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The New Age of the Joint Trust

When Congress passed the American Taxpayer Relief Act of 2012 (ATRA), it had a drastic effect on both the estate and gift tax laws and planning opportunities for many estate planners. ATRA increased the estate and gift tax exemption to […]


Hands with Paper DollsWhen Congress passed the American Taxpayer Relief Act of 2012 (ATRA), it had a drastic effect on both the estate and gift tax laws and planning opportunities for many estate planners. ATRA increased the estate and gift tax exemption to $5,000,000 per person (indexed for inflation) and increased the estate tax rate from 35 percent to 40 percent. For 2015, the estate and gift tax exemption amount has increased to $5,430,000 per person or $10,860,000 for a married couple.  ATRA also introduced the concept of portability, which in simple terms has the effect of providing a husband and wife a joint exemption of $10,860,000. Essentially, if upon the death of the first spouse, he or she did not utilize his or her full exemption, the remaining exemption amount can be preserved and used by the surviving spouse on his or her subsequent death. As a result of the changes brought about by ATRA, 99.8 percent of estates will owe no estate tax at all. Only the estates of the wealthiest 0.2 percent of Americans – roughly 2 out of every 1,000 people who die – will owe any estate tax. Accordingly, the focus of estate planning for most has shifted from concern for estate taxes to realizing income tax advantages, such as the step up in basis of assets at death for income tax purposes, as permitted under Section 1014 of the Internal Revenue Code of 1986, as amended.

For years, the federal estate tax was the primary concern for many individuals. The A-B (marital trust/credit shelter trust) trust structure was the fundamental estate planning tool to ensure that a husband and wife each maximized their individual separate exemptions (which was as low as $675,000 per person in 2000, $1,000,000 in 2002, $1,500,000 in 2005, and $2,000,000 in 2008). Before the significant increase in the exemption and portability brought about by ATRA, practitioners also implemented complex strategies to equalize the gross estates of a husband and wife. This was done to take full advantage of the separate exemption of each, making the division of assets associated with the funding of each trust complicated in many instances.

With the greatly increased federal estate tax exemption,or estate tax exclusion amount, more married couples will not require tax-oriented estate planning, separate trusts, or division  of their joint assets. This will give rise to an increase in the use of the joint trust as a viable estate planning tool.   Although the use of joint trusts will be more prevalent, they are not the answer for all planning situations. The use of a joint trust for a husband and wife is more appropriate when the following circumstances exist:  (1) no federal estate tax concerns; (2) with regard to the gross estate of the spouses and the impact of the federal estate tax, it is anticipated that the value of the gross estate is expected to be stable or likely diminish; (3) the only children of the spouses are of the current marriage; (4) with or without children, the spouses agree completely on the allocation of assets when both have died, regardless of the order of death; (5) all or most of the assets of the spouses are viewed by them as joint marital assets; and (6) there are no creditor problems or high risk occupations, which could expose the combined assets in the joint trust to the liability of one spouse.

The joint trust is a single trust to which two persons, most commonly a husband and wife,or spouses, transfer their assets as co-settlors of the trust. The assets generally are commingled. Both spouses will act as co-trustees during their lives and the survivor will continue to act as sole trustee after the death of the first spouse to die. Each spouse is given control over a stated portion of the trust. In the typical case, each may revoke and acquire one-half of the trust assets. Thus, each spouse is treated as owning half of everything, a familiar and comfortable position for those in long-term marriages. Under the terms of the joint trust, if one spouse withdraws assets from the trust, the trustee is directed to distribute the same value to the other spouse. Through this mechanism, each spouse’s share remains at one-half even though segregated shares are not maintained. A general power of appointment is granted to the first spouse to die. The general power confirms the control possessed by each spouse to distribute one-half of the trust as he or she desires and is typically a testamentary power of appointment, exercisable by will. The life time power to revoke and the testamentary power of appointment has the effect of providing an adjustment in the basis of one-half the assets (step-up in basis), for income tax purposes, at the death of the first spouse under Section 1014 of the Internal Revenue Code. Further, the use of a disclaimer within a joint trust may allow for additional flexibility and post mortem planning.

Creditor protection concerns can be a significant disadvantage to a joint trust as compared to separate trusts or other types of joint ownership. Assets in a joint trust are available (at least to some extent) to creditors of one spouse during life. Under Michigan law, certain types of assets may be held by a husband and wife, in the form of tenancy by entirety. Assets held in a tenancy by entirety will not be subject to liabilities of only one spouse. Currently, the transfer of such assets to a joint trust will terminate the creditor protection afforded to assets held in a tenancy by the entirety arrangement. The Council for the Probate and Estate Planning Section of the State Bar of Michigan is presently working on proposed legislation that would provide “tenancy by entirety” protection to assets that are transferred to certain trusts, including joint trusts. Adoption of this proposed legislation would be welcome relief to this impediment to the use of a joint trust.

The recent significant revisions to the federal estate tax laws, including the increased estate tax exclusion amount and portability of the exemption between spouses will result in the increased use of the joint trust in common-law states such as Michigan. The use of the joint trust is not a panacea for all estate plans, and various client issues, such as income tax planning, creditor protection and family dynamics will still need to be considered. Regardless, the addition of the joint trust as a viable estate planning tool is welcomed by most practitioners.

Mark E. Kellogg chairs Fraser Trebilcock’s Business and Tax Law practice, and has devoted his nearly 30 years of practice to the needs of family and closely-held businesses and enterprises, business succession, and estate planning. In addition, Mark is a certified public accountant. He holds several leadership positions for legal organizations dealing with business, agriculture, estate, trust and probate law. He also currently serves on the Board of the international organization of Attorneys for Family-held Enterprises (afhe) and is President of the DeWitt Public Schools Board of Education. Contact Mark at 517.377.0890 or mkellogg@fraserlawfirm.com.