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“Sweetheart Estate Planning” – Separate Trusts or a Joint Trust?

By Howard C. Stross
February 14, 2024
Stross Law Firm - Sweetheart Estate Planning

What is Sweetheart Estate Planning? Most married couples today need not plan for the payment of federal estate taxes. For 2024, federal estate tax is only imposed on a deceased person’s estate if its value exceeds $13,610,000. With proper planning, a married couple can effectively double that exemption to $27,220,000. If you are a Floridian, the State of Florida does not impose an estate tax. This is why many married couples have a simple objective: to provide for the surviving spouse after the first spouse’s death and distribute the remainder of the estate to benefit their children after the surviving spouse’s death. This is sometimes called “sweetheart estate planning”.

Often in estate planning for married couples, we recommend using a trust to help the couple achieve their planning objectives. In advising couples about trusts, often there is a question of whether each spouse should have a separate trust or whether one trust, a joint trust, may be used. Which is better? Well, it depends. There is debate among estate planning professionals about whether to use joint or separate trusts for a Florida married couple.

A joint trust is a single trust used to hold assets of a married couple, with instructions for how the marital assets are to be managed and distributed on the death or disability of one or both spouses. Joint trusts are an alternative to creating separate trusts for each spouse. Attorneys differ in their views of joint trusts, especially when the trust is in a “separate property state”, such as Florida. Some estate planning attorneys believe that because joint trusts treat the spouses as a unit, they are more in line with the clients’ understanding of the ownership of their marital assets. Others feel the potential complications of administering joint trusts outweigh the benefits and prefer to use a separate trust for each spouse.

Because there is great flexibility in drafting joint trusts, it is difficult to make blanket statements about their structure. This discussion pertains to a married couples’ estate, which is not subject to federal or state estate tax, where the joint trust will be funded with assets of both spouses, and the entire estate will pass upon the first death to benefit the surviving spouse. Joint trusts can be drafted so on the death of the first spouse, a survivor’s trust is created. The survivor’s trust is funded with the surviving spouse’s interest in any marital property and the surviving spouse’s separate property. The balance of the deceased spouse’s separate property and the deceased spouse’s interest in any marital property is also transferred to the survivor’s trust after payment of any administrative expenses and specific bequests. The spouses’ combined property eventually ends up in the survivor’s trust. On the surviving spouse’s death, the assets of the survivor’s trust can be distributed to the couple’s children or held in trust for their benefit.

A tax benefit can be lost by using separate trusts, where the property in each trust is generally treated as that spouse’s separate property. For our discussion, assume that property valued at $100,000 is in the surviving spouse’s separate trust and that property has a tax “basis” (what it cost to buy) of $20,000. There would be no “step-up” in tax basis due to the first spouse’s death, meaning the property’s tax basis will not be adjusted up to the date of death value of the property. In the example above, the stepped-up value would have been $100,000, had that property been part of the first deceased spouse’s estate. Instead, the property would retain its $20,000 basis in the hands of the surviving spouse and would not receive a basis step-up until the surviving spouse’s death. If the surviving spouse sells the property during his or her lifetime, the $80,000 of appreciation will be subject to capital gain tax.

If estate planning attorneys always knew which spouse would die first, optimal basis adjustment could be achieved by always funding the first-to-die spouse’s separate trust with the appreciated assets that the couple owns. But, attorneys rarely know with any certainty who will die first. The best way to ensure that the couple minimizes capital gain tax is to ensure the property retains its character as community or martial property. That can be accomplished by keeping the assets in a joint trust.

In separate-property states, such as Florida, separate trusts may be the better choice for married couples with a “sweetheart” estate plan. The benefits of enhanced asset protection, ease of administration, and greater flexibility many times outweigh the psychological benefit and possible tax benefit of a joint trust. Other times, clients simply do not want to use separate trusts, in which case a joint trust can be a viable alternative. In community-property states, such as California or Wisconsin, joint trusts are often a better choice, especially if clients have appreciated assets. Using a joint trust provides income tax benefits that are not available to separate trusts. The potential tax savings offered by community or marital property classification are sometimes enough to justify the decision. And separate trusts can also be part of the estate plan to hold separate property if there is a reason to do so.

Whether you have not updated your estate plan in some time or you do not have an estate plan, contact our office at (813) 852-6500 to arrange a complimentary consultation to discuss your planning objectives and whether a trust is the right choice for you.

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