Saturday, 13 April 2024

Estate planning: Separate property trusts for married persons

When establishing a living trust, married persons – and registered domestic partners – with significant separate property assets must decide whether to transfer their separate properties into a single joint trust, or into individual separate property trust(s). This is often very relevant in second marriages, and later in life marriages, where significant separate property assets and step-children are usually involved.

Maintaining one’s separate property’s identity is important because at death or divorce it belongs to that one spouse alone. Assets acquired prior to marriage, or received as a gift or inheritance during marriage, are separate property, unless co-mingled and transmuted into community property.

Community property, however, belongs equally to both spouses. It is divided 50-50 at death or divorce. Everything acquired during marriage, particularly marital earnings, is presumed to be community property.

When significant separate property is involved, there are multiple concerns with using a single joint trust.

First, including separate property in a single trust with community property and/or the other spouse’s own separate property, risks losing the separate character of these assets.

The separate property might be sold and the proceeds co-mingled with community property or the other spouse’s separate property. It will be difficult, or impossible, to distinguish the proceeds from the original separate property.

Second, assets in a joint trust will usually be managed by both spouses while they are alive and competent, and thereafter their children or beneficiaries.

That may not be desirable for separate property. The spouse with the separate property may not want to share control and management of the separate property with the other spouse. Also, and more worrisome, is that the stepchildren may later manage the separate property when both spouses are no longer able to manage their affairs.

Third, the surviving spouse, if left in charge of the separate property, may consume the separate property before using their own property – to the detriment of the children of the spouse owning the separate property.

What are the solutions?

The best solution, when substantial separate property assets are concerned, is to create two separate trusts to hold each spouse’s separate property estate. If necessary, a joint trust may be established to hold “community property” assets.

Alternatively, the separate property assets may be held a common trust but be controlled by a “special trustee” appointed by the spouse owning the separate property. Initially that spouse would be the special trustee.

The successor special trustee, who steps in at disability and/or death, would be that spouse’s own children or beneficiaries. The trust would say how the separate property is to be used for the benefit of the contributing spouse, the other spouse, and the children.

Protecting their children, as well as themselves, motivates people to ensure that their separate property is maintained as such, is separately managed, and is separately distributed at death (and not co-mingled with the other spouse’s estate).

Whether to use a separate property trust or use a common trust with a special trustee(s) in charge of separate properties, entails examination of individual circumstances such as the nature of the assets, the size of estate, and the quality of familial relationships involved.

Dennis A. Fordham, attorney (LL.M. tax studies), is a State Bar Certified Specialist in Estate Planning, Probate and Trust Law. His office is at 55 1st St., Lakeport, California. Dennis can be reached by e-mail at This email address is being protected from spambots. You need JavaScript enabled to view it. or by phone at 707-263-3235.

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