When are two living trusts better than one?

When you’re the drafting attorney and get paid per document.

Just thought I’d get that joke out of the way before the comments arise.

The real answer is that for a married couple having two, sometimes even three, trusts may make sense when there is separate property, the spouses have different beneficiaries, and/or privacy is a particular concern.

Let’s look at the difference between joint and separate trusts in California.

Joint trusts

It’s common for a married couple to have a joint trust that deals with all their assets and all their beneficiaries. The trust would typically have schedules of assets, delineating each spouse’s separate property and their community property.

The trust then states what happens to the separate property and one-half of the community property of each spouse when that spouse dies (or becomes incapacitated).

Typically, in a joint trust, the surviving spouse becomes the sole trustee and carries out the terms of the trust.

If any portion of the deceased spouse’s assets remain in a trust over which the surviving spouse has limited ability to change beneficiaries or terms of the trust, (i.e., the trust is not an “all to spouse and they can do what they want” trust), California law requires notice and a copy of the trust be sent to the heirs and contingent beneficiaries.

An “heir” is someone who would be entitled to inherit under the intestate provisions of the California Probate Code had there been no will or trust (generally, spouses, children, descendants, then parents, siblings, nieces, nephews, etc.).

A “contingent beneficiary” is anyone named in the trust document who may receive assets or an income stream when the surviving spouse dies.

The issues

When one or both spouses have significant separate property, the joint trust may not function well. This is particularly true if a spouse intends for their separate property to benefit primarily or exclusively their children or other beneficiaries instead of their spouse.

Two trusts will result at death anyway

In this scenario, a joint trust must split into two trusts (commonly referred to as an “A/B” trust) at the death of the first spouse, so you’ll wind up with two trusts anyway.

One trust, the “A Trust” holds the assets of the surviving spouse, and the other, the “B Trust,” holds the assets of the deceased spouse. If it helps you remember, and if you have a sense of humor, you can think of the A Trust as the “above ground” spouse’s trust, and the “B trust” as the “below ground” spouse’s trust.

Trustees may not be the same

If assets, whether separate or community, of a spouse are intended to benefit the children or other beneficiaries, it may not be wise to have the surviving spouse act as trustee of the B Trust. Much will depend on the relationship between the surviving spouse and the beneficiaries. If the surviving spouse is not a good choice for the trustee in this situation, a joint trust must be carefully drafted to provide for a different trustee of the “B Trust.”

Terms need to be very specific

The B Trust must also carefully spell out the terms for distribution of the income and the principal to the surviving spouse and/or the other beneficiaries, including how and when distributions are made, the priorities (preservation of principal? care of the spouse? children’s education?), and what happens should the surviving spouse remarry. Litigation between step-children and step-parents over the terms of a trust is all too common

Notices

With a joint trust, the heirs of the deceased spouse receive a statutory notice of the trust and the name and contact information of the trustee, but so do the beneficiaries of the entire trust. That means both “sides” (e.g., children of each spouse) receive notice and a copy of the trust. This may be more information than you intend for your step-children to have. Keep in mind also that each person entitled to the notice also has 120 days to raise any claims about the trust (e.g., lack of capacity, undue influence).

Separate trusts as a solution

As a result of the above issues, sometimes it makes sense for spouses to have separate trusts. Occasionally, three trusts make sense — one for each spouse’s separate property and one joint trust for the community property. The latter is usually true when there are significant assets for each trust.

By utilizing separate trusts, confidentiality can be maintained for each spouse. Only the heirs and beneficiaries of the deceased spouse ever see that spouse’s separate property trust, and only those persons can raise any claims. If the only beneficiaries of the deceased spouse’s separate property trust are that spouse’s children, the terms will often be very different than the terms of the joint/ community property trust, and the documents will be much clearer.

In addition, the separate trusts, because of how the assets are then titled, make it very clear which assets are the separate property of each spouse. And finally, the spouse who created the separate property trust is free to amend or revoke their separate property trust without the consent or involvement of the other spouse (which can be very important in the event of incapacity of the other spouse, among other things).

Separate trusts for married couples are not always necessary. But sometimes, in the event of second (plus) marriages, differing beneficiaries, significant separate property, or for privacy and ease of administration, they can make a lot of sense.

Teresa J. Rhyne is an attorney practicing in estate planning and trust administration in Riverside and Paso Robles, CA. She is also the #1 New York Times bestselling author of “The Dog Lived (and So Will I)” and “Poppy in The Wild.”  You can reach her at Teresa@trlawgroup.net