court involvement. This, of course, minimizes costs and maximizes privacy, as probate filings and proceedings are matters of public record.
With a joint trust, there is no issue of whether an asset is owned by either spouse's separate trust or by one of the spouses in their sole name. All assets are placed in the joint trust and are available to both spouses. As a result, it is not necessary to make any transfers after the death of the first spouse. As you can imagine, this greatly simplifies the process of estate administration, which in turn reduces fees and costs.
Perhaps even more importantly, joint trusts can provide tax planning and asset protection advantages for couples. The amount of assets that can be excluded from estate taxation is currently high, but that amount could decrease in the future. A joint trust that contains a disclaimer provision which passes assets into a trust for the survivor's benefit upon the death of the first spouse offers the flexibility to take advantage of any estate tax savings that a credit shelter trust might offer.
Such disclaimers were once considered a transfer for the purposes of fraudulent transfer claims under Ohio law, but that is no longer the case. As a result, if creditor issues exist at the time of the first death, a disclaimer which causes assets to be transferred into a trust for the survivor may keep those assets out of the hands of creditors, and safe for the surviving spouse.
Joint trusts may have a number of advantages, but that doesn't mean that they are right for everyone. These trusts are best used by couples in a stable, long-term relationship, where divorce is not contemplated. The couple should be willing to indicate that all trust assets are owned equally by both of them.
If there are any current or contingent creditors' claims and the creditor would seek to recover against one spouse but not the other, a joint trust might not be ideal. If either spouse has children from a previous marriage, they also might prefer to use another type of trust. Both spouses should be entirely comfortable with the prospect of the other having full control over all trust assets after their own death. If one spouse has children who are not children of the other spouse, this might not be the case. If either spouse has any concerns that the other might abuse or misuse trust assets, they should consider options other than a joint trust.
If you are interested in a joint trust, you should consult with an experienced estate planning attorney to determine if it is indeed the best option for your needs.