Scenario #1 – The blended family
Facts: Al (age 72) and Lois (age 65) are a newly married couple seeking estate planning advice. Both were married previously and prepared individual estate plans over 20 years ago. Their plans are outdated and therefore need updating. Al has three adult children and seven grandchildren, while Lois has one adult child and three grandchildren. Al and Lois own most of their assets separately. While they wish to provide for each, Al and Lois want to provide for their own child(ren) and grandchildren and want to ensure the surviving spouse does not have the ability to change these terms. Al also has a business interest in an investment firm where he has worked for the past 30 years and a strong desire to leave a portion of his assets to several charities. Lois inherited a vacation home from her family and wishes that it be passed to her child and grandchildren.
Conclusion: In blended families or subsequent marriages, especially where each spouse came into the marriage with their own assets, separate trusts might be the best choice. Separate trusts allow each spouse to maintain control of his or her individual assets during their lifetime and ensure their estate passes to his or her intended beneficiaries at death. Establishing separate trusts will address the concerns of Al and Lois, including maintaining control during their respective lifetimes, ensuring the other is cared for after the first death, and providing for their own children and grandchildren without fear that their plan will be changed by the surviving spouse.
Scenario #2 – The “high-risk” couple
Facts: Jane (age 45) and Mike (age 50) have been married for 15 years and have 2 minor children, ages 8 and 10. They created “do-it-yourself” wills online several years ago but aren’t sure if they are legal or adequate given their current life circumstances. Jane and Mike want to do it “right” this time. Jane is an OB/GYNy physician and Mike is a neurosurgeon—both are considered to be in high-risk medical specialties. Mike and Jane own a home together in Minnesota, have a few life insurance policies, and contribute significant amounts to retirement accounts each month. With life insurance, the total value of their estates is around $5 million. They anticipate their net worth will increase significantly as they advance in their careers. They wish to provide for each other and then their children, equally. However, given their occupations, they are worried about creditor protection and losing their marital estate should either of them get sued. Estate tax minimization is also a concern.
Conclusion: Separate trusts are usually the better option when creditor protection is a potential issue for each spouse. Depending on state law, if either Jane or Mike were sued, only the assets in their separate trust would likely be at risk of loss to a judgment, rather than the entire pot of marital assets. The other spouse’s trust assets should stay out of reach from his or her spouse’s creditors. Separate trusts would also allow for the creation of trusts for their minor children to ensure that, on the death of both Jane and Mike, a trusted individual would serve as trustee over the funds until their children are ready to handle an inheritance.
Scenario #3 – The “senior” couple
Facts: Pat (age 78) and Mary (age 75) recently celebrated their 50th wedding anniversary and want to mark the occasion by creating a comprehensive estate plan. They have heard about probate and want to avoid it. Mary and Pat own most of their assets jointly, including a home in Minnesota, and investment, checking and savings accounts. Pat remarked that they “treat all their assets as part of the marital unit” but expressed concern that “Mary won’t know how to handle our money if I die first.” Their priority is to provide for the surviving spouse first. Thereafter, they wish to provide for their, their 4 children equally, but if a child is not living, then their grandchildren. Pat and Mary do not have a taxable estate; they are on a “fixed income” and are worried about the costs associated with estate planning. Mary and Pat both want to stay in their home even when the other passes away. They appear to be of sound mind and memory.
Conclusion: A joint revocable trust might be the better option for Pat and Mary given the length of their marriage, as well as their joint assets, aligned goals, and identical beneficiaries. Joint trusts are sometimes easier to “fund” (i.e., to transfer assets into a trust), easier to administer (depending on the structure of the joint trust, they can provide for complete flexibility and control by the surviving spouse), and the goal of probate avoidance is also achieved.
Scenario #4 – The “windfall” couple
Facts: Linda and Tom have been married for 20 years and have no children. Tom comes from a generation of family business owners and expects a large inheritance from his recently deceased father. He wishes to keep this inheritance separate from his marital assets to provide for charities and several nieces and nephews upon his death. Linda has been a manager with a software company for her career, has several sisters who she is close with, and wants them to receive the bulk of her estate at her death (given Tom’s independent wealth, she is not concerned about providing for Tom). Linda and Tom rent a condo in Chicago, have a few life insurance policies, and several individual retirement accounts. Their combined estate is approximately $4 million. Tom is unsure of the exact amount of his inheritance but is worried about estate tax minimization.
Conclusion: Separate trusts are usually the better option when one spouse expects to receive an individual inheritance and wants to keep it separate. Their differing wishes for the ultimate disposition of their estates might also be easier to achieve through separate trusts. While providing for the other is not a huge concern given their independent financial situations, they can still do so with separate trusts while ensuring their wishes to provide for charities and other beneficiaries are fulfilled.
It is crucial to remind your clients to “fund” their joint revocable trust or separate trusts. This includes retitling accounts and property to the name of the trust and updating beneficiary designations for payable-on-death or transfer-on-death accounts or policies. Clients must understand that their trust document is ineffective unless completely funded. Estate planners must also determine whether community property considerations in their state impact their recommendation for a joint trust or. separate trusts. In community property states, joint trusts are typically used much more frequently.