WHAT IS A SEPARATE REVOCABLE LIVING TRUST?
When a couple engages in foundational estate planning, one of the first questions addressed by estate planning attorneys is whether it makes sense for the couple to use a revocable living trust (RLT) as a part of their plan. If using an RLT makes sense, an important follow-up question to married couples should be whether it makes sense for them to use a joint RLT or separate RLTs.
WHAT IS A REVOCABLE LIVING TRUST?
A trust is a legal concept that allows an individual (i.e., a grantor, settlor, trustor, or trustmaker) to transfer ownership of their accounts and property to a trustee (for most revocable living trusts, the trustee is the same person as the grantor) who has a legal obligation to use that property for the benefit of a beneficiary.
A revocable living trust is a trust that an individual (the grantor) creates during their lifetime. The trust can be changed at any time until the grantor becomes incapacitated (unable to make their own decisions) or dies. To create the trust, the grantor changes the ownership of their accounts and property to the trustee of the trust. As a planning tool, an RLT enables the grantor to name themselves as the current trustee and designate a co-trustee, or substitute trustee, to act on their behalf if they become unable to act as trustee for any reason. An RLT also allows the grantor to continue enjoying their money and property during their lifetime and to designate what will happen to that money and property upon their death.
WHAT IS THE DIFFERENCE BETWEEN A SEPARATE REVOCABLE LIVING TRUST AND A JOINT REVOCABLE LIVING TRUST?
When a married couple (the grantors) uses a joint RLT for estate planning, they are typically both also initial trustees of the trust. The grantors then transfer all of their separate property and joint property into the same trust, which typically names both of them as trustees and beneficiaries. However, they can designate which property is truly joint and which is their separate property on schedules attached to the trust. Grantors of a joint RLT can also designate what happens to joint and separate property at first death and at second death.
On the other hand, when a married couple uses separate RLTs, two separate trusts are established, and each individual transfers their separate property into their own trust (one grantor per trust). They also typically split their jointly owned property and transfer the resulting separate shares into their own trusts. As they acquire additional jointly owned property, the couple continues to divide the property in accordance with what they have agreed upon and transfer their respective shares into their separate trusts.
WHY WOULD A COUPLE USE SEPARATE REVOCABLE LIVING TRUSTS?
There are a number of good reasons to consider using separate trusts in estate planning.
ENHANCED ASSET PROTECTION
Keeping property in separate RLTs during marriage can sometimes make it much more difficult for one spouse’s creditors to access property held in the other spouse’s trust. For example, in one Utah case,[1] a lumber supply company sued a husband in an attempt to foreclose on his family home as a result of a personal guarantee he had made to the company to obtain building materials. Because the couple had decided years before to transfer their home into the wife’s separate RLT, of which she was the only trustee, the court held that even though the husband continued to live in the home with her, the home was beyond the reach of his creditors.
Of course, this case directly applies only to Utah residents. But many of the legal principles are similarly applicable in other states. Anytime one spouse creates some level of legal separation between themselves and certain property that would otherwise be treated as marital property, that spouse strengthens the argument that their creditors cannot reach that property in a lawsuit.
In addition to asset protection during the grantor’s life, assets in a separate RLT are even more protected after the grantor of the separate trust dies. At that time, the trust becomes irrevocable, making it even more difficult for other beneficiaries or the surviving spouse’s creditors to reach the property held in the now-irrevocable trust.
EASE OF ADMINISTRATION AT DEATH
Administering the property of a joint RLT after one spouse dies requires a certain amount of effort to divide the property between the deceased spouse’s share and the surviving spouse’s share. This process frequently requires careful valuation of the property in the trust as well as executing new deeds for real property, retitling stock certificates, or establishing separate investment accounts to hold the deceased spouse’s separate property.
On the other hand, if all of this work was done when the spouses funded their separate RLTs (transferred or retitled their property into the name of the trust), trust administration after the death of the first spouse can be very simple and straightforward. The only tasks may be notifying the financial institutions of the grantor’s death and providing them with the trust’s new tax identification number in order to properly report tax issues going forward.
REMARRIAGE AND BLENDED FAMILY BENEFITS
Couples who have been married before or who have children from another relationship may also benefit from using separate RLTs. This is particularly true when each spouse has property that they would like to keep separate for certain reasons. For example, perhaps a newly married spouse has inherited their parents’ home and the couple would like to live there, but the new spouse wants to make sure the family home stays in their own family and passes only to their own children at their death. In addition to a prenuptial agreement, keeping the house in a separate RLT would allow this spouse to specify exactly how that home should be used and passed on when they die. Using a joint RLT to achieve the same result requires much more careful drafting and introduces a much greater potential for confusion and mistakes in administering the trust after the death of the spouse who owns the house.
CONCLUSION
As you can see, using separate RLTs in a marriage can make very good sense in some situations and offer a number of benefits:
provide enhanced asset protection for married couples
simplify trust administration after one or both spouses pass away
clarify the division of property in a remarriage or blended family situation
If you feel that using separate RLTs might be appropriate in your situation, please call us at (614) 389-9711. We can schedule a consultation to discuss the pros and cons of using separate or joint trusts and help you design an estate plan tailored to your unique situation.
Learn more about how trusts can be used in your estate plan by reading our Consumer's Guide to Estate Planning in Ohio.
[1] Lakeside Lumber Prods., Inc. v. Evans, 110 P.3d 154 (Utah Ct. App. 2005).