The most common type of trust created by a married couple is a revocable living trust, and for those living in California, often the assets inside the trust are community property. However, depending on your marital and family situation, having a separate property trust may also make sense. If you have separate property, either assets owned prior to marriage or gifts or inheritances, having a separate property trust will ensure that those assets are passed on to your beneficiaries of choice.
Couples have many options when planning for their estate. Joint property trusts may be enough for many couples who have no prior marriages. However, those who have had prior marriages and are getting together later in life may both have significant separate assets. Some couples may choose to keep those assets separate, while others may want to make all of their property community property.
A joint property trust is used to combine a couples assets as community property. Community property belongs to both spouses. If the spouses become divorced, the property is split equally between the spouses. If the one spouse dies, the community property becomes the individual property of the living spouse. Community property is anything acquired during marriage while living in a community property state, such as California; including earnings. Separate property can be changed to community property if desired by the original owner.
A separate property trust allows the separate property placed in the trust to retain its character as separate property. Separate property is property that belongs to one spouse. This allows each spouse to ensure their separate property is passed down to heirs according to their wishes. Oftentimes, the beneficiaries of separate property trusts are the children from the first marriage.
Generally, while the trustor of the separate property trust is alive, his separate property is placed in the trust and he is the trustee of that trust. An independent trustee is designated to control the assets in the trust after his death. This prevents the surviving spouse from depleting the assets of the trust before they are passed to the intended heirs of the deceased spouse.
Setting up a separate property trust offers many benefits, but there are complex tax issues involved. If you are considering creating a separate property trust or are in the process of planning for your estate, it is important to seek professional legal and tax advice. Please feel free to contact your L&B professional at 858-558-9200 to further discuss these details.