Why is Estate Planning for Non-Traditional Couples So Tricky?
Let's assume a hypothetical fact situation where you have a women (Jane) with $4M in assets. She is a widow and has 2 children. Now let's also assume that she is in a committed relationship with a person (Alex) who has $2M in assets, and Alex has three children. Finally, let's assume that they agreed to set up a joint bank account and that they want to buy a house together worth about $1M, with Jane putting up three-quarters of the money for the house.Typically, the clients in this scenario will want to take care of each other, but they also want to ensure that a certain amount of their assets go to their respective children. Let's assume the specific goal for Jane and Alex is that the surviving partner can have the joint bank account and use the house for the rest of their life, but everything else goes to their respective children. To accomplish this, they buy the house as joint tenants with rights of survivorship and create Wills leaving everything else to their respective children.
In this hypothetical, if Jane dies first, the house and the joint bank account go to Alex because they are joint assets and supersede the Will. When Alex dies, his $2M plus the house goes to his children. This is not necessarily a far result for Jane's children. Alternatively, if Alex dies first, the house and the bank account goes to Jane, and then upon her death, it all goes to her children, cutting out Alex's descendants with respect to the joint assets. As you can see, the problem with this traditional plan is that one partner dies and the survivor takes the house and bank account and it cuts out the descendants of the first client to die with respect to the joint assets.
Why a Joint Trust Can Be an Important Estate Planning Tool for Non-Traditional Couples
One of the best ways to handle a situation like this is for Jane and Alex to set up a joint trust. The trust could be funded with the house and cash (in whatever amount they like). While Jane and Alex are alive, the trust could be revocable and they could have complete control over it to do whatever they like. The trust becomes really powerful when the first partner dies (or becomes incapacitated), because we can then make the trust Irrevocable. While we can customize these types of trusts in many ways, most people want to guarantee that the survivor can: live in the house for the rest of their lifetime, sell it and buy other real estate, or sell it and have an income stream to live off of.The main benefit to this type of trust planning is that we can provide a much safer way of ensuring that ALL of Jane and Alex's descendants receive whatever is left over when the survivor dies. Moreover, we can make sure that their descendants receive money in a way that is more fair based upon need or based upon how Jane and Alex contributed funds towards the trust. In this example, since Jane is putting up $750,000 towards the house, the trust can say that, following the deaths of both Jane and Alex, the remainder of the trust assets go 3/4 to Jane's children and 1/4 to Alex's children.
Initially, Jane and Alex could be in control of the Trust (making them the Trustees). We can also have a system in place so that one of Jane's children steps up as co-trustee if something happens to Jane and one of Alex's children steps up as co-trustee if something happens to Alex. If Jane's children and Alex's children can't work together, we can also have a neutral trustee appointed.
Can Anyone Create a Joint Trust?
Anyone can create a joint trust. The type of trust I am describing in this post works for unmarried or married couples.Are There Any Downsides to Creating a Joint Trust?
When creating any estate plan, one of the downsides is the cost to create the plan. Creating a custom plan like this will certainly cost more than simply titling assets in joint name. However, the more money over which you are trying to control the disposition, the more it is worth setting up this type of trust.Another potential downside to creating a joint trust is that, depending upon its structure, the trust may need a tax identification number and a tax return will need to be filed for the trust for any income earned.
It should also be pointed out though that if the couple is unmarried and they live in a jurisdiction with an inheritance tax (like New Jersey or Pennsylvania), this structure would trigger the inheritance tax on both the first to die and likely the second to die. However, for unmarried couples, this tax would be incurred on the first to die regardless of whether or not a joint trust was utilized. In New Jersey, the inheritance tax could be avoided if the couple agrees to enter into a NJ Domestic Partnership agreement.
