Thinking Thrice About Joint Trusts

Written by Allison Voge, JD, LLM

Choosing whether to use one joint trust or separate individual trusts when planning for a married couple requires careful consideration. A joint trust is established by a single trust agreement and is designed to hold nearly all of a married couple’s assets. The trust agreement includes instructions for managing the assets during the married couple’s lifetime, during the incapacity of either or both spouses, and upon each spouse’s death. 
An alternative approach to a joint trust is the creation of two separate individual trusts, one for each spouse. There are many factors to consider when deciding on a planning strategy for a married couple. Practitioners differ in their perspectives and practices, but separate trusts often provide greater clarity with respect to drafting, administration, and tax matters.

DRAFTING CHALLENGES

A joint trust is established by both spouses as trustmakers who agree on the instructions for the trust’s administration under a single trust agreement. Once established, a joint trust is funded with each spouse’s assets. Each spouse’s separate property retains its status as separate even after funding. If the couple has property characterized as community property, it retains its character as community property. The terms of a joint trust typically provide that spouses may jointly amend, restate, or revoke the trust during their lives and that either spouse may unilaterally amend, restate, or revoke the trust with respect to that spouse’s separate property or that spouse’s interest in any community property. Both spouses commonly serve as the initial co-trustees of the trust and may name the same or different successor trustees to serve upon their death or in the event of their incapacity.

The administration of joint trusts can be complicated by issues related to tracking and categorizing the trustmakers’ various contributions of property as well as differing or incompatible fiduciary succession and residuary distribution provisions. In addition, joint trusts bear the risk of unexpected changes to their terms or ultimate distribution after the first spouse’s death. These possibilities are discussed further in the following subsections.

When Does a Joint Revocable Trust Become Irrevocable?

Upon the death of the first spouse, a joint trust agreement will typically

• provide that the trust becomes irrevocable as it pertains to the deceased trustmaker’s trust property, which includes the deceased trustmaker’s separate property and interests in any community property held by the trust; and 
• create a subtrust commonly referred to as the survivor’s trust, funded with the surviving trustmaker’s separate property and interests in any community property.

Depending on the couple’s estate planning objectives, the deceased spouse’s trust property may be administered in several ways. For wealth transfer tax or other purposes, the deceased spouse’s trust property may be allocated to marital and nonmarital shares based on a percentage, fraction, pecuniary amount, or other formula. The marital share funding method used in a joint trust agreement can significantly impact the surviving spouse’s ability to steer and change the terms of the administration and distribution of the deceased trustmaker’s trust property. 

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Deceased Spouse’s Property Allocated to QTIP Trust and Credit Shelter Trust

In some cases, the deceased trustmaker’s trust property may be entirely allocated to the marital share and funded into and administered as a separate marital or qualified terminable interest property (QTIP) trust for the surviving trustmaker’s benefit. In other cases, the deceased trustmaker’s trust property is allocated in portions to the marital and nonmarital shares and administered as separate marital, QTIP, or credit shelter trusts, as the case may be. The terms of the subtrusts ultimately created are irrevocable and may not be amended, restated, or revoked by the surviving trustmaker.

However, it is important to note that a joint (or individual) trust agreement may grant a surviving spouse a right to demand principal or a testamentary general or limited power of appointment. The extent to which a surviving spouse may redirect trust property at their death depends on the scope of the power of appointment granted. A surviving spouse who withdraws all the trust property may dispose of it in any manner during their lifetime or upon death. These provisions can be tantamount to a power of amendment, restatement, or revocation when broadly drafted and validly exercised by the surviving spouse.

If the deceased spouse’s trust property is not subject to these powers or is not actually withdrawn or appointed elsewhere, the remaining balance will be administered in accordance with the terms of the original trust agreement that govern the residuary distribution. Ultimately, the extent to which a trust will be administered in accordance with its original residuary terms depends on the surviving spouse’s exercise of any powers granted to the surviving spouse over any subtrust created upon the first deceased spouse’s death.

Deceased Spouse’s Trust Property Allocated to Survivor’s Trust 

In some cases, some or all of the deceased spouse’s trust property may be allocated, funded into, and administered as part of the survivor’s trust. A joint trust agreement with this postdeath design may require . . .

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