A revocable living trust is an estate planning tool that allows individuals to transfer their accounts or property ownership to a trustee. The trustee has a legal obligation to use the property for the benefit of the beneficiaries.
The person who creates and funds the revocable living trust may also be called a grantor, settlor, trustor, or trustmaker. In most cases, the trustee of a revocable living trust is the same person as the grantor.
When couples embark on estate planning, one of the foundational questions they may discuss with their estate attorney is whether it makes sense to use a revocable living trust and, if it does, should they use a joint revocable living trust or should they use separate revocable living trusts?
What is a revocable living trust?
A revocable living trust is a trust that you create during your lifetime. You can change or even revoke your revocable living trust at any time. However, if the grantor becomes incapacitated and unable to make their own decisions or dies, no further changes can be made to the trust.
The grantor creates the trust by changing ownership of their accounts and property from the grantor as an individual to the grantor as the trustee of the trust. The grantor decides how the trust will operate and determines what property to put into it. The trustee, commonly the same person as the grantor, manages or invests the funds or property into the trust and distributes them to the beneficiaries according to the instructions in the trust agreement. The trustee can name themselves as trustee and also designate a co-trustee or a successor trustee. A revocable living trust allows a grantor to enjoy their money and property while they are alive and determine what happens to their assets after they die.
When grantors establish a joint revocable living trust, they can designate what happens to their joint and separate accounts and property when the first and the second grantor die.
If a married couple chooses to use separate revocable living trusts, they each set up their own trust, and each individual transfers their own accounts and property into their own trust. The division of each piece of jointly owned property is mutually agreed upon and transferred into their separate trusts.
In states with community property laws, most married couples use a joint revocable living trust to take advantage of the important tax benefits that accrue from community property ownership. But, of course, there are exceptions. In these cases, separate revocable living trusts should be considered.
When separate revocable living trusts may be a better option
Separate revocable living trusts may be a better option in the following circumstances:
When There Is a Need for Enhanced Asset Protection
If one member of a couple is concerned that the other member’s creditors may access their property or accounts, having separate revocable living trusts can sometimes make it more difficult for one spouse’s creditors to reach the other spouse’s property.
As an example, in a Utah case, a couple had established three trusts. One of the trusts was solely in the wife’s name. A lumber company sued the husband and attempted to foreclose on the family home. The husband had used the home as a personal guarantee to the lumber company to obtain building materials. The family home had been transferred into the wife’s trust several years before the lawsuit. Even though the husband lived in the home, the court decided that the home was beyond the reach of his creditors because it was in the wife’s trust.
The laws in your state may vary from the ones in Utah, but several of the legal principles are likely to be the same.
In addition to the asset protection separate revocable living trusts provide during a grantor’s lifetime, there is enhanced protection after the grantor dies. At that time, a revocable living trust becomes irrevocable. Once a trust becomes irrevocable, it is even more difficult for other beneficiaries or creditors of the surviving spouse to access property in the trust.
Easier to Administer After Death
After one grantor in a joint revocable living trust dies, steps must be taken to divide the surviving spouse’s property from that of the deceased spouse. A detailed valuation of each piece of property is followed by executing new deeds for real property, retitling stock certificates, and establishing separate investment accounts to hold the deceased spouse’s separate property.
If the spouses own separate revocable living trusts, these steps may have already been taken when they funded their separate trusts. In that case, they may only need to notify the financial institutions of the grantor’s death and provide them with the trust’s new tax identification number. This number is needed to report future property tax issues.
Remarriage and Blended Families
If a newly remarried couple has property they would like to keep separate, separate revocable living trusts may facilitate this process. For example, one spouse inherits a family home. Though the couple will live in the home, the spouse would like it to stay in the family and be passed down only to their children. A prenuptial agreement may help in this case, but a separate revocable living trust can make the instructions for how the home will be inherited and how the home should be used very clear. Of course, a joint revocable living trust may also be used in this case, but there is a greater potential for confusion and mistakes when administering the trust.
If you would like to discuss the benefits of separate and joint revocable living trusts and how they may apply to your situation, don’t hesitate to contact us. We can schedule a consultation to discuss their pros and cons.