This is another in a series of blogs on the basics of estate planning. In the last blog in the series, we looked at the income taxation of trusts. This week, we’ll look at the different types of revocable trusts for different family situations.
The first and simplest to understand is the unmarried trust. This revocable trust is established for one unmarried individual. It is taxed as a grantor trust because it is revocable. It may use the grantor’s social security number as the tax id number for the trust. See Regulation 1.671-4.
The grantor of the trust typically serves as the trustee and manages the trust while they have capacity. Upon their incapacity or death, their successor trustee(s) manage the trust as they had intended. The grantor may revoke or alter the trust at any time and may direct the trustee to distribute more assets to them, for example.
When an individual is married, they may either do a married separate trust or a married joint trust. A married separate trust accepts the assets of the individual spouse and operates much like the unmarried trust during lifetime. At death, typically such a trust splits into a Family Trust for the surviving spouse and children and perhaps a Marital Trust for the amount over the estate tax exclusion. Then, after the death of the surviving spouse, the assets go as directed by the grantor. This trust may be advantageous over giving the assets directly to the surviving spouse because the predeceasing spouse retains control over the assets and their ultimate disposition via the Family and Marital trusts.
A married individual may also create a married joint trust. A married joint trust is commonly used in community property states and may be used in separate property states, as well. With the Academy’s married joint trust, there are two “contributive shares” of the trust. A spouse’s contributive share includes all of their separate property and ½ of the community property. They retain control of this property during life, just as they would in the unmarried or married separate trust. A joint trust is really two married separate trusts joined in one trust. Clients often like a married joint trust because it is like joint property, with which they typically are familiar already. There will be three schedules for the property in the trust, schedule A which would include the community or tenant in common property, schedule B which would consist of any separate property of spouse 1, and schedule C which would consist of any separate property of spouse 2. Often, all the property is community or tenant in common property and, therefore, all assets would be on schedule A and nothing would be on schedules B or C.
If the spouses are married and filing a joint income tax return, they may use the social security number of a spouse as the tax ID number of the trust. In the unusual circumstance where the spouses are not filing a joint income tax return, they’d need to get an employer identification number for the trust. Then the trust would report all items of income attributable to spouse 1’s assets to spouse 1 and those attributable to spouse 2 to spouse 2.
In upcoming blogs in the series, I’ll cover more on the Basics of Estate Planning.
Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (800) 846-1555
www.aaepa.com
Steve Hartnett
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