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The Wealth & Wisdom Blog

Information on Estate Planning, Estate and Trust Administration and Unique Asset Planning

Buy One, Get One Free.  Who doesn’t like a good deal?  Whether two-for-one amusement park tickets, sports tickets or my favorite, BOGO children’s meals, we appreciate “two for the price of one” deals. In this month’s update, I share why we recommend that married residents of the State of Minnesota create two trusts—in some respects, two trusts for the price of one.

For my married clients who are residents of “community property” states (e.g., Wisconsin and Arizona), we generally recommend one trust jointly created by both the spouses.*  For Minnesota married residents, however, we recommend separate revocable trusts for three important reasons:

  • First, establishing separate trusts leads to a better income tax and estate tax result following the first death. Assets owned by the deceased spouse’s revocable trust receive a full cost basis “step up” at death, thereby saving the spouse or children future capital gains taxes.  For families in which estate taxes could be an issue, the use of separate trusts continues to be of critical importance in order to properly implement a Family Trust (also called a tax savings trust) at the first death to minimize estate taxes.
  • Legal Clarity.  Second, the use of a joint trust sometimes creates unnecessary confusion following the first death between a married couple. Some of our surviving spouse clients have been told that the name of the joint trust must be amended simply to remove the name of the deceased spouse.  Other surviving spouse have been told that they have no right to change the terms of the joint trust.  While most joint revocable trusts explicitly allow the surviving spouse to amend a trust or otherwise control the trust assets, this confusion is unnecessary.  Using separate revocable trusts makes it clear that the surviving spouse has complete control over his or her revocable trust.
  • Protection of the Assets for Children. Finally, the use of separate trusts may, if coupled with the use of a testamentary trust for the benefit of the surviving spouse, provide the surviving spouse with certainty about the ultimate distribution of certain assets following the first death, even if the surviving spouse remarries.  The assets held by the deceased spouse’s Family Trust or Marital Trust can be maintained for the benefit of the surviving spouse, thereby allowing the surviving spouse to benefit from the deceased spouse’s trust assets.  However, the surviving spouse cannot generally re-designate the beneficiary of those assets at his or her death.   The assets in such a trust are therefore protected for inheritance purposes for the benefit of the children, regardless of the marital status of the surviving spouse.