Trusts are sometimes a useful way to transfer assets to beneficiaries, or even to plan ahead for our own needs. Though most married couples opt for joint, Revocable Living Trusts (RLT), there are circumstances in which separate trusts can be useful. Legal experts explain.
Trusts: Why and What Type?
For many of us, a basic last will and testament will go a long way toward leaving our affairs in order for loved ones. However, some life circumstances make trusts important considerations in estate planning. For example, if you have a loved one with special needs, setting up a trust is an especially important way to plan ahead for their well-being. Trusts can also be established to arm your family or friends with resources to care for you if you become incapacitated. Families also turn to trusts when it’s important to avoid the probate process (for speed and or privacy), or for tax and asset protection strategies. Generally, as the Wilson Law Group explains:
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.
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 remarriage or blended family situation
Good To Know
When you work with a lawyer to establish a trust, you’ll appoint a trustee to oversee it. Given the significant fiduciary duties undertaken by the trustee, the trust agreement may require a trustee bond— a specific type of fiduciary bond, which protects the interests of the trust and its beneficiaries in accordance with applicable state law. Essentially, trustee bonds guarantee the faithful performance of the trustee. As a leading national provider of many types of fiduciary bonds, Colonial Surety makes it easy and efficient to obtain a trustee bond. Just get a quote online, fill out the information, and enter your payment method. Print or e-file the bond from anywhere—even the law office. Obtain Your Trustee Bond Here.
Separate Trusts: Case Study
Wilson Law Group points out that in community property states, married couples most typically opt for joint Revocable Living Trusts, because of tax benefits resulting from community property ownership. However, there can be important reasons to consider separate RLTs. Here’s an example from a case in Utah:
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.
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