Williams McDaniel, P.C.

A new Tennessee law, effective July 1, 2010, allows spouses to create a Joint Revocable Trust and convert assets to “Community Property.”  This has many advantages over a traditional Revocable Trust or a Will.  First, it will allow a husband and wife to keep all the assets titled jointly.  Second, it has a significant income tax benefit for the surviving spouse.  Third, it insures that at least half of the assets in the trust will be available to utilize the death tax exemption of the first spouse to die.

A Community Property Joint Revocable Trust can be created by both spouses during their lives if it meets the following four requirements:  1) The trust agreement states that it is a Tennessee Community Property Trust; 2) At least one Trustee is a Tennessee resident; 3) It is signed by both spouses; and 4) It contains a notice of the tax and legal consequences of the trust.

How it Works

You and your spouse retain the right to amend the trust acting together, and either spouse may revoke and recover his/her one-half of the trust assets.  If you get divorced, the trust will be divided in the same manner as marital property, which means equitably between the spouses as they agree, or if they are unable to agree, as the court determines.

At the death of a spouse, one-half of the property in the trust will be used to create various trusts for the surviving spouse for life to reduce death taxes.  The other half of the trust will continue as a Revocable Trust under the control of the surviving spouse.

The surviving spouse can serve as Trustee of all trusts, and can have full access and control of the assets in the trust.  The surviving spouse can also decide how assets in the trust pass to the children, in case circumstances change after the first spouse’s death.

When both spouses are deceased, the assets from the trusts will be divided among the children, either outright or they may be held in trust.

The advantages and disadvantages of a Joint Revocable Trust must be considered before making a final decision.

Advantages:

         1.    Simplicity.  The Joint Trust allows a couple to keep all assets titled jointly.  Without this trust, it is necessary for death tax reasons to separate assets into each spouse’s name.

          2.    More Efficient Planning for Death Tax.  Because everything is titled jointly in the trust, at least half of the assets in the trust will always be available to utilize the death tax exemption of the first spouse to die.  It is common for couples without this type of trust to waste at least part of the death tax exemption, because they do not monitor changes in assets over time, and the first spouse to die often does not have sufficient assets in his or her separate name at death.

          3.    Income Tax Advantage.  The Joint Revocable Trust provides a significant income tax advantage for the surviving spouse because assets in the trust will be the “community property” of both spouses.  Since 1948, Internal Revenue Code Section 1014(b)(6) has granted a full “step up” in basis for ALL community property owned by a couple upon the death of the first spouse (as opposed to only the assets in the decedent’s sole name).  This allows the surviving spouse to sell any asset in the trust virtually income tax free, if done soon after death.  This can be extremely useful to the surviving spouse to diversify an investment portfolio or sell a closely held business with a low income tax basis. 
The 1948 law was enacted to address a tax inequality between residents of community property states and residents of non-community property states.  Although the need for the full step up in basis for community property states was eliminated in the 1976 Tax Act, the 1948 law has never been repealed.  Attempts to repeal the income tax advantage (including two as recently as the Clinton administration) have thus far been unsuccessful due to the lack of support of the community property states.

          4.   Probate Avoidance.  A benefit of all Revocable Trusts is that they avoid the delay, hassle, expense, and public nature of Probate at upon death and/or disability (called a Conservatorship).  Although having a Financial Power or Attorney often avoids a Conservatorship in the event of disability, many financial institutions prefer dealing with a Trustee than an attorney-in-fact.
 
          5.    Asset Management.  Preparing and funding the trust requires you to review, list, and organize your assets.  This process often leads to consolidation of assets and accounts, and even rediscovering forgotten assets.  All of the above makes it much easier for the Trustee to manage the trust upon death or disability.

Disadvantages:

          1.    Funding.  One disadvantage is the time and effort that goes into funding the trust.  Funding the trust is crucial because the advantages are only available if the trust owns your assets.  The advisors must work together, with the client, to insure that most all assets are titled in the name of the trust or are payable to the trust.

          2.    Cost.  Another disadvantage of this type of plan is the higher cost to implement the plan.  Whereas a Will only provides for one scenario (death), a Revocable Trust provides for four different scenarios:  (1) Grantors are alive and healthy, (2) the Grantors are disabled, (3) one Grantor is deceased, and (4) both Grantors are deceased.  Additionally, there are the costs involved in funding the trust as discussed above.

          3.    Asset Protection.  Real estate owned by the trust may not have as much protection from lawsuits and creditors as it would be if owned by a husband and wife as tenants by the entirety.  However, assets of the deceased spouse held in trust for the surviving spouse or children are protected.  Clients may want to consider increasing their personal liability (“Umbrella”) policy.

          4.    Gift Tax Issues on Formation.  There can be gift taxes incurred upon formation of the trust if it is not drafted correctly.  Therefore, this trust should be prepared only by an experienced estate planning specialist.
Conclusion

Joint Revocable Living Trusts are not for every family.  However, if your goals are to minimize death tax, assure proper management of assets in the event of disability or death, avoid probate, minimize income taxes upon the sale of assets following death and cause your assets to be held in a single family trust under the joint control of both spouses, this technique deserves serious consideration.  The benefits are too substantial to ignore.

A. Stephen McDaniel, 2011
C. Michael Adams, Jr., 2011
Williams McDaniel, P.C.
5521 Murray Avenue,
Memphis, Tennessee 38119
(901) 767-8200
www.wmww.com