What are the benefits of separate trusts?

Estates worth less than a certain amount of money are not subject to Federal estate taxes.  This is called the estate tax exemption and while this amount has changed numerous times over the past few years. it currently stands at $5.43 million.  Therefore, all estates with a total less than $5.43 million are not subject to estate taxes.  The exemption is portable between spouses meaning that a married couple benefits from an over $10 million dollar exemption together.  

Beneficial tax treatment under a lower estate tax exemption was one major reason why using separate trusts for married couples was a popular tool in the past. Now, with the increased estate tax exemption, some might think that separate trusts are no longer needed.  But, even with the decreased need due to an increased exemption amount, separate trusts still have many benefits. For example, separating assets into respective spousal trusts can help protect assets from creditors.  If one of the spouses dies the surviving spouse can access the deceased parties trust .  But, the surviving spouse's creditors cannot.  Many joint trusts do not include this protection from creditors.  

Using separate trusts can also protect families in the event of remarriage.   Many times, an individual remarries after the death of his or her original spouse.  By using a separate trust model, the individual's new husband or wife may be prevented from benefitting from the dead spouses trust after the death of the surviving spouse. While the trust can be written to allow the surviving spouse the ability to amend the beneficiary distributions from the original trust, it is rarely done.  However, separating trusts also allows the surviving spouse the ability to amend his or her own trust to provide access to the second husband or wife.

In contrast, many joint trusts are irrevocable at the spouse's death meaning that the surviving spouse is prevented from changing anything regarding the joint trust.  With separate trusts, the spouse can amend or revise his or her trust up to the point of his or her death. 

Separate trusts can also be useful in the event that the surviving spouse needs nursing home care.  If special provisions are included in the Last Will and Testament of the first spouse to die, the assets that were contained in that spouse's separate trust can be protected from a Medicaid spend-down in the event that the surviving spouse needs nursing home care.  Such provisions should be considered whenever either spouse is diagnosed with a medical condition that could result in the need for long-term care.

If you are planning an estate you should consider all of your options including a joint trust, separate trusts and various other options.  Andrew Byers is an estate planning and elder law attorney in the Auburn Hills and Troy, Michigan area. Contact him today at (248) 301-1511 with for all of your estate planning needs.