Married couples have oftentimes had two separate trusts. In other words, one spouse would have a trust and the other spouse would too. This planning was typically done to minimize or avoid the estate tax at their passing.
Over the last decade though, the estate tax laws have changed so much that having two separate trusts are no longer necessary for many married couples. This has led to converting those separate trusts into one joint trust.
If you’ve done this with your estate plan or are considering it, there are three traps you need to avoid:
- Revoking your separate trust. When you established your joint trust, your estate planning attorney may have drafted a document that revoked your separate trust. This means that your separate trust went away and is no longer in existence. If this was done, it’s very important to review and update the ownership and beneficiary designation of your assets. If you don’t and that trust remains as an owner or beneficiary, that asset will likely have to be later probated. To avoid this court process, you should update the ownership and beneficiary designation of your assets to be consistent with your joint trust planning.
- Not merging the separate trusts into your joint trust. As you make this transition, it’s important to recognize that your separate trust is a different entity than your joint trust. When you created your joint trust, you may not have done anything with the prior separate trust. In other words, that trust may still exist. If you still own an asset (i.e. an investment account) in the name of that trust or have named it as a beneficiary, this will create problems for you or your surviving spouse if one of you passes away. Signing a legal document that merges the separate trusts into your new joint trust will avoid this issue.
- Having the separate trust as an owner or beneficiary of an asset. When you converted your separate trusts to a joint trust, you may not have updated the ownership or beneficiary of your assets. For example, your separate trust may still be the owner of an investment account or the beneficiary of a life insurance policy. This will create a problem if you or your spouse pass away because the trust will have to be administered. You will have to retitle the ownership of that asset, apply for a tax ID number, and deal with more complicated trust income tax rules. To avoid these complications, you should remove the separate trust as an owner and beneficiary on your assets.
If you have any questions about converting separate trusts into a joint trust, feel free to contact me at phmulder@cunninghamdalman.com.
