The Listen to Lawrence Letter: JOINT is not always better

READER QUESTION:

Why would a married couple have separate revocable trusts?

MY RESPONSE:

Great question, and one I hear all the time.

At first glance, it seems easier to just have one joint revocable trust. After all, you’re married…what’s mine is yours, right? Well…yes and no.

Here are 3 reasons why separate revocable trusts often make more sense:

1. ESTATE TAX PLANNING, AVOIDING THE “CLIFF” AND UNDERSTANDING PORTABILITY

In New York, there is no tax when your assets pass to your surviving spouse, but at the second death, there could be a tax. At the second death, the estate tax exemption in 2026 is $7.35 million per person. But there is a trap. If the survivor’s estate exceeds 105% of that number, about $7,717,500, they don’t just pay tax on the excess…they lose the exemption entirely, and the whole estate becomes taxable. That’s the “cliff.”

Now here’s where portability comes in, and why separate trusts matter.

At the federal level, spouses can essentially share their exemptions, thereby exempting twice the amount. If one spouse dies and doesn’t use all of their exemption, the survivor can pick up the unused amount. That’s called portability. NEW YORK DOES NOT ALLOW PORTABILITY.

So if everything is left outright to the surviving spouse, or in a joint trust that effectively does the same thing, the first spouse’s $7.35 million exemption can be completely wasted.

Separate trusts allow us to “lock in” that first spouse’s exemption, typically through a credit shelter trust (also known as a bypass trust), so both exemptions are preserved, and the family avoids unnecessary estate tax.

2. BETTER PROTECTION FOR CHILDREN, ESPECIALLY FROM PRIOR MARRIAGES

Instead of leaving everything outright to your spouse and hoping it ultimately goes where you want, your assets can remain in trust for your spouse, providing for their support during their lifetime, while ensuring that at the second death, those assets pass to your own children.

3. A HYBRID APPROACH FOR CERTAIN ASSETS

Sometimes it’s not about taxes or second marriages at all. If one spouse has inherited money or family assets they want to keep on their side of the family, a separate trust for that spouse can make sense, alongside a joint trust for everything else. That way, you get the best of both worlds, shared planning where it makes sense, and protection where it matters.

So, it’s not about separation, IT IS ABOUT SMART PLANNING!

Of course, if this is a first marriage and your assets are comfortably under, and expected to stay under, the New York estate tax cliff, a joint trust is almost always preferred.

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As always, please send your questions in! If you are thinking about it, others are probably too, so my answers will no doubt help you and many others.

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