Estate Planning

WHY MIGHT CLIENTS DESIRE TWO TRUSTS INSTEAD OF ONE TRUST?

Here are some possible reasons why a couple might desire to have 2 trusts instead of one joint trust. 

1.  In the case of a second marriage (with children from a prior marriage), one or both spouses may desire to have a separate trust in order to benefit the children from the prior marriage in some manner.  

            Example 1:  Joe and Helen are married.  Joe has 2 sons from a prior marriage.  Joe owns 2,000 shares of ABC stock.  If Joe wants his sons to inherit those stocks, Joe could set up his own trust to own the stocks (and designate his sons as the beneficiaries of the stocks upon Joe’s death).  If Joe has a will that designates his 2 sons to receive the stocks (and Helen survives Joe), then Helen may not agree to let all of the stocks pass to her stepsons.  (Helen has rights under Illinois law to receive a percentage of the assets passing through her husband’s will as stated below.)

            Unless Helen waived any of her legal rights by signing a premarital agreement, Helen can possibly take part of the stocks (Illinois law gives Helen the right to take a spouse’s share worth a minimum of $10,000 and one-third of her husband’s assets passing through his will).  Helen cannot claim part of Joe’s trust assets (unless a  premarital agreement gave specific rights to inherit specific assets, a specific percentage of his assets, or a specific dollar amount of his assets). 

            Example 2:  Ted and Abby are married.  Ted has 2 sons and a daughter from a prior marriage.  Ted’s 22-year daughter Leah suffers from Down’s Syndrome (and cannot work to support herself).  Ted owns 3,000 shares of XYZ company stock.  Ted wants to put 90% of his stocks into a “special needs trust” for his daughter Leah (and give 10% of the stocks to his wife Abby).  If Ted has a will that designates his daughter Leah is to receive 90% of the stocks (and Abby survives Ted), then Abby may not agree to let 90% of the stocks pass to a trust for her stepdaughter’s benefit  (especially if Abby believes that she herself may need the stocks to live on). 

            Unless Abby waived any of her legal rights by signing a premarital agreement, Abby can possibly take more than the 10% of the stocks that Ted wants her to get (Illinois law gives Abby the right to take a spouse’s share worth a minimum of $10,000 and one-third of her husband’s assets passing through his will).  Abby cannot claim part of Ted’s trust assets (unless a premarital agreement gave specific rights to inherit specific assets, a specific percentage of his assets, or a specific dollar amount of his assets). 

 2.  When there is real estate (or stocks or mutual funds) that the couple desires to have pass to one of them with a “stepped-up basis” for capital gains tax purposes.  (In order that the surviving spouse, who inherits such assets from the deceased spouse, will be able to sell those inherited assets and pay less – or no – capital gains taxes to the IRS.)  

            Example 1:  Al and Beth own their principal residence in Illinois.  They also own a cabin in Wisconsin that they bought for $80,000 (and it is now worth $150,000).  Al enjoys going to the Wisconsin property (but Beth wouldn’t want to keep it if she were the survivor).  This Wisconsin property could be in a separate trust for Al, and then it could pass to Beth at Al’s death (with Beth getting a stepped-up basis).  If Beth transfers/gifts her interest in the property to Al (or Al’s trust) and at least 1 year goes by before Al dies, then Beth can receive the stepped-up basis (but there won’t be a full stepped-up basis if Al doesn’t live at least 1 year from the time that Beth gives him her interest in the property).

            Example 2:  Cal and Jan own a commercial piece of real estate in Illinois.  They bought it for $120,000 (and it is now worth $220,000).  Cal manages the property, and doesn’t mind dealing with the issues of being a landlord (whereas, Jan doesn’t want to handle landlord issues).  Cal would want to keep the property if Jan died first, but Jan wouldn’t want to keep if she were the survivor.  This commercial property could be in a separate trust for Cal, and then it passes to Jan at Cal’s death (with Jan getting a stepped-up basis).  If Jan transfers/gifts her interest in the property to Cal (or to Cal’s trust) and at least 1 year goes by before Cal dies, then Jan can receive the stepped-up basis (but there won’t be a full stepped-up basis if Cal doesn’t live at least 1 year from the time that Jan gives Cal her interest in the property).

3.  When one spouse has inherited (or received as a lifetime gift) assets that that spouse plans to pass to his/her children (not his/her spouse).

            Example 1:  Jill and Stan are married.  They have two sons.  Jill’s mother Lois left Jill two acres of vacant land in Wisconsin which are on a lake.  Lois had told Jill that she wants the property to eventually be passed down to the grandsons.  Jill could establish a trust (which names her two sons as the successor beneficiaries), and transfer the Wisconsin real estate into the trust.  If Jill only uses a will to name her two sons as the beneficiaries to receive the Wisconsin land, then Stan might renounce the will (meaning that Stan could claim a part of the vacant land per Illinois law), but under present Illinois law, Stan doesn’t have the right to claim any of the assets passing through Jill’s trust (unless Jill and Stan have signed a premarital agreement or a post-marital agreement that would give Stan specific rights to make a claim against the vacant land or Jill’s assets in general). 

            Example 2:  Jon and Sara are married.  They have a daughter (Dora).  Jon’s father gave him 500 shares of XYZ stock while he was alive.  The stock is now worth $80,000.  Jon wants to leave the stock to his daughter Dora.  If Jon only uses a will to name his daughter as the beneficiary to receive the stock, then Sara might renounce the will (meaning that Sara could claim a part of the stocks per Illinois law), but under present Illinois law, Sara doesn’t have the right to claim any of the assets passing through Jon’s trust (unless Jon and Sara have signed a premarital agreement or a post-marital agreement that would give him specific rights to make a claim against the vacant land or Jon’s assets in general). 

4.  When there is concern that one spouse may have a higher possibility of being sued, the couple may want to have two trusts (and even consider putting more than 50% of the couple’s assets into the trust for the benefit of the spouse that is less likely to be sued).

            Example 1:  Ben and Milly are married.  Ben is a physician.  Although Ben has malpractice insurance, Ben is concerned in case he were sued (and lost a lawsuit). Ben and Milly may want to have two trusts, and then put some/many of the assets into Milly’s trust (to protect those assets in case Ben is sued and loses a lawsuit and his malpractice insurance isn’t enough to cover the judgment amount). 

            Example 2:  Kara and Brad are married.  Kara is a dentist.  Although Kara has malpractice insurance, Kara wonders if she might be sued.  Kara and Brad might desire to have two trusts, and then put some/many of the assets into Brad’s trust (to protect those assets in case Kara is sued and loses a lawsuit in which her malpractice insurance wasn’t enough to pay the judgment amount).

            Example 3:  Dan and Beth are married.  Dan is a lawyer in Illinois (where an attorney isn’t required to have malpractice insurance).  Dan chooses not to pay for malpractice insurance (probably not a smart choice), and Dan wonders if he might be sued.  Dan and Beth might desire to have two trusts, and then put some/many of the assets into Beth’s trust (to protect those assets in case Dan is sued and loses a lawsuit).