When a married couple creates an estate plan using a revocable living trust, they have the option of creating a single joint trust or two separate individual trusts. While the pros and cons of each are beyond the scope of this article, spouses may choose to create separate trusts for a variety of reasons including the following:
- the desire to leave property to different beneficiaries or for greater asset protection from the financial risks of one spouse
- the ability to keep inherited or individually owned property separate from jointly acquired property, or
- the need for greater flexibility or more certainty with respect to tax planning after the death of the first spouse.
Whatever the reasons for creating separate trusts, when the ultimate beneficiary is the same for both spouses’ trusts (often the couple’s child or children), the question that inevitably arises is whether the beneficiary of these separate trusts will always have multiple trusts to deal with? Keeping track of the property owned and invested by each trust and filing tax returns for multiple trusts can be an administrative headache. The good news is that, in general, if multiple trusts have similar terms and neither the trust agreement nor state law prohibit the consolidation of the trusts, then the trusts can usually be combined into one.
Under section 417 of the Uniform Trust Code (UTC), which has been adopted (either completely or in some form) in thirty-five states and the District of Columbia[1] as of the date of this writing, a trustee, after giving notice to the qualified beneficiaries, may combine two or more trusts into a single trust, “if the result does not impair rights of any beneficiary or adversely affect achievement of the purposes of the trust.”[2] Keep in mind that this provision of law would be overruled by any contrary provision in the trust agreement, so it is essential to know and understand what the trust agreement provides.
While the UTC does not require that the trust terms be identical to be combined, the more that the terms governing distribution of trust property of the trusts to be combined vary, the more likely it is that the rights of a beneficiary would be impaired as a result of the combination. Therefore, it would be less likely that the combination would be approved. Where the trusts to be combined are the separate trusts of a married couple, which likely have identical or very similar provisions, there should be little to no impediment to combining trusts.
In fact, if the trusts do have identical provisions, it could be argued that the trustee has a responsibility to combine the trusts to provide for a more efficient and economical trust administration. Combining trusts could result in the reduction of trustee fees, filing one trust tax return instead of two or more, and more effective investing opportunities.
The UTC does not require a trustee to obtain consent of the beneficiaries or a court prior to combining multiple trusts. It does, however, require that the trustee give the beneficiaries notice prior to doing so. And, although the law may not require the consent of either the beneficiaries or a court, if the terms of the trusts to be combined vary significantly, a prudent trustee would seek the consent of the beneficiaries or the court prior to combining the trusts.
For married couples who are considering or have chosen separate trusts as part of their estate plan, the good news is that their child does not always have to handle multiple trusts after their death. Rather, if the terms of the trusts or state law permit the combination of trusts, the trustee may do so, thus taking advantage of certain economies in trust administration. If you have questions about whether your separate trusts can be combined into one for the benefit of your beneficiaries, please give us a call.
[1] Legislative Bill Tracker, Unif. L. Comm’n (last visited Oct. 3, 2022), https://www.uniformlaws.org/committees/community-home?CommunityKey=193ff839-7955-4846-8f3c-ce74ac23938d#LegBillTrackingAnchor
[2] Unif. Tr. Code § 417 (Unif. L. Comm'n 2000).