Individual vs. Joint Trust: How to Decide Which is Right for You

So you and your spouse, or partner, are creating your estate plan for the first time. Early on in the process, you're likely to be faced with the decision of setting up a single Joint Revocable Trust or separate Individual Revocable Trusts.

Knowing which is best for you both may not be immediately obvious, and you should take the time to understand the differences between the two to come to a decision.

There are a lot of factors you should consider, including:

• Your estate planning and legacy goals and wishes
• Your family situation, e.g. if you have previous spouses or a blended family
• If separation or divorce is a concern
• If asset protection from creditors or legal issues is a concern
• If you and your partner are legally married or not

The article below digs into these factors as well as the pros and cons of each type of trust to help you make an informed decision about your estate plan.

First, do you need a trust?

If you’re not sure if you should have a trust in your estate plan—let alone choose which type of trust—here are a few reasons why you should consider having one in place:

• To avoid probate. Trusts help bypass the probate process, which can be lengthy and costly, so that your assets are distributed quickly and privately.
• To protect and control asset distribution. Trusts provide a way to protect assets from creditors, lawsuits (like divorce), and even from mismanagement by beneficiaries by providing specific instructions for how assets are distributed to them. The grantor (the person who sets up the trust) can include further instructions for how their assets in the trust should be distributed and to whom.
• Planning flexibility. Trusts can be tailored to meet a number of goals and wishes, from providing for children or those with special needs to laying out how a business you own should be dealt with after your death.
• Tax efficiency. Depending on the trust and how it's structured, you may be able to minimize estate and gift taxes, leaving more of your assets to pass onto your beneficiaries.

It should also be noted that this article is focusing on revocable trusts. As the name suggests, a revocable trust can be “revoked” or updated by the person(s) who set it up. Sometimes referred to as “Living Trusts,” they allow for more flexibility in your estate planning, especially if you expect your situation to change in the future.

An irrevocable trust, on the other hand, cannot be easily revoked or changed. However, an irrevocable trust—and there are multiple types—are often used for greater asset protection and tax strategies, as assets placed in them can be removed from your taxable estate. Though this could often result in the grantor losing control of those assets placed in the trust. Irrevocable trusts are also often used by those with more complicated and/or high-net-worth estates.

That said, revocable trusts are a great vehicle for many people due to their flexibility and ability to both help avoid probate and provide a seamless transfer of assets upon your death.

As a couple, your next decision is whether to create and maintain separate trusts or create one together. Below, we go through some factors that can help you decide what is best for you and your spouse or partner.

What is the difference between an individual trust and a joint trust?

If a couple opts for individual trusts, each person will create their own trust separately. This means both you and your significant other will maintain control over your respective trust, allowing each of you to independently manage your assets. Each person is able to determine how their assets are distributed, name their own beneficiaries, and set specific terms for how their trust is managed.

Alternatively, a joint trust is a single trust set up by both of you together. Assets are combined into one entity and managed jointly by you and your significant other. This represents a unified estate plan for your shared financial goals and intentions.

What are the pros and cons of an individual trust?

Just because you are married, or in a committed relationship, it doesn’t necessarily mean a joint trust is the right, or best, decision for you.

Individual trusts allow each spouse or partner to have control over their assets and their estate plan. Having separate trusts could make sense for couples that may differ in their approach to who should control which assets or how those assets should be distributed after their respective deaths.

You may also want separate trusts if you have concern over how your spouse or partner may handle certain assets after you pass.

Here are some factors that you should consider about an individual trust:

Strengths of an individual trust

1. Simple administration upon death

With an individual trust, asset administration becomes more straightforward upon death. It reduces confusion because the assets are already segregated between you and your deceased spouse. This helps streamline the process of transferring assets to the beneficiaries named in the deceased spouse’s trust.

2. Separate control over your estate plan

If you and your significant other prefer to have separate control over your assets, an individual trust allows for that rather than tying assets together in a single trust. This could be a benefit for those that may have previous marriages or children from a prior relationship and want to manage assets for those beneficiaries separately. It can also be a benefit in case you separate or divorce, since your estate plans are already separated and can help protect assets in any potential legal proceedings.

3. Allows for certain spousal gifting strategies

Individual trusts can simplify certain financial strategies, such as gifting assets to your spouse or significant other. For example, if one spouse needs to qualify for Medicaid, their assets can be moved out of their name and into the other spouse’s name. This allows one spouse to qualify for Medicaid benefits while still protecting the assets of the healthy spouse. It should be noted in the Medicaid example, however, that laws differ by state and you’ll want to understand the laws in your state if this may be a priority for you both when creating your estate plan.

4. Asset protection in certain situations

Individual trusts may protect assets in situations where one partner is exposed to legal or financial risks. By keeping assets separate, this could shield the other spouse from exposure to creditors or lawsuits.

5. Greater flexibility for beneficiaries

Individual trusts create more flexibility for couples that may have blended families or differ in their goals for how their assets should be distributed. Each person can structure their estate plan to suit their individual goal without needing to compromise the other person.

Weaknesses of an individual trust

1. Complexity during life

Having two separate trusts can certainly create complications for you and your partner. Especially if you want to keep the balance between both relatively equal. Doing so requires frequent monitoring and adjusting, which could be more time-consuming compared to a joint trust.

2. Higher administrative costs

Creating two separate trusts could result in higher legal and management costs. Each trust also requires its own documentation and could result in separate tax filings, which could create additional costs over time.

3. Potential for conflicts in decision-making

With each partner or spouse having full control over their own trust, this could lead to conflicts if both of you are not completely aligned on your financial and estate planning goals. This could be about which assets are put into each trust, if the trusts are equally balanced (or not), or if changes should be made to one, or both, of the trusts.

What are the pros and cons of a joint trust?

Creating separate individual trusts could require more oversight and frequent adjusting, but it could also lead to more streamlined decision making and execution upon death.

That said, a joint trust may require less management while you’re alive but it could create more complications at death or if you and your significant other were to separate.

Here are some factors to consider about a joint trust:

Strengths of a joint trust

1. Simplified and convenient asset management

Unlike needing to manage two separate trusts, you and your significant other will have all assets consolidated into a single trust. This helps reduce the paperwork and complexity of managing multiple trusts and also streamlines the process of moving assets into a single trust. If you want to make updates, it’ll be easier to do with a single trust versus separate ones.

2. Reflection of shared goals

A joint trust provides a cohesive estate plan that reflects the financial plan of both you and your spouse. It helps both partners agree on a single approach for how assets are to be distributed and aligns legacy planning.

3. Easier administration upon death

A joint trust creates a smoother transition of assets when one partner dies. With assets already consolidated and clearly designated, it creates even more protection from probate and allows for a smoother transfer process to the living spouse and/or beneficiaries.

4. Fosters clear communication

With a joint trust, both partners need to be on the same page. While that could cause some tough conversations up front, before the trust is created, it helps foster open and clear communication about what your shared goals and wishes are. It also creates transparency in handling shared finances.

Weaknesses of a joint trust

1. Complications in the event of divorce or separation

A joint trust can be problematic if you get a divorce, or decide to separate, since both of your assets are combined in a single legal entity. This can make dividing those assets time-consuming and, potentially, costly due to legal disputes. This can all be compounded if there’s a blended or complicated family situation.

2. Conflict due to differing estate planning goals

While creating a joint trust can help open up communication between you and your spouse, it can also lead to conflicts if you’re unable to resolve differences. For example, you may have a dispute about leaving assets to children from a prior marriage or which of your children should receive a certain family heirloom. Both of you must agree on the terms of the trust and it creates the possibility of opening up disagreements.

Even after a joint trust is established, you must both agree on any updates or changes you’d like to make. If one spouse wants to make an update, but the other disagrees, this can obviously create a conflict.

3. Potential lack of asset protection

Unlike two individual trusts which can help shield assets if one spouse runs into financial or legal issues, a joint trust means your pooled assets are potentially at risk in these situations.

Further factors and considerations when choosing a trust

Beyond these pros and cons for each type of trust, there are other factors that you should consider when deciding which is best for both of you.

These include:

Estate size and complexity: Larger estates or those that may involve more complex needs or distribution rules may benefit from individual trusts while a joint trust may be preferred for simpler estates.

Blended families or previous marriages: If you or your partner have previous spouses or children from a prior relationship, you may opt for individual trusts to separate control over certain assets.

For example, if you and your spouse have a joint trust and after one of you passes, a family member is upset that they are not named as a beneficiary, or are unhappy with the terms of the trust, they could try and contest it in court. If they are successful, that could throw out the entire trust for the spouse that’s still alive.

Your goals for managing your estate and finances: Some couples prefer to manage their finances jointly, while others prefer to do so separately. That doesn’t mean your estate planning needs to match but you should consider if you and your partner prefer to keep things separate or want to manage your estate together.

The state where you live: There may be nuances depending on the state where you live that could affect whether a joint or individual trust is the best choice. For example, if you live in a community property states—meaning assets acquired during marriage are jointly owned by both spouses, regardless of which person actually is named on the title or earned the income—a joint trust may make the most sense.

Currently, there are nine community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Alaska is also a community property state but only if both spouses opt in through a community property agreement.

Furthermore, how your state deals with estate tax may impact your decision to have joint or individual trusts. An example would be in a state like New York, which has a state estate tax that’s separate from the federal estate tax. Individual trusts may make sense in this case so that each spouse’s estate is able to use their full estate tax exemption. With a joint trust, you may forfeit some of those tax advantages because assets become blended between you both.

Whether you’re legally married or not: For those that aren’t legally married, a joint trust could complicate issues—especially if you and your partner don’t or can’t file joint tax returns. If you each need to file separate, individual tax returns, you’ll need to keep track of the income generated in the trust separately.

This can lead to tax reporting and accounting complexities, particularly when it comes to dividing trust income, capital gains, or deductions because each person must accurately report their portion of the earnings. Furthermore, having a joint trust can blur the lines of ownership which could complicate the issue even more.

Should you choose individual trusts or a joint trust?

Ultimately, the decision comes down to your goals and wishes each of you have.

If you have a simple estate, have no concerns about divorce or separation, and are in agreement with how your assets should be managed while living and after death, a joint trust is likely a good choice.However, if your estate is complex, your assets are considered high- or ultra-high-net-worth, you prefer to manage assets separately from each other, or have different views on how certain assets should be distributed, creating separate individual trusts may make the most sense.

You and your partner should sit down and discuss these with each other, and understand how you each want to approach legacy planning. It’s always recommended that you also discuss these factors with your financial advisor, CPA and/or an attorney in your state to help weigh the pros and cons against the financial plan you already have.

Also remember, both types of trusts are revocable—meaning they can be undone. While doing so could be messy depending on the terms of the trust, it's something that can be done if needed.

If you want to learn more about the difference between individual and joint trusts, and how to approach choosing one, listen to this Practical Planner episode.

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