Joint trusts are commonly used for married couples, especially in states where there is no state estate tax, where the couple is in a stable relationship, and where they do not have many creditor concerns. Compared to separate trusts, they are easier to fund and manage, allow the surviving spouse complete control over the assets of the trust, and avoid higher income tax rates that would be applicable to assets in their spouse’s separate trust after their spouse dies.
If you are unmarried but in a long-term relationship with your partner, you may wish to take advantage of these benefits. However, joint trusts are often not a good option for unmarried couples.
Gift Tax Consequences
Under federal tax law, a married person can give unlimited gifts to their spouse, during their lifetime or at death, without incurring estate or gift taxes, because there is an unlimited marital deduction. This benefit is not available to unmarried couples. If an unmarried couple forms a joint trust, they must be careful to ensure that each partner contributes assets that are already jointly owned or are precisely equal in value. If one of the partners contributes assets of greater value to the joint trust, that partner may be considered to have made a taxable gift to the other partner. To avoid this result, assets each partner transfers to the joint trust could be divided into separate shares, in effect, creating two separate trusts within one trust agreement. However, the burden of creating these separate shares in a joint trust may outweigh its benefits.
In addition, to prevent transfers to the trust from being considered a completed (and therefore taxable) gift under the federal tax code, the trust document may need to include provisions that allow either partner to revoke the trust instead of requiring joint action by both partners. One or both partners may find this type of provision unattractive.
Income Tax Consequences
Joint trusts are typically used for married couples who file joint income tax returns because either spouse’s Social Security number can be attached to property or accounts held by the trust that are producing income. Revocable trusts commonly used by married couples during their lifetime, are grantor trusts. For federal income tax purposes, the person or couple who creates a grantor trust is considered the owner of the assets held by the trust. The income produced by the trust is reported by the married couple on their joint income tax return rather than a separate income tax return filed on behalf of the trust. Either spouse’s Social Security number can be used as the tax identification number for the trust, and the assets held by the trust can be associated with either spouse’s Social Security number.
Federal tax law does not allow unmarried couples to file joint tax returns, so each partner must file separate returns reporting income from their respective share of the trust. This makes reporting much more complicated for a joint trust operating under one partner’s Social Security number or a separate tax identification number, and it sets the couple up for trouble stemming from inaccuracies on their tax returns.
What Are Some Alternatives?
Separate trusts. To avoid the complications that will likely arise if an unmarried couple establishes a joint trust, each partner could form a separate trust funded with some or all of their assets. Each partner can be a trustee for their own trust and can choose a co-trustee or successor trustee to manage their affairs during their lifetime if they become incapacitated. In addition, they can name anyone they choose to be beneficiary after their death, including their partner, and can specify the assets that should pass to them.
Keep in mind that if you and your partner transfer jointly owned assets to a trust, they will no longer be jointly owned because the trust will be the sole owner. The trust’s terms will determine who will ultimately receive it.
Joint ownership. Jointly owning assets may be an option to consider. There are a couple of types of joint ownership.
Assets owned as joint tenants with rights of survivorship pass automatically to the surviving owner when the other owner passes away—without going through the probate process. Typically, neither partner can transfer the property or obtain a mortgage on it without the other’s consent.
Assets jointly owned as tenants in common with another person pass as part of a probate estate according to the deceased person’s will, or in the absence of a will, to the heirs specified by state law. Each of the tenants in common may freely transfer their interest in the property, so it is often a less desirable option than a joint tenancy with a right of survivorship. Unless the deceased partner’s will provides that the surviving partner should inherit their interest, the surviving partner could end up co-owning property with someone they may not have chosen.
We Can Help You Plan Ahead
Although some states provide protections for couples who have registered as domestic partners or civil union partners, state law generally does not protect unmarried couples when one of them passes away without an estate plan. Instead, the next of kin set forth in the state’s intestacy statute will inherit all of their assets, and the surviving partner will receive nothing. Contact us today so we can help you create the best plan for your unique situation. We can help you implement a plan to provide for your needs during your lifetime and ensure that your partner’s future is secure if something happens to you.
