Joint Trusts – Helping or Hurting? re: Estate Planning
A recent Ruling by the IRS, PLR 201429009, illustrates the difficulty of understanding and administering a "Joint Trust."
Several clients have recently come to me with existing Joint Trusts. A Joint Trust involves a husband and wife creating one Trust, in which all of their assets are contributed during their lifetimes. The Joint Trust typically provides that assets contributed are deemed to be owned 50% tenant in common by each spouse. Upon the first death, the assets are then segregated into a "Decedent’s Trust," and a "Survivor’s Trust." The provisions of each of these Trusts are different to take advantage of desired estate tax objectives.
Many practitioners, however, myself included, believe a Joint Trust is often a recipe for a planning disaster. What is presented as convenience, ultimately ends up in additional complication, expense, and remedial planning at the death of the first or both spouses. Understanding the terms of the Decedent’s Trust and Survivor’s Trust, and then determining what assets go where, when, and at what tax consequence, becomes extraordinarily complex or often ignored. I have had two cases in the last six months where the survivor of a Joint Trust did not appropriately deal with the segregation of the assets, resulting in more time and expense to correct the problem.
Back to PLR 201429009, where an IRS ruling was necessary to obtain the desired tax result. The IRS generously excused the erroneous advice from the initial estate counsel, and allowed the new estate counsel to correct the problems for the desired tax consequences. But the new counsel needed accounting backup, and forensic financial expertise, to solve it.
In contrast to a Joint Trust, the preferred practice is for each spouse to have his and her own Revocable Living Trust, just as they have their own Will. Assets are earmarked by either beneficiary designation or title into each Revocable Trust during each spouse’s lifetime. The planning upon the first and second deaths becomes straightforward and less prone to omission or error.
Perhaps in the simplest of cases a Joint Trust can be more "convenient" than a traditional Revocable Living Trust for each spouse. (There may also be rare occasions when listing a child on a joint account or relying on beneficiary designations can be a convenient and simple way to do an estate plan.) However, for the vast majority of individuals planning their estate, each spouse should have their own Will and Revocable Trust.
The link to the PLR is below. A Private Letter Ruling is not precedent, in contrast to a federal court case, but reflects the IRS’ position in general and the IRS’ position specifically as it pertains to the facts presented.