Joint Trusts for Joint Property
Joint trusts are a great way for spouses to hold assets if your assets are also jointly held. It makes it easy to take care of each other. With a joint trust, both parties are joint trustees. If one person becomes incapacitated the other one is the sole trustee and continues to take care of everything. After the first person dies the other person serves as the sole trustee. The idea behind a joint trust is to put all joint assets in the trust. Often married couples have joint assets titled in one spouse’s name. The problem with an asset like that is if there is more than $50,000.00 in that asset it could go through probate. However, if the assets are put into a joint trust everything will automatically pass to surviving spouse with no retitling and no probate.
The alternative to having a joint trust is for spouses to have two separate trusts. If all of the assets are joint then they can be divided up with 50% going into husband’s trust and 50% going into wife’s trust. In the alternative, the attorney will put the assets in each respective spouses name into their respective trust. Things can sometimes be very lopsided with more assets being in one trust or the other. Another choice is to split the assets up and placing certain assets into one trust or the other. Sometimes our office can run into a problem if one person has a majority of assets in his or her name. Then you have the majority of the assets in one trust and hardly any in the other. This is not a problem with a joint trust. When the first spouse dies there is retitling. The assets that are in the deceased person’s trust must be retitled into the surviving spouse’s trust.
There are some pitfalls for joint trust. A joint trust is not appropriate for couples only married for a short time or for couples who keep everything separate. If your only joint asset is a joint bank account you each put money in to pay joint bills. That does not mean a joint trust cannot be used by a blended family. There are a lot of blended couples who have been married for a long time and have comingled all of their assets. The real decision maker is how the blended couple wants to leave their assets.
If you move from a community property state to a common law state, you want to be able to preserve your community property, so those assets would get a 100% step-up in basis. That means all the capital gains in the asset is erased. It is as if you purchased it on the date of death. It is also possible to have assets in both community property states and common law states. Having assets in that situation requires a joint trust and special language in your trust.
For example, your family moves from California to Virginia. California is a community property state. Virginia has a state statute that recognizes proceeds from community property states as still having the characteristics of community property. Why that is important is the step-up in basis. At the death of the first spouse, a community property asset will have 100% of the capital gains erased. In a common law jurisdiction at the death of the first spouse, only 50% of the capital gains are erased.
The reverse is also true. If you move from Virginia to Texas, you want to have a document written saying all of your joint and marital property is now community property. This is called a Transmutation Agreement. That way if something were to happen the surviving spouse could benefit from the 100% step-up in basis.
Alaskan Community Property Trust – Not Just for Alaskans
Just because you do not live in a community property state does not mean you cannot take advantage of the 100% step up in basis. The “basis” in an asset is what you paid for that asset. Capital gains are the appreciation of the asset. If you live in a common law jurisdiction, joint or marital assets are considered to be 50% owned by each spouse. If you have highly appreciated property then you and your spouse may want to make sure that you get all of the capital gains erased after the first to die in order to avoid paying a lot of taxes. This can be done by setting up an Alaskan Community Property Trust is a great option. In a community property state when the first person dies 100% of the asset gets a step up in basis thus effectively erasing all of the capital gains. This type of planning is available to you to any person who lives in a common law jurisdiction. Call our office today to work with one of our community property experts.