Joint Revocable Living Trusts (Jt RLTs) in common law property states, such as Georgia, are often used by a married couple as their primary estate planning vehicle because of a perception of simplicity. Married couples who own most of their wealth jointly believe having a Jt RLT makes their lives simple, at least when it comes to their estate plan, and their lawyers are often happy to oblige. However, the perception of simplicity when using Jt RLTs is not reality. While utilizing a Jt RLT in a community property state, such as California, may make sense, this is often not the case in common law property states.
This Newsletter aims to provide the pros and cons of utilizing Jt RLTs as the primary estate planning vehicles for married couples in a common law property state, such as Georgia. For a discussion of utilizing a revocable living trust (RLT) based estate plan vs a Will based estate plan, please see our prior Newsletter on this topic here.
Table of Contents
I. The pros for married couples utilizing a Jt RLT rather than separate RLTs for each spouse in a common law property state, like Georgia.
A. Perception of simplicity
Married couples often believe that having one joint trust will be simpler to deal with during their lives, especially for those that own most of their assets jointly.
B. Ease of owning assets in a Jt RLT.
Because only one trust is being utilized, the spouses do not need to worry about splitting up jointly owned assets and deciding which assets should go into each separate RLT.
C. Elective community property trusts, which utilize a Jt RLT structure, may make sense for wealthy married couples living in a common law property state, like Georgia.
For wealthy clients with highly appreciated assets, an income tax strategy exists to utilize the laws of another state, such as Tennessee, which permit an elective community property trust. These types of trusts are a specialized form of a Jt RLT. While it is not completely clear if these trusts will be successful from a tax perspective, a compelling argument exists that they will serve their intended tax planning purposes. If this type of planning is successful, then all the Jt RLT property will receive the step-up in income tax basis at the first spouse’s death, just like the benefit achieved by those that live in community property states.
What is a step-up in income tax basis? From a tax perspective, death is an estate tax bad and an income tax good. The bad: all assets in which you have an interest (and possibly others) are included in your estate tax calculation to determine if you owe any estate tax at death. The good: even if you do not end up owing any estate tax at death, all assets includible in the estate tax calculation get their tax basis (to determine future gain or loss upon sale) adjusted to their date of death value. In other words, it wipes out all gain or loss as of date of death. This rule generally applies to all such assets other than Income in Respect of Decedent (IRD), which is generally deferred compensation and tax deferred accounts which were not yet subject to income taxation during your life, such as IRAs and Qualified Retirement Plan accounts. Married couples in a community property state, such as California, and possibly those utilizing elective community property trusts in states like Tennessee, get the step-up in basis treatment as to all their community property assets, and not just the deceased spouse’s one-half interest in their community property.
II. Discussion of the cons for married couples utilizing a Jt RLT rather than separate RLTs for each spouse in a common law property state, like Georgia.
A. Why does it matter if you live in a common law property state vs a community property law state when considering a Jt RLT as your primary estate planning vehicle?
Married couples living in community property states are presumed to own all their assets as community property unless they have gone out of their way to legally treat particular assets as separate property. All community property is presumed to be owned 50% by each spouse no matter what the title says as to how it is owned. For example, if the married couple in a community property state owns their home or brokerage account in one spouse’s name, it is still presumed to be owned 50% by each spouse, unless they have gone out of their way to legally treat it differently. This is not the case in a common law property state where ownership title matters. For example, if a married couple in a common law property state owns their home or brokerage account in one spouse’s name, then it is owned only by the one spouse.
Why does this distinction matter when it comes to Jt RLTs? As you will see below, multiple tax and non-tax issues exist when utilizing a Jt RLT. For married couples in community property states, many of these issues do not exist. However, for married couples in common law property states, these tax and non-tax issues are numerous and magnified.
B. All these issues begin with the lack of proper Jt RLT administration while both spouses are living.
While both spouses are living, they normally believe their Jt RLT is treated as if it were a joint bank or brokerage account. They have not a care in the world about who put what assets in, who took assets out, and where any earnings need to be credited. However, this is not what is supposed to happen.
What is supposed to happen when it comes to Jt RLT administration while both spouses are living? In general, the Jt RLT is supposed to have sub-accounts for trust accounting purposes, with a separate sub-account for separately owned assets contributed by each spouse, a separate sub-account for any contributed jointly owned assets, and a separate sub-account for any contributed community property. The Trustees (normally both spouses) are then to keep up with each sub-account as more assets are contributed, assets are distributed, investment income is generated, and gains and losses are recognized.
Why does this separate accounting matter? It matters for important tax and non-tax reasons. At some point in the future, the parties will need to know who owned what. This point could be a potential future divorce, when a creditor of one spouse comes looking for assets to seize, or when the first spouse dies.
Does anyone end up doing this onerous trust accounting? In the experience of our law firm of 30 years (as of 2025), we have never personally seen this trust accounting ever done. This does not mean it is never done, but it likely means that it is a relatively rare occurrence.
C. The issues often come to fruition when the first spouse dies.
At the first spouse’s death, the Trustee (normally the surviving spouse) needs to be able to determine what assets are in each ownership bucket (surviving spouse, deceased spouse, jointly owned and community property). The deceased spouse can only control their separate assets bucket, half of the jointly owned bucket and half of the community property bucket. The Jt RLT document will then lay out what is to happen with the deceased spouse’s share of assets and what is to happen with the surviving spouse’s share of assets. While Jt RLT documents are drafted in wildly different ways, they often retain the assets in the Jt RLT at least until the surviving spouse’s death. The question becomes how these assets are owned in the Jt RLT during this period, in one or more sub trusts or simply remaining in the Jr RLT with no discussion of what happened? In our experience, what happens is nothing. The surviving spouse normally believes nothing is needed to be done and does not seek guidance as to properly following the terms of the Jt RLT.
What types of issues arise by failing to properly administer the Jt RLT after the first spouse’s death?
- Estate tax related issues: How much of the Jt RLT assets are includible in the estate tax calculation of the first spouse to die? This has effects on the possible need to file and properly complete an IRS Form 706, Estate Tax Return, the possible portability election (the election to carry any unused Estate tax exemption of the first spouse to die over to the surviving spouse), and issues as common as qualification for the marital deduction for assets remaining in the Jt RLT, and in the determination of which assets receive a step-up in income tax basis.
- Income tax related issues: Which assets have their tax basis adjusted to date of death value (step-up in income tax basis); and are irrevocable, non-grantor, sub-trusts being created by the Jt RLT document after the first spouse’s death that require the need to obtain a tax identification number and the filing of annual trust income tax returns on IRS Form 1041? Non-compliance with these rules could cause improper tax reporting of future taxable income and capital gains and losses, paying taxes at the wrong tax rates, and penalties and interest for failure to properly file trust income tax returns and from the failure to report trust income on the proper tax returns.
- Asset protection related issues: Failure to properly administer the Jt RLT may result in the loss of any otherwise available protection from current or future creditor claims. For example, while both spouses are living, the creditor of one spouse may be able to access all the Jt RLT assets of both spouses, when this would otherwise not be possible. After the first spouse’s death, the ability to protect the first spouse’s assets from the surviving spouse’s creditors may be lost.
D. Jt RLT document wording is often lacking.
In our experience, we see most Jt RLTs drafted by non-tax attorneys who often fail to fully appreciate the tax and non-tax issues resulting from the specific wording of the Jt RLT document. Not only can improper or undesirable document drafting have negative tax and asset protection effects, but such wording can also create horror stories for clients and their loved ones. Below are just a couple horror stories that we have seen.
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Beware of requiring both spouses to consent to any Jt RLT agreement modifications, distributions, and terminations, at least as to their own share of Jt RLT assets!Some attorneys believe that by requiring both spouses to consent to trust distributions, changes to the terms or to the full or partial termination of the Jt RLT, even as to a separate spouse’s own share of the Jt RLT assets, that they are protecting the spouses from future potential undue influence or other types of financial abuse, and it ensures the ultimate disposition of their remaining assets at the second of their deaths. It does, but it also creates the possibility of massive potential abuse, be it intentional or unintentional, by one of the spouses against the other! Think about this. You own and control your assets, but the moment you contribute them to such a Jt RLT, you give up ALL freedom to use or dispose of these assets as you choose, except to the extent your spouse consents. This is not something we would ever recommend, except in extremely limited fact situations. In the case we saw, this restriction continued as to any trust principal (but not as to trust income) even after a spouse was deemed incapacitated and their legal representative was not permitted to consent on their behalf. As a result, neither spouse (nor their legal representative) could ever access the trust’s principal nor change or terminate the Jt RLT after one of the spouses became incapacitated.
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Beware of general powers of appointment (Gen POA) given to the first spouse to die as to the surviving spouse’s assets!Some attorneys will include a provision in the Jt RLT document that gives the first spouse to die a full Gen POA over all the trust’s assets, including the assets of the surviving spouse. A Gen POA is a power to benefit yourself, your creditors, your estate or the creditors of your estate. Having a Gen POA over assets includes those assets in your estate tax calculation at death. This is presumably done to try to achieve a step-up in income tax basis as to all the Jt RLT assets at the first spouse’s death. According to the IRS, this does not work, but many attorneys believe it may work if it is structured properly.In the matter we saw, it was not structured properly to make a compelling argument for the step-up in income tax basis as to the surviving spouse’s share of Jt RLT assets, but the drafting attorney may have felt no harm, no foul to try anyway. In this case, the Gen POA gave the first spouse to die the unlimited power to pass all the Jt RLT assets to anyone or to the estate of the first spouse to die. In this situation, the spouses, who were both previously married and had children by prior marriages, started to have marital problems later in life and the first spouse to die became vindictive. The vindictive spouse decided to exercise the Gen POA to provide that ALL the Jt RLT assets were to pass to his children by his prior marriage, and he attempted to leave his surviving spouse with nothing, including taking away the surviving spouse’s own share of the Jt RLT assets!
III. Pros and cons of married couple utilizing a separate RLT for each spouse.
A. Pros for using separate RLTs.
Simple, none of the multiple cons discussed above as to Jt RLTs apply to separate RLTs. With separate RLTs, it is completely clear as to who (which RLT) owns what assets, and therefore, no need for any onerous, ongoing maintenance of sub-accounts while both spouses are living. The tax and non-tax implications should be clear and straight forward. So, instead of the facade of simplicity with Jt RLTs, you get actual simplicity with separate RLTs. The only complexity relates to which assets to place in each RLT while both spouses are living, as discussed below.
B. Cons for using separate RLTs.
The only con of significance is deciding on which assets to put in each separate RLT and the possible related concern by not having your assets jointly owned. However, in most cases, this does not end up being a significant issue.
If the first spouse to die is passing all their assets outright to the surviving spouse, then most of these clients will opt to go with minimal funding while still fulfilling their objectives, including avoiding probate upon a spouse’s death. Probate can be avoided at the first spouse’s death by utilizing beneficiary designations, owning assets as joint tenants with rights of survivorship (or as Tenants by the Entireties where such ownership is available, including Florida), and/or transferring individually owned assets which do not have a beneficiary designation to the owner’s RLT. After the first spouse’s death, the surviving spouse will then need to transfer all the assets (other than those passing by beneficiary designation) to their RLT, which is known as fully funding their RLT. We refer to this minimizing of administrative hassle while both spouses are living as going with the path of least resistance. The only extra risk of the need to go through the probate process when utilizing this RLT funding option is if both spouses die within a relatively short time of each other because insufficient time will exist for the surviving spouse to fully fund their RLT.
On the other hand, if the spouses want to ensure no probate at either of their deaths even if they die close in time to each other, then they will want to fully fund their separate RLTs from the outset. They will also want to fully fund their separate RLTs from the outset if they intend to pass their assets at the first of their deaths to the surviving spouse in one or more irrevocable sub-trusts to achieve one or more tax or non-tax benefits. To fully fund their RLTs at the outset, they will need to ensure that their assets (other than IRAs, qualified retirement plan accounts, life insurance, annuities, and normally their primary residence) are split up between them and then contributed (transferred) to their separate RLTs. This is not normally a big deal, but it does take some concentrated effort.
IV. What should you do if you already have a Jt RLT?
Some married couples that contact us are already utilizing a Jt RLT as their primary estate planning vehicle because they came from a community property state, such as California, or they previously used an estate planning attorney who likes to use Jt RLTs. What should they do now when they live in a common law property state, like Georgia, or they now understand their options better and prefer to go with the separate RLTs structure?
Two options exist. First, they can restructure their estate planning documents based on what makes the most sense under their present circumstances, or second, they can keep their Jt RLT document and update it for any desired changes since it was originally drafted. In our legal practice, we will refer married couples who choose to stick with their existing Jt RLT document to another attorney who utilizes Jt RLTs as part of their estate planning practice. Outside of the very specialized elective community property trusts done for tax planning purposes, we simply do not believe Jt RLTs should serve as our clients’ primary estate planning vehicle.
If you would like to learn more about this important topic and as to how to best structure your estate plan, please call our offices at (678) 720-0750 or e-mail us at info@morgandisalvo.com to schedule an estate planning consultation to discuss your particular situation.
