A person may have multiple trusts. A married person may establish a joint trust with their spouse, to control the couple’s community property assets acquired while married, but also establish a separate property trust to control their separate property assets.
Generally speaking, however, most married couples use a single joint trust. The joint trust consists either entirely of community property assets or a mixture of the couple’s community property and separate property assets.
Sometimes, when there is little community property assets, such as with later in life marriages, each spouse may want full independent control over their own assets and to keep their own assets separate. A joint bank account can be used to receive any marital income and to pay any joint living expenses. Either spouse can still use their separate property assets for the couple’s joint benefit.
Using a separate property trust in addition to a joint community property trust occurs when a married person owns substantial separate assets, such as large inheritances and/or assets acquired from prior to marriage. It is often seen in second marriages where one spouse wants to protect their separate property assets for inheritance by their own children. Often the two trusts have different distribution schemes at the death of the settlor (trust owner); typically the separate property trust is more beneficial to the deceased settlor’s children.
Having assets in a separate property trust allows the settlor (owner) to control their assets independently of their spouse. A person who establishes a separate property trust has sole control, while they are alive and competent, over their assets inside the trust. That is, the sole settlor has complete control over the management, the use and the final distribution of their separate assets. Such control may be important to a married person who wants to protect their separate property assets in a second marriage.
With a joint trust, both spouses as co-trustees and co-settlors have joint control (management) over the combined assets as provided under the terms of the trust. Typically, either spouse acting alone as trustee can manage the trust’s community property assets. Both spouses acting together would be required to amend the trust, unless otherwise provided in the trust.
In California, a spouse’s management and control of community property is subject to a fiduciary duty that each spouse owes the other to act in the “highest good faith and fair dealing”. A spouse who takes any unfair advantage of the other spouse has breached the fiduciary duty and can be held accountable. Both spouse’s acting together say who inherits the community property assets in the joint trust when the first spouse and then the second spouse dies. Each spouse controls who inherits their own separate property assets at their own death.
When a married person with a separate property trust dies, their surviving spouse may, or may not, have any beneficial rights in the deceased spouse’s separate property trust. The surviving spouse only receives whatever benefits the deceased spouse left for the surviving in that trust. The surviving spouse, as an heir, however, is still entitled to request a copy of the deceased spouse’s separate property trust.
The deceased spouse’s separate property trust is liable to pay for the separate property debts of the deceased spouse, for debts associated with the last illness, and for any expenses of administration associated with the decedent’s estate. Otherwise such debts are payable from the decedent’s community property trust.
Any payments of the deceased spouse’s debts and expenses by the decedent’s separate property trust may provide relief to the surviving spouse. The surviving spouse often benefits more from the joint community property trust than from the deceased spouse’s separate property trust.
Often, however, the largest unpaid debts of the deceased spouse are community property debts, i.e., debts acquired while married, and as such are chargeable against the community assets in the couple’s joint trust.
The foregoing brief discussion of a complex and broad subject is not legal advice. Consult a qualified attorney for legal guidance.
Dennis A. Fordham, attorney, is a State Bar-Certified Specialist in estate planning, probate and trust law. His office is at 870 S. Main St., Lakeport, Calif. He can be reached at Dennis@DennisFordhamLaw.com and 707-263-3235.
“Serving Lake and Mendocino Counties for nineteen years, the Law Office of Dennis Fordham focuses on legacy and estate planning, trust and probate administration, and special needs planning. We are here for you. 870 South Main Street Lakeport, California 95453-4801. Phone: 707-263-3235.”