Joint trusts benefit many married couples, especially if they enjoy a stable relationship. Also, this works for couples who spurn credit and who live in a state that does not subject estates to a state death tax. Compared to separate trusts, joint trusts are easier to fund. What’s more, they allow the surviving spouse to maintain complete control over money and property held in the trust. Also, they may help avoid much higher trust income tax rates after the spouse dies.
If you are in a long-term relationship with your partner but remain unmarried, you may want to take advantage of these benefits. However, joint trusts do not work for unmarried couples. This may not seem fair. However, there are some important reasons why unmarried couples should consider separate rather than joint trusts.
Gift Tax Consequences in Joint Trusts
Under federal tax law, married couples benefit from an unlimited marital deduction that allows them to make an unlimited amount of gifts to their spouse, during their lifetime or at death, without incurring estate or gift taxes. This benefit is not available to unmarried couples, regardless of the longevity of their relationship and level of commitment to each other.
Thus, if an unmarried couple forms a joint trust, they must ensure that each partner only contributes money and property already jointly owned. If one of the partners contributes property of greater value to the joint trust, the court may encourage that partner to make a taxable gift to the other partner. To avoid this result, each partner should carefully transfer to the joint trust/ The burden of creating these separate shares in a joint trust may outweigh its benefits.
Joint Trusts & Income Tax Consequences
Joint trusts are typically used for married couples who file joint income tax returns because either spouse’s Social Security number can be attached to property or accounts held by the trust that are producing income. Revocable trusts, which are commonly used by married couples during their lifetime, are grantor trusts: for federal income tax purposes, the person or couple who creates a grantor trust is considered the owner of the accounts and property held by the trust. This means that the income produced by the trust is reported by the married couple on their joint income tax return rather than a separate income tax return filed on behalf of the trust. Either spouse’s Social Security number can be used as the tax identification number for the trust, and the property and accounts held by the trust can be associated with either spouse’s Social Security number.
Federal tax law does not allow unmarried couples to file joint tax returns, so each partner must file separate returns reporting income from their respective share of the trust. This makes reporting much more complicated for a joint trust operating under one partner’s Social Security number or a separate tax identification number, and it sets the couple up for trouble stemming from inaccuracies on their tax returns.
Alternatives to Joint Trusts
Separate Trusts
To avoid the complications that will likely arise if an unmarried couple establishes a joint trust, each partner could form a separate trust funded with some or all of their money and property. A trust allows the people to transfer property and accounts to the named beneficiaries according to its terms, and it avoids probate at death. Each partner can be a trustee for their own trust and can choose a co-trustee or successor trustee to manage their affairs during their lifetime if they become incapacitated. In addition, they can name anyone they choose to be their beneficiary, including their partner, and can specify the property and accounts that should pass to them.
Joint Ownership & Joint Trusts
There are a couple of ways that unmarried couples may jointly own their accounts and property. The method the partners choose will depend on whether they want the surviving partner to receive full ownership of the account or property when one of them dies. Generally, if they hold the accounts or property as joint tenants with rights of survivorship, the surviving partner automatically and immediately becomes the full owner when one of them passes away—without going through the probate process. Typically, neither partner can transfer the property or obtain a mortgage on it without the other’s consent.
About Skvarna Law Firm in Glendora and Upland, California
Let a skilled attorney assist with your estate plan. So, contact us today to learn about your options (909) 608-7671. We operate offices in Glendora and Upland, California. Therefore, we provide legal services for individuals living in San Bernardino, Los Angeles, Orange, and Riverside Counties. This includes the cities of Upland, Ontario, Rancho Cucamonga, Fontana, Colton, Rialto, Chino, Chino Hills, Glendora, Claremont, Montclair, Pomona, La Verne, San Dimas, Azusa, Covina, West Covina, Diamond Bar, Walnut, La Puente, Corona, Norco & Mira Loma. Visit SkvarnaLaw.com to learn more.
