For a married couple, a joint revocable living trust means that both spouse’s assets are held jointly in one trust.
This generally mirrors the way most couples own their assets outside a trust. The other option is for each spouse to have her/his own separate trust that owns only her/his assets.
At the first spouse’s death, the trust document needs to be reviewed for any directions on dividing the trust and re-titling assets. If the couples’ assets are below a taxable threshold (one million dollars in Oregon) the trust likely does not contain any estate tax protection planning features. If the couples’ assets are above the taxable threshold, however, the trust likely will have estate tax protection planning language. At the first spouse’ death, the trust could direct that the trust be divided into two shares, the decedent’s share and the survivor’s share. The survivor’s share can continue under the joint trust name. The decedent’s share funds the ‘credit shelter trust’ or ‘bypass trust.’ If the decedent’s share is above the federal taxable threshold ($5.34 million in 2014), the amount over the taxable threshold of the decedent’s share could fund a ‘marital trust.’
Dividing the trust assets and re-titling one-half in the name of the credit shelter trust helps the Trustee segregate and track the deceased spouse’ share of the joint assets so they are not included in the surviving spouse’ taxable estate at her/his death. For example, suppose the joint trust held one and a half million dollars of assets at the first spouse’ death. The decedent’s share would be $750,000 and the survivor’s share would be $750,000. The decedent’s share would go into the credit shelter trust. No Oregon or federal estate tax would be due at the first spouse’ death. The surviving spouse would still have access to the income and principal from the credit shelter trust in the event the survivor’s share was not sufficient to meet the surviving spouse’ needs. As long as the survivor’s share did not grow in value to above one million dollars, there would be no Oregon or federal estate tax at the surviving spouse’ death either.
Now imagine the joint trust did not have estate tax planning provisions so the joint trust was not divided at the first spouse’ death. This would mean all the joint trust assets would be included in the surviving spouse’ taxable estate at her/his death. In the example above, the surviving spouse’ taxable estate would be one and a half million dollars. This is below the federal taxable threshold, but above the Oregon taxable threshold. The $500,000 above the Oregon threshold would be taxed at a rate of ten percent. Thus, $50,000 would be due to the state of Oregon as an estate tax on the surviving spouse’ death. Going through the process of dividing the joint trust at the first spouse’ death would save $50,000 in estate tax that could be passed on to the spouses’ beneficiaries.
Dividing the joint trust involves obtaining a tax identification number for the irrevocable credit shelter trust, opening new accounts in the credit shelter trust’s name, and funding the new accounts with the decedent’s one-half interest in the joint trust assets. For real property, one-half of the joint trust’s interest in the real property would be conveyed by deed(s) to the credit shelter trust.
Whether or not the joint trust has estate tax planning features, the surviving spouse or Trustee should consider obtaining date of death values for assets that have capital gains. This is because the decedent’s share of the assets receive a step up in cost basis to date of death values, thereby eliminating one-half of the built up capital gain(s). If the surviving spouse needs to sell an asset with capital gains during the surviving spouse’ lifetime, this additional step can have significant benefits because the combined federal and Oregon capital gains tax rate is about 25%.
At the surviving spouse’ death, the Trustee or successor Trustee should review the trust carefully to ensure the spouse’ distribution plan is carried out.
An experienced estate planning attorney can assist you with deciding on the appropriate trust for your situation, dividing a joint trust at the first spouse’ death, and/or distributing the trust assets at the surviving spouse’ death. Contact the Estate Planning attorneys with the Law Offices of Nay & Friedenberg in Portland, Oregon at (503) 245-0894 to set an appointment.