Married individuals may decide to create a joint trust to address their Estate Planning needs. Joint trusts make sense in community property states because those states consider assets accumulated during the marriage as community assets and require that both spouses have equal management rights with respect to the community assets. Joint trusts may provide benefits in separate property states as well by eliminating the need for separate trusts for each spouse. In a typical joint trust, each spouse decides what will happen with their respective contributive share of trust assets upon their death. They retain control of the assets during their life, just as they would were their assets in separate trusts. A joint trust is nothing more than two separate trusts governed by one document instead of two. Clients often prefer joint trusts because they have familiarity with joint property. Typically, the trust has three property schedules, one for each grantor and one for their community or joint assets.
Spouses in second marriages find these trusts useful because they allow the survivor to have continuing access to assets or wealth that the couple accumulated together while maintaining some separateness thereby allowing the spouses to split whatever remains at the second death however they like. Of course, joint trusts for second marriages require careful drafting and consideration. For example, naming the surviving spouse as sole trustee after the death of the first spouse could cause issues. If the surviving spouse fails to seek competent counsel upon the death of the first spouse, that only exacerbates the issue. Unfortunately, sometimes a surviving spouse continues to view and use all the assets of the joint trust as their own because they had unrestricted access to the assets during the life of the now-deceased spouse. Occasionally, the surviving spouse fails to realize that, as the Trustee, they have fiduciary duties to the remainder beneficiaries and a duty to follow the terms of the trust, even if against their self-interest.
A recent Michigan case, In re James M. Kurtz Protection Trust, Docket No 360605 2003 Westlaw 2618498 (Mich Ct App Mar 23, 2023) (unpublished), highlighted some of the issues that arise in a joint trust situation when the surviving spouse lacks competent counsel or fails to retain counsel altogether. James and Barbara Kurtz created a joint trust naming their respective children from prior marriages as equal residuary beneficiaries after the death of both of them. The joint trust contained provisions preventing revocation or amendment by the surviving spouse after the death of the first spouse. The joint trust also gave the surviving spouse the right to withdraw principal. After Barbara died, however, James purported to restate the joint trust. He eliminated the children as beneficiaries and named his newly created “protection trust” as the sole residuary beneficiary. In his capacity as trustee, James made distributions from the joint trust to himself and then used those assets to fund the protection trust. James named one of his sons as the sole beneficiary of the protection trust. James died and Barbara’s children initiated a lawsuit challenging James’ actions, including his restatement of the joint trust, his withdrawals from the joint trust, and the creation of the protection trust. The lower court invalidated the restatement, the withdrawals, and creation of the protection trust. James’ son appealed.
The appellate court considered both the provision prohibiting amendment of the joint trust as well as the provision allowing the surviving spouse the right to withdraw principal from the trust. The court determined that one of the main purposes of the trust was to “ensure the children of one settlor would not be posthumously disinherited following the death of that settlor” which was exactly what James did. By removing assets from the joint trust and putting them in the protection trust, James effectively disinherited Barbara’s children, which frustrated the goal of the joint trust. The appeals court found that although James had the right to withdraw assets from the joint trust for his own use and benefit, the withdrawals that he made were not for that purpose. The court determined that the withdrawals that James made were solely to fund the protection trust which was improper. The court of appeals affirmed the lower court’s rulings with respect to the restatement of the joint trust and withdrawals therefrom. The higher court indicated that James had the power to create the protection trust, but the terms of the joint trust prohibited unfettered access to the assets thereby preventing him from using joint trust assets to fund the protection trust.
The James case highlights some of the pitfalls that may trap the unwary practitioner with respect to joint trusts and provides several important lessons. First, even though all the assets are in the joint trust at the first death, it’s important to retain counsel to review the terms of the trust and help guide the trustee through the administration of the joint trust after the death of the first spouse. Second, it’s vital to follow the terms of the joint trust precisely in making distributions from the trust. Third, the joint trust need not be irrevocable upon the first death, although the contributive share attributable to the decedent spouse should be irrevocable if protecting the plan is important. If you want to discuss whether a joint trust is right for you or want to better understand the terms of your joint trust, reach out to a qualified Estate Planning attorney now.
Tereina Stidd, 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: (858) 453-2128
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