Why a Joint Trust? A Trust is like bucket used to hold your assets, and is effective during your life, upon your incapacity, and at death. When created by married individuals, each spouse is free to revoke or amend the Trust as to his or her one-half share. You are the Settlors of the Trust, which is just another name for the creators or owners of the Trust. You may jointly revoke or amend the Trust at any time while you both have capacity. If either of you chooses to revoke your share of the Trust, the remainder of the Trust is held and administered as a “Survivor’s Trust” for the person not revoking his or her share of the Trust. The “Survivor’s Trust” is just a legal name for your own Trust, holding your own property, either during your lifetime or after the death of your spouse.
The Trustee of the Trust is the manager of the Trust, and is responsible for following the instructions set forth in the Trust. During your lifetimes and while you are able and willing, the Trust is held and administered by both of you, as co-Trustees. If you’re both unable to manage the Trust, your successor Trustee will step in to manage your Trust property on your behalf, either indefinitely, or temporarily, until you regain capacity.
The typical joint trust for married individuals utilizes the unlimited marital deduction which allows your Trust assets to pass to your surviving spouse without incurring estate or inheritance tax liability on that transfer. On the first spouse’s death, the joint Trust assets are divided into two separate Trust shares, (i) the survivor’s share; and (ii) the decedent’s share.
Survivor’s Share and Survivor’s Trust. The survivor’s share is distributed to the Survivor’s Trust. Due to the unlimited marital deduction, this marital bequest to the Survivor’s Trust will not incur Federal or state estate taxes at the death of the first spouse. The surviving spouse is entitled to receive all of the income and principal of the Survivor’s Trust, and may amend or revoke the Trust at any time, so long as he or she is competent. Upon the death of the surviving spouse, the remaining assets held in the Survivor’s Trust will pass to your named remainder beneficiaries, which typically include children, friends, or charities. The assets of the Survivor’s Trust will be included in the surviving spouse’s estate for both Federal and Oregon estate tax purposes. Unlike the Decedent’s Trust, which becomes irrevocable on the death of the first spouse, the Survivor’s Trust is revocable, meaning the beneficiaries of the Survivor’s Trust may be changed to benefit a new spouse, step-children, or anyone else, and the distributions from the Survivor’s Trust upon the second spouse’s death can be completely different from the beneficiaries who ultimately receive a share of the Decedent’s Trust.
Decedent’s Share. The decedent’s share consists of one-half of the joint trust assets and all of the decedent’s separate trust assets, if any. The decedent’s share of the Joint Trust is distributed to the Decedent’s Trust, which is funded with up to the Oregon estate tax exemption amount. This allows spouses to utilize the Oregon estate tax exemption available to each spouse. The Decedent’s Trust becomes irrevocable on the death of the frist spouse, meaning the beneficiaries cannot be changed from what was initially agreed upon, such as to benefit a new spouse or step-children. This allows the first spouse to be reasonably sure that his or her share of the Joint Trust assets will pass to the beneficiaries initially agreed upon by both spouses.
However, the division of the Joint Trust assets at the first spouse’s death does not preclude the surviving spouse from using or benefiting from the Decedent’s Trust during the surviving spouse’s lifetime. For the remainder of the surviving spouse’s lifetime, the Trustee of the Decedent’s Trust will make principal distributions from the Decedent’s Trust to the surviving spouse for his or her health, education, maintenance and support. All of the income generated from the Decedent’s Trust assets is distributed to the surviving spouse each year. Distributing the income to the surviving spouse, enables you to avoid paying trust tax rates of 37% on the income generated from the Decedent’s Trust.
Upon the death of the surviving spouse, any remaining assets held in the Decedent’s Trust will pass to your named remainder beneficiaries, which typically include children, friends, or charities. The assets held in the Decedent’s Trust will not be included in the surviving spouse’s estate for either Federal or Oregon estate tax purposes.
Benefits of Funding the Decedent’s Trust.
There are a number of benefits to electing to fund the Decedent’s Trust, rather than simply passing all of the assets to the surviving spouse under the terms of the Survivor’s Trust. These benefits include, without limitation, the following:
- Federal Estate Tax, Oregon Estate Tax, and Portability of Estate Taxes: Under Federal estate tax exemption laws, each spouse may currently pass, via gift or a death, the sum of $11.56 million dollars, without incurring Federal estate tax. Further, to the extent one spouse has not utilized his or her entire Federal estate tax exemption, the unused exclusion amount may be utilized by the surviving spouse through a legal concept called ‘portability’. In order to claim portability, an estate tax return (Form 706) must be filed at the first death, and the portability election must be made by the surviving spouse or the person administering the estate. At this time, the portability election allows married individuals to pass a total of up to $23.16 million in assets free of Federal estate tax at the second spouse’s death.
However, the current Federal estate tax exemption will sunset on December 31, 2025, and if not renewed by Congress, will revert back to the prior Federal estate tax exemption amount, which was $5.49 million in 2017, adjusted for inflation. We have no way of knowing what the Federal estate tax exemption will be in 2026. Most estate plans will need to be reviewed at this time, if there is any question about whether the estate will be federally taxable at the first or second spouse’s death.
- No Portability of Oregon Estate Tax. In contrast, under the Oregon estate tax exemption laws, each spouse may pass the sum of $1 million dollars at death without incurring Oregon estate tax, which means at the time of the first spouse’s death, you may have assets valued high enough that there will likely be an Oregon estate tax due at the second spouse’s death. Importantly, rather than being portable, the Oregon estate tax exemption is a ‘use it or lose it’ tax exemption. The portion of the $1 million dollar Oregon estate tax exemption that a deceased spouse fails to use is lost and is unavailable to the surviving spouse. Oregon has provided some relief from this by allowing a deferral of that tax until the death of the surviving spouse.
The Decedent’s Trust, created by the division of the Joint Trust property at the first spouse’s death, is designed to qualify for such a deferral under Oregon law. By funding the Decedent’s Trust, you may utilize (in whole or in part) the first deceased spouse’s Oregon estate tax exemption. This enables married individuals to pass a combined amount of up to $2 million dollars at the second spouse’s death without incurring any Oregon estate tax. This results in a savings of at least $100,000 in Oregon estate taxes that would otherwise be owing at the second spouse’s death. If you do not fund the Decedent’s Trust at the first spouse’s death, all assets exceeding $1 million dollars in value as of the date of the second spouse’s death will be taxable at a rate of between 10-16%.
Oregon calculates the estate tax owing by adding up all of your property, including bank accounts, savings accounts, retirement accounts, investment accounts, life insurance proceeds, tangible personal property, vehicles, annuities, real property, pension benefits, business interests, stocks, bonds, cash, and any other property owned by you or your Trust at death. The Oregon estate tax filing requirement is be based on the gross value of the Estate, not the net value.
- No Indexing of Deceased Spouse’s Unused Exclusion Federal Estate Tax Purposes: The surviving spouse’s Federal estate tax exclusion amount is indexed for inflation. In contrast, the deceased spouse’s unused Federal estate tax exemption (the amount passing to the surviving spouse via portability) is not indexed for inflation. This means that the portability of the deceased spouse’s unused Federal estate tax exclusion amount could be significantly less beneficial than using the deceased spouse’s unused exclusion amount through the funding of the Decedent’s Trust. The appreciation of assets in the Decedent’s Trust will not be included in the surviving spouse’s estate for Federal estate tax purposes, so any appreciation of the assets from the first spouse’s death to the second spouse’s death will not be included in any Federal estate taxes owing. This can be a huge benefit if the Decedent’s Trust is funded with assets that are likely or expected to appreciate in value significantly.
Downsides of Funding the Decedent’s Trust.
While there are a number of benefits to funding the Decedent’s Trust (in lieu of passing the entire decedent’s share to the Survivor’s Trust), there are a number of potential downsides as well, including without limitation, the following:
- No Step-Up in Basis on Death of Surviving Spouse. An asset’s “basis” is a fundamental concept in income tax planning. Basis matters when you are calculating capital gains taxes because a taxpayer recognizes taxable income whenever property is sold for an amount greater than the taxpayer’s adjusted basis in the property. Your “basis” is the value of the property when you first purchased it or when you first inherited it, as the context applies. If you receive property as part of a lifetime gift made to you by another person during that person’s lifetime, the owner also gifts his/her basis in the property to you as well. In contrast, if property is received as part of an inheritance, the property gets a stepped up basis equal to the fair market value of the property as of the date of the owner’s death, thereby eliminating any inherent capital gains taxes that may otherwise be owing by the taxpayer (recipient of the property), when the property is later sold.
For example, if you purchase property for $10,000, but it is valued at $100,000 at your death, your kids will inherit the property with a stepped up basis to the fair market value of the property as of the date of your death, so the kids’ new basis in the property will be $100,000. If the kids sell the property for $100,000, there will be no capital gains taxes owing, but if they sell the property for $110,000, they may only owe capital gains tax on the $10,000 gain in value above their $100,000 stepped up basis.
In contrast, if you give the property away to the kids during your lifetimes, you also give them your $10,000 basis in the property, so if the kids then sell the property for $100,000, they will owe capital gains taxes on up to the $90,000 worth of gain realized from the sale of the property (note: there are deductions available for capital improvements and depreciation, as applicable, as well as any IRC 121 qualifying residential exclusion if the property is their primary residence). When spouses own property jointly, you also get a second step up in basis to the fair market value as of the date of death of the second spouse to die.
The Decedent’s Trust is designed with the express goal of excluding the assets used to fund it from the taxable estate of the surviving spouse for Federal and/or Oregon estate tax purposes, as applicable. This is important because while estate taxes are avoided, so too is the stepped up basis (cost basis adjustment) in the assets at the second spouse’s death. Thus, while assets in the Decedent’s Trust will receive a step-up in basis to their date-of-death value as of the date of the first spouse’s death, they will not receive an additional step-up in basis as of the second spouse’s date of death unless a QTIP election is made for the Decedent’s Trust. We will help you make these tax elections and decisions at the first spouse’s death, based on a multitude of factors once a spouse dies.
We recommend that you review your Trust, especially the dispositive and tax provisions, at least every three to five years. You may want to make changes to the dispositive provisions to reflect changes in your family and financial situation. Also, the value of your assets may have increased to a point where you require additional tax planning.