Any Valid Reason for Joint Trusts?
I have lately run into many Joint Trusts, especially from the left coast. To me they are difficult to work with, since one does not know who’s trust it is until the first death. Then what is the spouse left with? We don’t use them here in IN, and I am trying to find out what avantage they are, other than saving a few bucks in attorney fees when setting them up. Same with Testamentary trusts. In fact some firms here charge more for them, since most people want RLTs instead. Yet I still see fairly recent ones established. What’s the point?
Permalink Submitted by Bruce Steiner on Sun, 2007-12-30 16:13
There are some reasons for creating a joint revocable trust in a community property state such as California. But since you’re in Indiana, which is a common law state rather than a community property state, I assume you’re asking about their use in common law states; and my response will deal only with common law states.
The IRS has issued several private letter rulings allowing the use of the same assets to fund the credit shelter trust regardless which spouse dies first. These rulings involved either joint revocable trusts in which the first spouse to die has a general testamentary power of appointment, or a revocable trust created by one spouse in which the other spouse has a testamentary general power of appointment. These rulings have been criticized, and the IRS is reviewing the issue. But if these rulings are correct, then this might make sense for a couple where one spouse has a large IRA and where they do not have enough other assets to put $2 million of nonretirement assets in each spouse’s name.
Other than that, joint revocable trusts in common law states are often confusing, and can raise lots of problems. Perhaps someone was using a California form.
Indeed, except in a few states such as California, or where there is some special reason for having one in a particular case, even the more typical 1-person revocable trusts are often not worth the cost and complexity. They do not save any income or estate taxes. The cost of creating a revocable trust and transferring your assets to it is often as much as the cost of probating a Will, and the cost of the revocable trust is a current cost, for which the client writes the check, while the cost of probating the Will is not incurred until later, and someone else writes the check.
Revocable trusts are often a distraction. There’s so much to cover in a relatively short period of time at the initial estate planning conference, and (absent some reason for it in the particular case) if the client starts asking about a revocable trust, often we never get to discuss some of the more important issues.
Finally, many of the IRA beneficiary disasters discussed in this forum could have easily been avoided had the IRA owner not created a revocable trust and made it the beneficiary of the IRA. That’s not entirely the fault of creating the revocable trust, since the IRA owner could have created the revocable trust and just not named it the beneficiary of the IRA. But the revocable trust may have contributed to the distraction.
That’s not to say there aren’t cases where revocable trusts make sense. But they’re the minority of cases.
Permalink Submitted by Al Fry on Sun, 2007-12-30 16:26
Good insights, Bruce. By the same token, heirs are always trying to get spousal continuation or a NQ stretch when non-qualified annuties are owned by and/or payable to revocable trusts that become irrevocable at the annuitant/owner’s death. Neither will happen! It will be a lump sum or at best 5-year deferred payout and taxation of gain to the trust. Even when brought to the owner’s attention prior to death, they insist on having it that way because they paid good money to have the trust drafted. Then the financial advisor is asked by the heirs to untangle the mess after death. It is almost always an impossible task