presented to the DC Bar Tax Section

1. Melinda Merk, Esq.
Regional Trust Advisor
SunTrust Bank
Private Wealth Management
Vienna, VA
Logan Helman Winn, Esq.
Family Wealth Strategist
GenSpring Family Offices
Chevy Chase, MD
Jeannette Roegge, Esq.
Counsel
Baker Hostetler
Washington, DC

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 What are joint revocable trusts (JRTs)?
 Potential planning benefits and pitfalls
 Drafting considerations
 Post-mortem administrative issues

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 Single revocable trust to which a married couple
transfers their assets for asset management, probate
avoidance, and tax planning purposes
 Most commonly used in community property states to
preserve the community property character of the
couple’s assets
 Appealing to couples in non-community property
states who are reluctant to sever/divide their jointly
owned assets between separate revocable trusts for
each spouse

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 Avoids probate of assets owned by the
decedent/grantor (provided trust is properly funded
during grantor’s lifetime)
◦ Including ancillary probate of assets owned outside of the
grantor’s state of domicile
 Provides for ongoing management of assets in the
event of incapacity during the grantor’s lifetime
 Provides for the disposition of assets at the grantor’s
death, including any ongoing trusts for the benefit of
the grantor’s spouse, children and/or other
beneficiaries

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 Under current law, each spouse has a federal estate tax exemption of up to $5 million
(different exemption amount may apply for state estate tax purposes)
 In non-community property states, generally one-half of the joint spousal property (JSP) is
included in the deceased spouse’s estate
◦ Tracing rules apply if surviving spouse is a non-US citizen
 Under the typical marital estate plan, up to $5 million of the deceased spouse’s taxable
estate is directed to a “credit shelter” trust (CST) to which the deceased spouse’s estate
tax exemption is allocated – any excess assets are directed to the marital share
◦ Results in zero estate tax at the first spouse’s death
◦ CST is generally not includible in the surviving spouse’s estate
 Only assets titled in the deceased spouse’s sole name or revocable trust are generally
available to fund the CST
◦ JSP passes automatically to the surviving spouse by right of survivorship
◦ Surviving spouse can disclaim the deceased spouse’s one-half interest in any JSP by filing a qualified
disclaimer within 9 months of the deceased spouse’s death
 If all or most of the couple’s assets are titled jointly, the CST will be underfunded at the
first spouse’s death, and 100% of the couple’s combined assets will be includible/taxable
in the surviving spouse’s estate
 The new concept of “portability” of exemption between spouses, enacted under the 2010
Tax Act, may alleviate the bunching problem - but the mechanics of this election can be
problematic and probability is set to expire at the end of 2012

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 Traditionally, for couples with combined assets in
excess of the estate tax exemption, some or all of the
JSP is divided and transferred to each spouse’s
separate revocable trust, to more fully utilize each
spouse’s estate tax exemption
 Both spouses are typically named as co-trustees of
each separate revocable trust
 In VA and MD, tenancy by entirety protection can
generally be maintained, even if not equally divided
between each spouse’s revocable trust

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 Disclaimer Trust
◦ Qualified disclaimer of any JSP must be filed within 9
months of deceased spouse’s date of death
◦ Surviving spouse cannot accept any benefits of the
disclaimed property, and cannot have a power of
appointment over its disposition
◦ No guarantee that the surviving spouse will disclaim
 Joint Revocable Trust

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 No separate shares are maintained during spouse’s joint lifetime - each
spouse is presumed to own one-half of the trust assets
 Both spouses are co-grantors and co-trustees of the trust
 Trust can be amended by the couple’s mutual consent
 Each spouse retains the right to income and principal from the trust as the
spouses jointly direct during their lifetime
 Each spouse typically retains a unilateral right to revoke and acquire one-
half of the trust
◦ Results in a completed gift of one-half of any separately owned property upon
transfer to the trust
 Generally qualifies for marital deduction under IRC Section 2523(e) (life estate
with power of appointment in donee spouse)
◦ If one spouse partially revokes and withdraws less than one-half of the trust
assets, the trustee is directed to distribute the same value to the other spouse
 Maintains each spouse’s share at the same percentage (50%)

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 Scenario #1: No Tax Planning
◦ First spouse to die retains a general power of
appointment over one-half of the trust assets; in default
of such exercise, entire trust continues for surviving
spouse
 Surviving spouse has right to revoke/amend over entire trust
 Results in a stepped-up basis of ½ of the trust assets at the
first spouse’s death
 100% of trust assets are includible in the surviving spouse’s
estate

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 Scenario #2: Disclaimer Trust
◦ First spouse to die retains a general power of appointment over
one-half of the trust assets; in default of such exercise, entire trust
continues for surviving spouse, but he/she can make a qualified
disclaimer of up to one-half of the trust assets to Disclaimer Trust
 Surviving spouse has not right to revoke, amend or appoint over
the Disclaimer Trust
 Surviving spouse’s interest in Disclaimer Trust is limited to an
ascertainable standard
 Results in stepped-up basis of ½ of the trust assets at the first
spouse’s death
 Disclaimer Trust is not includible in surviving spouse’s estate

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 Scenario #3: Equalizing Joint Trust
◦ First spouse to die retains a general power of appointment over
one-half of the trust assets; in default of such exercise, the
decedent’s one-half share of the trust assets (up to his/her
remaining exemption amount) is directed to CST
 Surviving spouse has not right to revoke or amend CST
 Surviving spouse’s interest in the CST is limited to an
ascertainable standard
 Generally, results in stepped-up basis of ½ of the trust assets at
the first spouse’s death
 Unless the grantor who contributed the lesser amount of property dies
within 1 year of funding [IRC Section 1014(e)]
 CST is not includible in surviving spouse’s estate

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 Scenario #4: Fully Funded CST
◦ First spouse to die retains a general power of
appointment over 100% of the trust assets
 Results in 100% inclusion of the trust assets in the deceased
spouse’s estate
 Assets up to the deceased spouse’s remaining estate tax
exemption are allocated by formula to a CST
 Surviving spouse has not right to revoke or amend CST
 Surviving spouse’s interest in the CST is limited to an
ascertainable standard
◦ Same approach could be used using two separate
revocable trusts

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 Scenario #4: Fully Funded CST (cont’d)
◦ IRS has denied full basis adjustment under IRC Section 1014(e),
based on position that the deceased spouse acquired the
survivor’s contribution by gift at his/her death, and the survivor
then simultaneously reacquired such property from the decedent
 See PLRs 2001-01-021 and 2002-10-051
 Stepped-up basis is only available for the trust assets allocable
to deceased spouse’s contribution to the trust
 Hard to determine if separate property/unequal contributions are
made to the trust, and separate shares are not maintained
◦ 1st spouse to die is considered the transferor of 100% of the trust
assets – as a result, the above rulings held that CST assets were
not includible in surviving spouse’s estate

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 Separate shares/schedules are maintained for joint property and for
any separate property transferred to the trust
 Both spouses are co-grantors and co-trustees of the trust
 Trust can be amended by the couple’s mutual consent
 Each spouse retains the right to income and principal from the joint
property, as well as from his or her share of separate property
 Each spouse typically retains a unilateral right to revoke and
acquire one-half of the joint property, as well as her or her
respective share of separate property
◦ Renders any interspousal gift of separate property incomplete for gift tax
purposes, so long as separate shares are maintained

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 JRT is typically divided into “Survivor’s Trust” and “Exemption Trust”
◦ Survivor’s Trust consists of the surviving spouse’s one-half interest in the
joint property, as well as his or her separate property
◦ Exemption Trust consists of the deceased spouse’s one-half interest in
the joint property, as well as his or her separate property – up to the
decedent’s remaining exemption amount
 Any amount in excess of the exemption amount is directed to the
Survivor’s (Marital) Trust
 Either entire trust becomes irrevocable, or surviving spouse retains
right to revoke/amend Survivor’s Trust only
 Typical credit shelter and marital trust provisions apply to each
respective share

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 Why do clients (and attorneys) like JRTs?
◦ Married couples generally believe their assets are owned by both
spouses (they may object to dividing them to fund two separate
revocable trusts)
 Suggestion: make the spouses co-trustees of the two separate revocable trusts
◦ Preservation of community property under applicable state law
(important for step-up in basis issues)
◦ Some practitioners believe that a JRT is simpler to draft and
administer because it’s easier to contribute assets (don’t have to
split assets and then contribute to fund two separate revocable
trusts)
 Issue: only true if there is no estate tax planning, because JRTs require detailed
and careful accountings of each spouse’s contributions to avoid adverse tax
consequences

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 When to use a JRT?
◦ Community Property Clients w/Existing Joint Trusts
 Clients have an existing JRT from a community property
state
 Current Community Property States:
 Alaska (optional), Arizona, California, Idaho, Louisiana, Nevada,
New Mexico, Texas, Washington, and Wisconsin (and Puerto
Rico)

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 Community Property
◦ Generally, property acquired by spouses during their marriage while domiciled in a
community property state is deemed to have been acquired by both equally
regardless of which spouse actually contributed the property
◦ Each spouse owns a one-half interest in all such property, regardless of title
 Separate Property (in Community Property Jurisdictions)
◦ Property acquired before the marriage
◦ Property acquired by gift, bequest, devise, or descent
◦ Property acquired as separate property while domiciled in a separate property
state remains separate
◦ Property bought with, or exchanged for, separate property remains separate
property
◦ Property converted from community property through a valid agreement
(transmutation agreement) becomes separate property

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 Community Property at Death
◦ One-half of the value of community property owned by a married couple
is includable in the estate of the deceased spouse for estate tax
purposes
◦ However, the value of both spouses' shares of the property is stepped up
or down to fair market value at the death of the first spouse
 An alternate valuation date, six months after the deceased spouse's death, may
also be used

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 The Mobile Community Property Client
◦ Uniform Disposition of Community Property Rights at Death Act
(UDCPRDA)
 Adopted by Alaska, Arkansas, Colorado, Connecticut, Florida, Hawaii,
Kentucky, Michigan, Montana, New York, North Carolina, Oregon, Virginia,
and Wyoming
 Applies to personal property, wherever situated, that is community property
under the laws of a state, as well as to personal property that is traceable to
community property
 Applies to real property located in the state adopting the UDCPRDA that was
acquired with the “rents, issues or income of, or the proceeds from, or in
exchange for” community property

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 The Mobile Community Property Client
◦ Community Property Removed to Common Law Jurisdiction
 Presumes that property acquired during marriage while the spouses
were domiciled in a community property jurisdiction is community
property
 Further, personal property generally retains its status (community or
separate) regardless of where the spouses move (unless assets are
commingled and cannot be traced)
 i.e., If spouses acquire property and earn income in a community property state, and
then move to a separate property state, the property and income already acquired
retains its community property status

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 The Mobile Community Property Client
◦ Existing Joint Revocable Trust
 Recent client example: Elder clients moved from New Mexico to Washington, D.C. All of
their property is community property and titled in the name of their joint revocable trust.
After careful consideration, decided not to sever the trust into separate revocable trusts, in
order to not taint any of community property and to maintain the ability to step up the basis
of all assets at the first spouse’s death.

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 Trust Funding
◦ Clearly define shares of JRT assets (for tracing and funding
purposes) – Example:
 Share A – H’s separate property
 Share B – W’s separate property
 Share C – Community property
 Share D – Joint property (other than community property (i.e., was
separate property, but spouses intend to be joint)

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 Drafting Tip: Clearly define shares of JRT assets:
H’s separate share, W’s separate share, and joint
assets
◦ Sample: The trust estate consists of all assets held in the Trust by the Trustee as of this date,
and assets listed on Schedules A, B, C, and D, which together with any assets later added to
this Trust are referred to as the "Trust Estate." All assets listed on Schedule A have been
conveyed to the Trustee and represent a portion of HUSBAND's share of the Trust Estate. All
assets listed on Schedule B have been conveyed to the Trustee and represent a portion of
WIFE's share of the Trust Estate. We have jointly conveyed any assets listed on Schedule C
to the Trustee that were owned by us as joint tenants with rights of survivorship, as tenants by
the entirety, as tenants in common, or as community property. Each of us has conveyed the
property listed on Schedule D that is or was presently owned by one or the other of us, but is
intended to be owned equally. Each of us intends that all assets contributed by one of us and
listed on a respective Schedule A or B be allocated to that Grantor's share of the Trust. Any
assets listed on either Schedule C or D are to be allocated equally to each Grantor's share of
the Trust, so that each of our shares of those assets is equal to one-half of the total value of
those assets.

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 JRTs for Common Law Jurisdiction Client
◦ Advantages of Joint Revocable Trusts vs. Two Revocable Trust
 Avoids severing joint assets into separate trusts for each spouse
 Can step-up 100% of assets at the death of the first spouse
◦ Disadvantages of Joint Revocable Trusts vs. Two Revocable Trusts
 Can lose Tenancy by the Entirety creditor protection (in some states, including MD and
VA, revocable trusts can maintain TbyE creditor protection)
 Much more complex to administer
 Hard to trace assets unless clients kept good records
 Tax problems (see next slide)

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 Tax problems relating to JRTs for Common Law
Jurisdiction Clients
 Nondeductible interspousal gift upon trust creation
 Trap: Typically, transfers to a revocable trust are NOT taxable gifts because the donor does not part
with dominion or control over the assets. However, the transfer of property to a JRT will be considered
a taxable gift to the extent the grantor does not reserve the right to reacquire ownership of the
grantor’s transferred asset.
 Note: Assets will not qualify for the gift tax marital deduction if the terms of the trust give the donee spouse
a “nondeductible terminal interest” – i.e., if the trust permits distributions during the surviving spouse’s
lifetime to someone other than the donee spouse or his or her estate.
 Solution: Result can be avoided if each spouse retains the right to revoke the trust with respect to all
separate property contributed to the trust and to each spouse's share of all contributed property
previously held jointly by the spouses.
 Gift to remainder beneficiaries upon trust creation
 Trap: A reserved right to revoke a trust and reacquire the transferred assets does not render a gift
incomplete if the power is exercisable only with the consent of a person who has a substantial interest
in the trust that is adverse to the exercise of the settlor's power of revocation. For example, a
spouse's transfer to a joint trust that can be revoked only by the joint action of the spouses will be a
completed taxable gift on the creation of the trust.
 Solution: Result can be avoided if each spouse retains the right to revoke the trust with respect to all
separate property contributed to the trust and to each spouse's share of all contributed property
previously held jointly by the spouses.

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 JRTs for Common Law Jurisdiction Client
◦ Special tax problems relating to Joint Revocable Trusts
 Gift to Remainder Beneficiaries at Death of First Spouse
 A completed gift to the contingent beneficiaries may occur if some or all of the surviving spouse’s
assets are used to fund the credit shelter trust at the death of the first spouse.
 Moreover, if the surviving spouse receives an income interest in the same credit shelter trust, the IRS
could argue that all or part of the credit shelter trust is includable in the surviving spouse’s estate.
 Estate Taxation of Jointly-Owned Property Transferred to a JRT
 If the surviving spouse receives an income interest in a credit shelter trust to which he or she
contributed assets upon the death of the first spouse, the IRS could argue that all or part of the credit
shelter trust is includable in the surviving spouse’s estate.

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 Drafting Tip: Each spouse should have the ability to revoke his/her
separate share and ½ of the joint assets
◦ Sample: We reserve the following personal rights with respect to our individual separate
shares of the Trust:
 To amend or revoke this Trust;
 To remove a Trustee and to designate a new Trustee;
 To withdraw assets, whether income or principal, from the Trust Estate;
 To require changes in the investments of the Trust Estate;
 To direct the Trustee to perform any act of administration; and
 To direct the Trustee to make distributions to any person.
This Trust may be revoked as to community property held hereunder by either Grantor. This
Trust may be revoked as to any quasi-community property or separate property held
hereunder by the Grantor who transferred such property to the Trust.
In the event of such revocation, or withdrawal (1) the community property or the revoked
portion thereof, shall revert to the Grantors as their community property. (2) The property
held in the individual separate shares which are not community property and any quasi-
community property (if recognized under state law) shall revert as that Grantor's separate
or quasi-community property as if this Trust had not been created.

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 When is it NOT necessarily appropriate to use a
JRT?
◦ Client has existing JRT from a non-community property state (i.e.,
client does NOT have any community property)
◦ What to do:
 Sever the JRT into two separate revocable trusts
 Sever client’s assets between two separate revocable trusts

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 Drafting Tip: Clearly define property character of
JRT assets
◦ Sample: It is the Grantors’ intention that all community property transferred to the Trust Estate
and the proceeds thereof shall retain their character as community property during the joint
lifetime of the Grantors subject, however, to all the terms and conditions of this instrument.
Similarly, it is the Grantors’ intention that quasi-community (if recognized under state law) and
separate property of the Grantors and the proceeds thereof which may hereafter become part
of this Trust shall also retain their character during the joint lifetime of the Grantors subject
also to all the terms and conditions of this Trust agreement. It is the Grantors’ intention that
the Trustee shall have no more extensive power over any community property transferred to
the Trust Estate than either of the Grantors would have had under law, had this Trust not
been created, and this instrument shall be so interpreted to achieve this intention. This
limitation shall terminate on the death of either Grantor.

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 What happens to the assets held in the JRT after the death of the
first spouse to die (the “Decedent”)?
◦ Look closely at the actual terms of the JRT and the schedules to the JRT
◦ Typically see 2 scenarios: separate shares or one-half JRT property
◦ Decedent’s Share and Survivor’s Share (1/2 all trust property OR ½ joint
property and all Decedent’s separate property)
◦ Separate the Survivor’s Share as soon as possible but it make time to
determine such share
◦ Although disposition terms for Decedent’s Share may be familiar (credit
shelter trust, marital share), determining Decedent’s Share may be more
difficult
◦ • Be prepared to do some forensic work to determine title of assets
upon contribution to the trust

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 What trust assets are included in the Decedent’s taxable
estate?
◦ Look at the powers retained by the Decedent during lifetime
(power to revoke and general power of appointment (“GPOA”)
over all trust assets)
◦ The power to revoke during results in inclusion of assets over
which Decedent had the power under Section 2038
◦ GPOA over assets at death results in inclusion under §2041
◦ GPOA purposely included to trigger inclusion of all assets in JRT
to fully fund credit shelter
◦ There are PLRs which support the GPOA intended result, BUT
you don’t get step up [Section 1014(e)] for Surviving Spouse’s
Assets in credit shelter
◦ There is a risk that the IRS’ position could change

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 Other Practical Administrative Concerns
◦ Don’t trust Survivor’s recollection of title of assets!! Check title
and ownership at time of contribution early on
◦ Fiduciary Returns--Section 645 election is available
◦ Get tax ID for Decedent’s Share of trust during administration
◦ There may be a probate estate
◦ Very important to bring the accountant into the process early so
that fiduciary returns and accountings are not overwhelming
◦ Basis issues? There may not be a full step up for assets in Credit
Shelter Trust because of Section 1014(e)

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 Consider Having Survivor Restate His or Her
Share of JRT
◦ Clean up trust instrument
◦ Can do it as a restatement of Survivor’s Share instead of
a revocation
◦ May need to revise designations on accounts
◦ Make sure surviving spouse’s SSN is on the accounts

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 Additional resources
◦ “Joint Revocable Trusts for Married Couples Domiciled in
Common Law Property States,” Melinda Merk, 32 Real
Property, Probate and Trust Journal (Summer 1997)
◦ “The Joint Trust: Estate Planning in a New Environment,”
John H. Martin, 39 Real Property, Probate and Trust
Journal (Summer 2004)
 Questions?