A joint trust can combine a couple’s assets into three sub-trusts: one for each spouse and a third made up of community property. This structure allows families to manage trust assets and income more easily, especially in a community property state like New Mexico.
When one spouse passes, their share of the joint trust can remain accessible to the surviving spouse, convert to an irrevocable trust (using an “AB” bypass trust structure), or be decanted into another type of trust, such as a qualified terminable interest property (QTIP) trust.
As you can see, there are many possibilities available both before and after a joint trust is created. Their flexibility makes them perfectly suited for couples (potentially even unmarried couples) who want to keep their assets organized while designating some assets to go to specific beneficiaries.
Contact New Mexico Financial & Family Law to learn more about these versatile trusts and how they could benefit your family, as well as your legacy. Call 505-503-1637 or contact us online to schedule a no-obligation consultation and estate plan review with a New Mexico joint trust lawyer today.
Handling marital assets can get complicated fast, especially if one or both spouses have already been married before. In a community property state like New Mexico, couples may want to only mix some of their assets while leaving others separate.
This separate status makes it easier to figure out taxation and distribution of assets when one spouse dies. In the meantime, both spouses can declare all proceeds from the trust on their joint tax return.
Without a trust, one spouse may have to report income from certain business or investment activities separately from their regular income schedule. With a trust, while they still have to report the source of the income, they can consider all trust proceeds to come from the same income “stream.”
The benefits of this arrangement include the ability to:
New Mexico Financial & Family Law may recommend a joint trust for your family if these advantages sound appealing to you.
We will start with a review of your finances and a discussion of your goals for estate planning. Then, you will receive personalized recommendations from an experienced New Mexico trust attorney regarding the best way to structure your trust in light of your unique goals.
A trust is created when a grantor transfers property into the ownership of the trust, assigning a trustee to manage its contents. The grantor will also name beneficiaries who will receive property (or income) from the trust at a designated time or event.
What makes joint trusts special is that there are actually two grantors, who are typically spouses to one another. They also usually name themselves co-trustees.
Most joint trusts are revocable grantor trusts, meaning that they can be changed or dissolved by the grantors at any given time without permission from beneficiaries. This quality means that these trusts present a low amount of risk for couples since they can modify them at any time and freely access the property within them.
The property held inside the trust can be one large intermingled pool, but the couple also has the option to designate certain property as separate.
Note that there should be a logical reason for the separation, such as one spouse wants to make an investment without affecting the other’s credit. A separate sub-trust can also be created if one spouse owns a business or shares in an enterprise.
Technically, just about any asset that can be owned by one or both spouses can be transferred to the trust. Common examples of assets deposited into a joint trust include:
Usually, the surviving spouse becomes the sole grantor and trustee. They have the right to access all contents of the trust, but they also have a fiduciary duty to ensure, to the best of their ability, that the intended beneficiaries receive property designated for them by the deceased spouse.
Optionally, the deceased spouse’s portion of the trust could become irrevocable, meaning that the surviving spouse is unable to modify the trust’s provisions affecting that portion. However, the surviving spouse may want to retain a “testamentary power of appointment over trust assets.”
Otherwise, they have no retained interest in the assets, which could trigger a gift tax since the assets are now designated for a non-spousal beneficiary.
The deceased spouse’s portion of the joint trust can also be converted or “decanted” into another type of trust, including a:
Typically, the remaining non-trust assets that form the surviving spouse’s estate will be transferred into the trust using what’s known as a “pour-over will.” These portions are subject to probate, and they can only be distributed after the probate process has concluded.
The contents of the trust that don’t need to go through probate can be distributed immediately or at their designated time. A successor trustee should be designated in the surviving spouse’s will to oversee the management of the trust after they have passed on.
Since they are grantor trusts, income generated from a joint trust passes through to the grantor. The easiest method of handling this is for the couple to file a joint tax return (which likely creates tax savings, anyway) and to declare all earnings on trust assets as household income.
Couples can also file separate returns if they want to account for their portion of the trust separately. The communal portion should be split 50/50 between each spouse’s individual tax return.
Note that if one spouse creates a significantly larger tax burden than the other, then splitting the taxes evenly could qualify as a spousal gift for that tax year in some substantially uneven situations.
If a surviving spouse is not designated as a grantor for the deceased spouse’s portion of the trust, and a beneficiary is listed who has the right to withdraw from the trust at any time, that beneficiary must report any income or transfers from the trust as personal income, per IRS code §678.
If the trust remains separate and earns income and does not automatically transfer that income to a beneficiary, then the trustee (e.g., the surviving spouse) has to file a separate tax return for the trust itself.
One key feature of a joint trust is that one spouse can create rules designating property in their separate portion to specific beneficiaries. When this spouse dies, it is the sole responsibility and duty of the surviving spouse to exercise good judgment and ensure that this distribution eventually happens.
A recent case in the state of Michigan saw a surviving spouse exercise their powers as trustee to empty out a trust, removing principal assets that were designated for their deceased spouse’s children from a prior marriage. These assets were then transferred into an asset protection trust listing the surviving spouse as the sole beneficiary.
Because the surviving spouse had the power to make changes to the rules of the trust and withdraw the principal from it, they assumed that they were legally allowed to, in casual terms, “cut out” the children from accessing the trust. However, because the surviving spouse had a fiduciary duty to the beneficiaries, and the spouse’s actions were clearly for their own benefit, the Michigan Court of Appeals ruled that the transfers out of the trust had to be voided, restoring the assets designated for the original beneficiaries.
This case illustrates the need to fully understand the responsibilities that come with a joint trust. Even if you assume you have unlimited powers to modify the contents or structure of a trust, it is always advisable to refer to a qualified New Mexico joint trust lawyer before making any major decisions.
One major shortcoming of a joint trust compared to other trusts is that they are easily accessed by both spouses. Either spouse can revoke the trust, modify it, or withdraw assets from it at any time, in most situations.
These qualities make a joint trust a poor choice for protecting assets from creditor claims. A claim against one spouse could allow a creditor to force the other spouse to access the community property or their own separate property held in the trust.
If a beneficiary has a guaranteed right to a distribution from the trust, a claim against them could allow a creditor to access the income or asset promised to them, as well.
Protecting assets requires that the grantor or beneficiary not have unlimited access to the trust’s contents. The trust should be irrevocable.
Also, a separate, non-family trustee should be named who has discretionary powers over the trust.
Another common concern is that assets held in trust could cause someone to not qualify for need-based assistance programs, including Medicaid or Social Security Disability Insurance. If there is a risk that a surviving spouse could require enrollment in either program, then they should structure the trust so that the first-to-die spouse has their portion of the trust “spun off” into a separate, irrevocable trust.
Creating a separate trust can also permit greater exemptions from gift taxes or estate taxes, especially if a charitable institution is listed as a beneficiary.
Finally, there is the risk that the surviving spouse will exercise poor discretion or preferential treatment of beneficiaries, jeopardizing the ability of all beneficiaries to receive their promised distribution. If this is a risk, a bypass trust should be considered, which would remove the surviving spouse’s discretionary and trustee powers over the deceased spouse’s property.
Your family deserves peace of mind, and that is exactly what a joint trust can provide. New Mexico Financial & Family Law can consult with you to determine the ideal trust or combination of estate planning instruments to help you succeed in your goals.
You have many options at your disposal when creating a joint trust, and we want to help you select the perfect ones for your family.
Reach out to our New Mexico joint trust attorneys at any time to schedule a confidential case review with no obligation when you call 505-503-1637 or contact us online.
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