Joint Trusts - A Great Planning Opportunity for Non-Traditional Couples and Blended Families

Creating an estate plan for clients who are in non-traditional relationships or are part of a blended family can be very tricky.
  

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.

How Do I Create a Joint Trust?

If you would like to know more about estate planning for non-traditional couples or setting up a joint trust, we would happy to speak with you to so that it could be properly customized to meet your needs.  Kevin A. Pollock, Esq., LL.M. is an attorney licensed to practice in NJ, NY, PA and FL.  Kevin Pollock meets with clients in Lawrenceville, NJ and in Boca Raton, FL by appointment only.  Kevin may be reached at (609) 818-1555.  

Estate Planning for Non-Traditional Couples

For purposes of this article, I am going to define a traditional couple as a relationship between a man and a woman who are in their first marriage and the only children are children of the marriage. Estate planning for traditional couples usually consists of having a Will, Financial Power of Attorney, Medical Power of Attorney and Advanced Health Care Directive.

The traditional plan itself usually consists of each spouse leaving money to the other (occasionally in trust for tax planning purposes). On the death of the surviving spouse, everything is left to the children. The surviving spouse is usually executor and trustee of any trusts. If a traditional couple does not create a Will, the state's intestacy scheme will send the money in the same direction - but without any trust or tax planning.

There are typically three types of couples that need planning significantly different from that of traditional couples:

1. Same Sex Couples
2. Couples where at least one party has children from a previous relationship (often called "Blended Families"); and
3. Couples who are in a long term hetero-sexual relationship but are not legally married.

For all non-traditional couples it is even more important to prepare Wills, Financial Powers of Attorney, Medical Powers of Attorney and Advanced Health Care Directives. However, while the documents stay the same, the methodology is very different.

The laws for same sex couples vary widely by state, and the federal government does not recognized the validity of a same sex marriages or civil unions for tax purposes or for most other purposes. If one partner dies without a Will, in most states, the state intestacy law will not direct that the money goes to the surviving partner. Additionally, in many states, the partner will have no rights to administer their loved one's estate or act as a guardian absent written instruction.

Since state law will usually not protect the rights of same sex couples, it is imperative for gay and lesbian couples to prepare a Will, Power of Attorney and Health Care Directive. Additionally, trust and tax planning becomes even more important as does coordination of the couple's other assets. This is particularly true if there are children involved.

Even in states where the law is favorable, same sex couples must plan to minimize the federal estate tax, as the unlimited marital deduction only applies to heterosexual couples. Planning must also be done to minimize state estate taxes and state inheritance taxes if the couple is thinking about moving to another jurisdiction.

For Blended Families, many of the traditional planning techniques do not work because the goal is not always to provide for the spouse first and then for the children. Special planning is needed to ensure that both the needs of the surviving spouse and children from the prior relationship are addressed. This often involves setting up irrevocable life insurance trusts or segregating assets.

For couples who are in a long term relationship but are not legally married, planning is often a sore point. Legally, such couples are pretty much in the same boat as same sex couples unless they living a jurisdiction that has common law marriage. If no planning is done, the surviving partner gets completely cut out.

Ignoring the issue not only leads to litigation, but a more expensive estate administration process and higher taxes. If you are in a non-traditional relationship, I strongly recommend seeing a competent estate planning attorney in a jurisdiction near you to flush out all the issues that affect you.