Most married couples using a revocable trust select what is commonly referred to as a “joint trust.” Instead of having to split or horse trade assets between each spouse’s separate trust, they are all pooled into a single trust. This makes the “funding” process light years easier. In many instances, clients would refuse to use a revocable trust if they had to split assets between two separate trusts. Closing existing cash and brokerage accounts, setting up new accounts and balancing future withdrawals between the accounts is just too much.
When the first spouse dies, however, we often have to perform the splitting, etc. that we avoided when the trust was originally established. Conceptually, most joint revocable trusts split into two shares, one for the decedent and one for the surviving spouse. The decedent’s share may be further divided into two shares, one known as the “credit shelter” or “bypass” trust, and the other known as the “marital trust.” The surviving spouse’s share is usually referred to as the “survivor’s trust.”
For liquid assets, most clients bite the bullet and set up new accounts after the first spouse dies. The “credit shelter trust” is a new taxpayer (with a new tax identification number) and only by setting up a new account will the income be referenced to the proper tax identification number. The surviving spouse frequently leaves her half in the historical accounts, but arranges for the bank or brokerage house to exclusively use her SSN for the account, and remove her husband’s SSN.
For real estate, there are alternatives. Before death, the real estate was owned by the joint trust, i.e., Robert Smith and Jane Smith, Trustees of the Robert and Jane Smith Revocable Trust dated 3/28/2012. After death, the property is conceptually owned 1/2 by the “credit shelter trust,” and 1/2 by the “survivor’s trust.”
One approach is to execute and record deeds memorializing the split. For example, the deed might convey the property to: Jane Smith, Successor Trustee of the Credit Shelter Trust established under the Robert and Jane Smith Revocable Trust dated 3/28/2012, as to an undivided 1/2 interest, and Jane Smith, Successor Trustee of the Survivor’s Trust established under the Robert and Jane Smith Revocable Trust dated 3/28/2012, as to an undivided 1/2 interest.
There is a second approach which may be simpler and less expensive. It is to leave title to the property intact, and enter into a simple agreement (signed by the trustees) memorializing how the real property is divided between the subtrusts. The funding agreement will not be recorded in the real estate records. If the property is sold down the road, the seller on the deed will be the joint trust (i.e., Jane Smith, Successor Trustee of the Robert and Jane Smith Revocable Trust dated 3/28/2012), but the proceeds will be allocated in accordance with the funding agreement. Along the same lines, the rental income and deductions will be allocated between the subtrusts as if deeds had been signed and recorded.
In summary, administering a joint trust upon the death of the first spouse to die can be a tedious and time-consuming process. At least for real estate, you should consider the simpler and less expensive approach of documenting the division of property with a funding agreement.