“Joint Trusts” are Attractive but…
Joint trusts for a husband and wife can create numerous problems. First, creditor protection is potentially jeopardized. Second, it may be difficult to prove basis step up at death. This could have negative income tax consequences when a survivor sells stock. Third, there could be adverse gift and estate tax consequences. If you have a joint trust, it was most likely because you lived in a “community property” state. South Carolina is not such a state. It is considered a “separate property” state. As such, joint trusts, common in “community property” states, are not so common for South Carolina residents.
First, the during life creditor protection that may exist in another state often does not exist in South Carolina. You see, a form of joint ownership known as “Tenants by the Entireties” does not exist in South Carolina. This form of ownership creates a legal fiction whereby each spouse who owns property as “Tenants by the Entireties” owns the whole to the exclusion of the other. The result is if one spouse is sued, the creditor cannot get to the property that is owned as “Tenants by the Entireties”. They can’t get it because each spouse owns the whole to the exclusion of the other. This protection does not exist in South Carolina.
Second, when the survivor goes to sell stock, they may be in for a big surprise when it comes to reporting the gain. They may not have adequate records to substantiate their spouse contributed the stock sold. In essence, they may not be able to use the date of death value as the value for determining their basis in the sold stock. If they can’t use date of death value because they do not have adequate proof as to who contributed what to the joint trust, then the income tax bite can be more than necessary.
Third, joint trusts sort of treat all property as part of the joint trust. Without very careful language and careful record keeping, it is difficult to determine what assets may or may not be sheltered upon the first passing. The marital deduction is potentially jeopardized.
In South Carolina, a “separate property” state, it is generally advisable for all of the above stated reasons to use two separate trusts, one for husband and one for wife. The moral of the story is sometimes what appears attractive on the surface can have negative repercussions. The converse is also true: What may appear negative at first, can often end up being quite favorable. And so when it comes to structuring your affairs, it is wise to delve into the real consequences of your actions. What will be the income tax consequences? What will be the estate tax consequences? What will be the gift tax consequences?
If you have a “joint trust”, a close look at the above potential problems should be made to make sure you will not experience negative consequences from an arrangement that may have appeared attractive to you at first.
Mark F. Winn
Attorney at Law, PLLC