When To Use A Joint Revocable Living Trust

A joint revocable living trust is a single trust created by a husband and wife, into which they transfer their assets. The trust provides that while both spouses are living, the trust income and principal shall be paid to either or both of them as they desire. Finally, any assets remaining in the trust after both spouses have passed away avoid probate.

Checklist of Potential Tax Dangers for Joint Revocable Living Trusts

There are a number of significant tax problems often presented by the administration of joint revocable living trusts. Many of these potential pitfalls have not yet received IRS attention. Because of this, there are not many definitive cases or rulings to provide guidelines. Estate planners may recommend using these trusts for individuals who have assets subject to federal gift and estate tax. However, you still might not achieve useful tax results.  Below are some potential tax issues:

• Transfers of assets to the trust may be taxable gifts that may not qualify for the unlimited gift tax marital deduction.
• If the trust, or a portion of the trust, becomes irrevocable at the death of the first spouse, the surviving spouse may be considered to have made a taxable gift to the beneficiaries of the irrevocable trust.
• At the death of the first spouse, it is unclear whether one‑half the value of the trust is included in his/her estate or whether the entire trust is included.
• At the death of the first spouse in a non‑community property state like Virginia, it is unlikely that a basis step-up will be obtained for the entire principal of the trust.
• If assets contributed to the trust by each spouse are commingled in a joint trust, it may not be possible to keep what is intended to be a credit‑shelter trust from being included in the surviving spouse’s estate.
• At the death of the first spouse, a tax consequence may occur with assets. These assets include annuities and retirement plans that either has to be divided and distributed to take advantage of the lifetime credit (causing an income tax problem), or those assets may be unavailable to fund the lifetime credit (or by-pass) trust thereby wasting the decedent’s estate tax credit.

How a Taxable Gift Occurs When Funding a Joint Revocable Trust

Funding for a joint revocable living trust may give rise to immediate taxable gifts.  Property contributed to a joint trust by the spouses can be unequal in value. In this case, a gift and the occurs. The value of the property contributed by each spouse can also be equal. However, the spouse with a shorter life expectancy could have made a gift to the spouse with a longer life expectancy. This is because of the actuarial value of the second spouse’s interest in the trust is larger.

Further, if a gift occurs on the creation of a joint revocable living trust, that gift may not qualify for the unlimited gift tax marital deduction. This is because. 1. the interest is terminable because the donor‑spouse receives an interest in the property if he survives the donee spouse. 2. the interest doesn’t qualify for the QTIP marital deduction election. This is because under the terms of the trust the donee spouse does not receive all income from the trust. Furthermore, the trustees can distribute the trust principal to the donor‑spouse during the donee spouse’s lifetime.

Death of the first spouse may result in taxable gifts by surviving spouses.  This trust provides that on the death of the first spouse a portion or all of the trust becomes irrevocable. Thus, the surviving spouse could be a taxable gift to the beneficiaries of the irrevocable trust. The IRS has ruled that where spouses transferred the property to a joint revocable trust and retained life income interests, with the remainder to go to charity, the gift to the charity was complete at the death of the first spouse when the trust became irrevocable.

Credit Shelter Trusts

The use of a joint revocable living trust can hinder estate tax planning with credit shelter trust.  You can use a joint revocable living trust by spouses whose assets exceed the applicable exclusion amount of one-lifetime credit. If this occurs, the trust should provide that the joint revocable trust will be divided upon the death of one spouse. You would divide the trust by placing the protected amount into a trust for the benefit of the surviving family. This is a credit shelter trust. You could not claim the marital deduction for this credit shelter trust in the first spouse’s estate. Thus, excluding this portion of assets in the estate of the surviving spouse at her death.

You must fund a credit shelter trust with a property that you originally put into the trust. This is important if this tax saving plan is to succeed. You must carefully segregate the joint trust assets into “his” and “her” contributions during the administration of the trust. Otherwise, the value of the credit shelter trust may be includible in the surviving spouse’s estate at her death. This would defeat the attempt to avoid death taxes. If the trustee cannot establish that the assets in the credit shelter trust originally came from the decedent spouse, the trust will be in the survivor’s estate and the tax-saving opportunity will be lost.

Contact our DC Law Office for More Information

For more information regarding joint revocable living trusts, please contact Antonoplos & Associates at 202-803-5676. You can also directly schedule a consultation with one of our attorneys.