Most everyone has heard the dismal statistics on the divorce rate. Depending on which study you consult, between 40% and 50% of married couples divorce. The rate of divorce for second marriages is even higher. What few people consider is the impact those statistics can have on their estate plans. Even without divorce in the picture, often when couples marry, one spouse may have significant separate property that they bring into the marriage.
In California and the nine(ish) other community property states it is common for married couples to use a joint trust. While, technically, placing property into a revocable trust does not change the character of property from separate to community or vice versa, it can become difficult to track property when placed in a common name.
Often, both spouses will have different ideas about where their separate assets should go when they die. The property, such as a family business or farm may be intended to be passed down one spouse’s bloodline or go to children from prior relationships. Children of different parents can become – anxious – about their mother or father losing their property in a subsequent divorce or about their inheritance being diluted or delayed. Those stresses can make for awkward situations.
In general, joint trusts give each spouse control over all of the trust property. The shared control can be problematic when there is separate property involved. If separate property is also owned with other family members (frequently the case with inherited property) there may be objections or concerns about a non-family spouse controlling the property.
While it is possible to draft a single trust around the issues surrounding separate and community property issues the document can become convoluted and difficult to understand. It is confusing to third parties as to which spouse has the authority to act on a particular piece of trust property.
The solution is frequently two or more trusts. We often set up a trust to hold separate property for each spouse. That way, title to the property and control of the property is clearly set forth for both the couple and third parties. When the goal is to grow a community estate a third trust can be added to hold community property, such as a joint home or financial accounts. This multiple trust structure complements a pre-nuptial or post-nuptial agreement, helping to reflect the arrangement the couple set up to manage their finances.
When setting up your estate plan, consider whether multiple trusts are right for you, your spouse, your children, and for your general piece of mind. Sometimes more of a good thing is a good thing.
Michael E. Garner, Esq., CFP®