Joint trusts are beneficial for many married couples, especially if they have a stable relationship, do not have many creditors, and live in Wisconsin where their estate is not subject to a state death tax. Compared to separate trusts, they are easier to fund, allow the surviving spouse to have complete control over the money and property held in the trust, and may help avoid much higher trust income tax rates that are applicable to their spouse’s separate trust after their spouse dies.
If you are in a long-term relationship with your partner but are not married, you may want to take advantage of these benefits. However, joint trusts typically are not a good option for unmarried couples. This may not seem fair, but there are some important reasons why unmarried couples should consider separate rather than joint trusts.
Gift Tax Consequences
Under federal tax law, married couples benefit from an unlimited marital deduction that allows them to make an unlimited amount of gifts to their spouse, during their lifetime or at death, without incurring estate or gift taxes. This benefit is not available to unmarried couples, regardless of the longevity of their relationship and level of commitment to each other. As a result, if an unmarried couple forms a joint trust, they must be careful to ensure that each partner contributes money and property that is already jointly owned or is precisely equal in value. If one of the partners contributes property of greater value to the joint trust, that partner may be considered to have made a taxable gift to the other partner. To avoid this result, the money and property each partner transfers to the joint trust must be carefully divided into separate shares, in effect, creating two separate trusts within one trust agreement. The burden of creating these separate shares in a joint trust may outweigh its benefits.
In addition, to prevent transfers to the trust from being considered a completed (and therefore taxable) gift under the federal tax code, the trust document may need to include provisions that allow either partner to revoke the trust instead of requiring joint action by both partners. One or both partners may find this type of provision unattractive.
Income Tax Consequences
Joint trusts are typically used for married couples who file joint income tax returns because either spouse’s Social Security number can be attached to property or accounts held by the trust that are producing income. Revocable trusts are grantor trusts: for federal income tax purposes, the person or couple who creates a grantor trust is considered the owner of the accounts and property held by the trust. This means that the income produced by the trust is reported by the married couple on their joint income tax return rather than a separate income tax return filed on behalf of the trust. Either spouse’s Social Security number can be used as the tax identification number for the trust, and the property and accounts held by the trust can be associated with either spouse’s Social Security number.
Federal tax law does not allow unmarried couples to file joint tax returns, so each partner must file separate returns reporting income from their respective share of the trust. This makes reporting much more complicated for a joint trust operating under one partner’s Social Security number or a separate tax identification number, and it sets the couple up for trouble stemming from inaccuracies on their tax returns.
What Are Some Alternatives?
Separate trusts. To avoid the complications that will likely arise if an unmarried couple establishes a joint trust, each partner could form a separate trust funded with some or all of their money and property. A trust allows the property and accounts to be transferred to the named beneficiaries according to its terms, and it avoids probate at death. Each partner can be a trustee for their own trust and can choose a co-trustee or successor trustee to manage their affairs during their lifetime if they become incapacitated. In addition, they can name anyone they choose to be their beneficiary, including their partner, and can specify the property and accounts that should pass to them.
Note: Keep in mind that if you and your partner transfer jointly owned property to a trust, it will no longer be jointly owned because the trust will be the sole owner of the property or accounts. The trust’s terms will determine who will ultimately receive it.
Joint ownership. There are a couple of ways that unmarried couples may jointly own their accounts and property. The method the partners choose will depend on whether they want the surviving partner to receive full ownership of the account or property when one of them dies. Generally, if they hold the accounts or property as joint tenants with rights of survivorship, the surviving partner automatically and immediately becomes the full owner when one of them passes away—without going through the probate process. Typically, neither partner can transfer the property or obtain a mortgage on it without the other’s consent.
However, if the couple owns property or accounts as tenants in common, the deceased partner’s share will become part of their probate estate and will pass according to the terms of their will, or in the absence of a will, to the heirs specified by state law. Each of the tenants in common may freely transfer their interest in the property, so it is often a less desirable option than a joint tenancy with a right of survivorship. Unless the deceased partner’s will provides that the surviving partner should inherit their interest, the surviving partner could end up co-owning property (including a residence!) with someone they may not have chosen.
We Can Help You Plan Ahead
Wisconsin law generally does not protect unmarried couples when one of them passes away without an estate plan. Instead, the next of kin set forth in Wisconsin’s intestacy statute will inherit all of their money and property, and the surviving partner will receive nothing. Contact us today so we can help you create the best plan for your unique situation aimed at providing for your needs during your lifetime and ensuring that your partner’s future is secure if something happens to you.
 Treas. Reg. § 25.2511-2(b) (as amended in 2020) (a gift is complete if the donor retains no power to change disposition of the property); see id. § 25.2511-2(e) (a donor would not retain the power to revoke a gift if the right to revoke is only exercisable jointly with a person who has a substantial adverse interest, and thus the gift would be complete).