Joint Trust vs. Individual Trust: Which Should You Choose?

A trust is a legal arrangement used in estate planning to manage and protect assets for beneficiaries. The person creating the trust, known as the grantor, transfers ownership of their property to a trustee. The trustee holds and administers these assets for the benefit of the designated individuals or organizations.

A trust’s flexibility allows it to be tailored to specific circumstances, dictating how and when assets are distributed after the grantor’s death. By establishing clear instructions, a trust can avoid the public probate court process, ensuring the transfer of assets remains a private matter handled according to the grantor’s wishes.

Defining the Individual Trust

An individual trust is a legal entity created by a single person, the grantor, who transfers their personal assets into it. The trust, not the grantor, then legally holds the title to these assets. The terms for how the assets are managed and distributed are outlined in the trust document.

During their lifetime, the grantor serves as the trustee, maintaining control over the assets and managing them as they did before. The trust operates under the grantor’s Social Security number for tax purposes, so no separate tax return is needed while the grantor is alive and acting as trustee.

Upon the grantor’s death, a successor trustee named in the trust document takes over management. This individual is responsible for paying any final debts and taxes and distributing the remaining assets to the named beneficiaries. This transfer occurs outside of the probate court system, ensuring a more efficient and confidential settlement.

Defining the Joint Trust

A joint trust is a single trust created by two or more people, usually a married couple. Both partners act as co-grantors, transferring their shared and separate property into the trust. They also serve as co-trustees, managing the assets together during their lifetimes.

When the first spouse passes away, the surviving spouse becomes the sole trustee, continuing to manage all the assets held within the trust for their own benefit. The trust document may direct the trust to continue as a single entity or split into sub-trusts for tax or asset protection purposes.

Upon the death of the second spouse, the designated successor trustee assumes responsibility. The successor trustee’s role is to carry out the couple’s ultimate wishes by settling any final expenses and distributing the remaining property to the final beneficiaries as specified in the trust.

Key Comparative Factors for Decision Making

A distinction between trust types is the control a surviving spouse has. In a joint trust, the surviving spouse becomes the sole trustee with authority over all trust assets, which can include the power to change beneficiaries or alter the distribution plan for assets that were originally the deceased spouse’s property. An individual trust becomes irrevocable upon the grantor’s death, meaning its terms and beneficiaries are locked in, ensuring the deceased’s wishes are honored.

Asset protection is another point of comparison. With a joint trust, all assets can be vulnerable to the creditors of either spouse. If one partner incurs a large debt or faces a lawsuit, the entire trust could be at risk. Separate individual trusts create a protective barrier, as assets in one spouse’s trust are shielded from the personal creditors of the other, preserving at least half of the couple’s wealth from such claims.

Tax implications differ, especially regarding the “step-up in basis” which reduces capital gains tax on inherited assets. With a joint trust, tax treatment after the first spouse’s death depends on state law. In common law states, only the deceased’s half of the assets receives a step-up, while in community property states, all assets may get a full step-up. An individual trust provides a more predictable outcome, as all its assets receive a full step-up in basis upon the grantor’s death.

Another tax difference is how trust income is handled after the first spouse dies. An individual trust becomes irrevocable, and any undistributed income is taxed at high trust tax rates. In contrast, a joint trust remains revocable, allowing the surviving spouse to report the trust’s income on their personal tax return at their individual tax rate.

Administratively, a joint trust is simpler to establish. It involves a single document and the consolidation of a couple’s assets, which can reduce initial legal fees and simplify funding. Individual trusts require two separate documents and the division of assets between them, demanding more organization upfront.

Information Required to Establish a Trust

Before a trust can be drafted, you must compile an inventory of all assets to be included. This requires gathering documentation like real estate deeds, vehicle titles, and recent statements for financial accounts. Each asset must be clearly identified so it can be retitled into the trust’s name.

You must also select the people who will have roles in the trust. This includes identifying a successor trustee and an alternate to manage the trust upon your death or incapacitation. You will also name the beneficiaries who will inherit the assets, providing their full legal names and current contact information to your attorney.

Finally, you need a clear plan for how and when your assets will be distributed. You can choose a lump-sum distribution or structure payments to occur when a beneficiary reaches a certain age or milestone. These instructions form the core of the trust document.

The Process of Creating and Funding a Trust

The first step in creating a trust is to have the legal document drafted by an estate planning attorney. This document will contain all specific provisions, name the trustees and beneficiaries, and outline your distribution plan. The attorney will ensure the language complies with legal requirements and reflects your intentions.

Once the trust document is drafted, it must be formally executed. This involves signing the document as required by state law, which almost always requires the signature to be witnessed and notarized. This signing brings the trust into legal existence.

The final step is funding the trust by transferring legal ownership of your assets into it. For real estate, this requires recording a new deed, while for financial accounts, it involves changing the account title to the trust. A trust that is not funded will fail to avoid probate for any assets left out.