Joint Trusts [Not Your Father’s Oldsmobile]

By Joel S. Luber, Senior Counsel and Chair, Reger Rizzo & Darnall

I’m old enough to remember when first studying estates and trusts in law school, that the Federal estate tax exemption amount was $60,000 per person.  Then, under the Tax Reform Act of 1976 (unifying estate and gift taxes), the exemption began a steady rise and hit $600,000 by 1987, where it remained the same for ten years. Thereafter, by and through statutes with acronyms like EGTRRA; ATRA; TCJA; and most recently OBBB, taxpayers have been the recipients of the continued largesse of Congress where the exemption amount is now $15M per person and indexed for inflation moving forward. Moreover, after various scheduled dates for reduction (and panic by planners) along the way, we are told this one is “permanent.”   As a result, the estimate of taxpayers who will be required to file a Federal estate tax return (Form 706) is now well under 0.1% of all deaths. [1]

Standard planning from those days of yore, and even up through recent years, was to transfer assets between spouses in an attempt to have each spouse own, individually, an amount of assets equal to the exemption amount, and then have each spouse create a “bypass trust” or “credit equivalent trust” for the other, such that the maximum amount of assets could pass estate tax free to children and more remote descendants. “Portability” - the ability to transfer a deceased spouse’s unused estate tax exemption (“DSUE”) to the surviving spouse – was enacted in December 2010, and made permanent in January 2013 under ATRA - has effectively eliminated the need to level up assets in the name of each spouse; yet planning with the creation of separate trusts for each spouse is still a very common practice.[2] 

However, with exemption amounts now at levels where only couples with assets over $30M need to be concerned with a Federal estate tax, in states without a state estate tax, the focus of current planning is clearly on income taxes, and in particular basis adjustment planning, including the stepped-up basis to date of death value for all assets owned by a decedent under §1014 of the Internal Revenue Code of 1986, as amended (the “IRC”). In community property states,[3] both halves of community property assets receive a full step-up in basis to fair market value upon the death of one spouse. This includes assets held jointly or individually, provided they are classified as community property. The holy grail then becomes whether one can achieve a basis step-up for all assets owned by both spouses upon the death of the first spouse if domiciled in any of the other 41 states, including Pennsylvania. 

Say Hello to the Joint Trust.

First, State Law. Pennsylvania’s Uniform Trust Act, 20  Pa.C.S.A. §7701 et. seq. (the “PEF Code”) governs trusts in Pennsylvania, and recognizes a joint trust between one or more persons and by spouses.

§ 7752(b) states as follows: 

(b)  More than one settlor.--If a revocable trust is created or funded by more than one settlor:

(1)  to the extent the trust consists of community property, either spouse alone who notifies the other spouse may revoke the trust, but the trust may be amended only by joint action of both spouses;

(2)  to the extent the trust consists of property other than community property, each settlor may revoke or amend the trust with respect to the portion of the trust property attributable to that settlor's contribution upon notice to each other settlor; and

(3)  upon the revocation or amendment of the trust by fewer than all the settlors, the trustee shall promptly notify the other settlors of the revocation or amendment.

What is a Joint Trust. In simplest terms, it is a trust created by two or more grantors (often spouses) transferring assets into one single trust, with the trust serving as the centerpiece of the family planning and defining the dispositive provisions for all assets at the death of the surviving spouse (albeit other transfers can be made at the death of the first spouse). Spouses transfer into the trust the property they own together, property they own individually, or both. [There are some non-tax related issues associated with the transfer of jointly owned or tenants-by-the-entireties property.[4]] Both spouses are trust beneficiaries while living, and after the first spouse dies, the surviving spouse remains a beneficiary. The trust is revocable and amendable, where either or both spouses can revoke the trust while both are living (although both may be required to amend the trust). After the first spouse dies the trust may or may not continue to be amendable or revocable by the surviving spouse, sometimes not an easy question to answer. But on the death of the surviving spouse, the remaining trust assets are distributed to, or held in further trust, for other beneficiaries.

Why or Why Not. Joint trusts often make sense for married couples or long-term partners because they likely own property together, have intertwined financial lives and share long-term estate planning goals (like leaving the majority of their estates to their children, if they have children in common). In contrast, creating individual trusts requires couples to divide up their jointly owned property precisely so that each may transfer their portion into their own trust. This would be arduous for some couples, and for others, it would be impossible.  That said, a joint trust is not for everyone.  Individual trusts might be a better choice for those who have kept their finances and property mostly separate. Also, those in second or subsequent marriages (or long-term relationships) might want a more nuanced plan, especially if they hope to provide for their spouse while protecting an inheritance for children from a prior marriage or relationship.  And, certainly, if there is even a scintilla of doubt about the rock-solid nature of the marriage, this is not likely the right planning vehicle. In all events, professionals should have their standard conflict language ready to go in the engagement letter.

Beyond the Basics. The design of a joint trust must take into consideration both spouses’ desire about the disposition of assets on the death of the first spouse; that is, whether the trust disposes of only the assets contributed by that deceased spouse, or all the assets held in the trust at the first death. The latter is accomplished by giving the first-spouse--to-die a testamentary general power of appointment (which may be limited to that spouse’s estate or creditors of his/her estate) over all the assets of the trust contributed by the deceased spouse and the surviving spouse. [See further discussion below.] This general power of appointment is also the mechanism to best assure that all the assets of the trust get a stepped-up basis to date of death value at the first spouse’s death. The corollary decision that must be made by both spouses is the desire to “lock in” the dispositive plan. If there is a desire to lock in a plan at the death of the first spouse, then the trust must become irrevocable and unamendable at that time, with the survivor having no ability to modify the plan with respect to assets held in the trust. However, the surviving spouse could be given a limited testamentary power of appointment over whatever subtrusts are created under the Agreement after the death of the first spouse, no different than what might be added to a traditional single QTIP trust or credit shelter trust created by one spouse for the other.  Also consider having a third-party serve with the surviving spouse as co-trustee. This may be a good idea as the trustees will likely have the discretion to make principal distributions to the surviving spouse, and the intention of the first deceased spouse could be thwarted or undermined by way of runaway discretionary principal distributions.

Income Tax Considerations.  During the joint lives of the grantors, the trust, at least with respect to the assets contributed by them respectively, is revocable by each of them.  As such, as with individual revocable trusts, the trust is a grantor trust for income tax purposes. If the spouses are trustees, then, per Treasury Regulations, the trust does not need to have a separate tax identification number and can use the social security numbers of the grantors. Since the accounts for the joint trust will not be able to use two numbers, the social security number of one of the grantors should be used, similar to the number used for a joint account. All income will directly be reported by grantors on their personal Form 1040. Upon the death of the first-spouse-to-die, to the extent the joint trust becomes irrevocable, it will require a separate tax identification number, and the trust will file a Form 1041.

Avoid a Taxable Gift on Funding.  To avoid a taxable gift on funding, each spouse should have the right, alone, to revoke the trust with respect to their respective contribution, including their half of any jointly owned property.  This reserved power will prevent the transfer of assets to the trust from being a completed gift. [See Treas. Reg. 25-2511-2(c), providing that a gift is not complete if the donor retains the power to revert the property back to himself or herself]. [5] If transfers to the trust were completed gifts, it is not likely that the gift would qualify for the marital deduction.  The transfer would be to a trust with two beneficiaries, the two spouses, which would violate the marital trust requirements that the donee spouse be the only beneficiary of the trust entitled to receive distributions.  However, a joint trust will typically allow either spouse to withdraw trust assets.  Withdrawal of assets by the non-donee spouse will complete the gift (the donor spouse will no longer have a power to recover the assets, since they are no longer in the trust) and the now completed transfer should qualify for the marital deduction, since it is outright to the donee spouse.

The General Power of Appointment.   The provision of a testamentary general power of appointment (PLR 200101021), or a lifetime general power (PLR 200210051), to the donee spouse, will result in the following:

(a)        Inclusion in Gross Estate.  All the trust assets will be included in the gross estate of the first-to-die.  The property contributed by the first deceased spouse will be included in that spouse’s estate under IRC §2038 (retained right to revoke), and the property contributed by the surviving spouse will be included in the first deceased spouse’s estate under IRC §2041 (general power).

(b)        Gift by Surviving Spouse.  The surviving spouse is deemed to make a gift to the first-spouse-to-die upon the death of the first spouse that qualifies for the marital deduction (PLRs 200101021 and 200210051).  This further clarifies that the first-spouse-to-die is the transferor of all those trust assets that are directed to be left to the surviving spouse and/or in a trust for the benefit of the surviving spouse.

(c)        Basis Step-Up.  The assets of the trust contributed by the first-spouse-to-die receive a step-up in basis on death.  However, the trust assets contributed by the surviving spouse, although included in the gross estate of the first-spouse-to-die, may not receive a step-up.  The IRS contends that under IRC §1014(e) if a decedent has a testamentary general power of appointment over assets that were contributed by a surviving spouse, which the decedent (by definition) only acquires at death, and which revert to the surviving spouse, then those assets do not receive a basis step-up.

But well-known commentators disagree about this. The argument was made in a very detailed and exhaustive study published in the article cited next.

The Joint Exempt Step-Up Trust  (“JEST”).  Messrs. Alan Gassman, Thomas Ellwanger and Kacie Hohnadell, published an article in LISI Estate Planning Newsletter dated April 3, 2013,[6] Message #2086, that analyzed the many issues that arise with respect to joint trusts and proffered an innovative (at that time) joint trust design strategy that they believe should allow a married couple in a common law state to make maximum use of the first dying spouse’s unused estate tax exemption by fully funding a credit shelter trust upon the first dying spouse’s death, even if this requires using assets contributed by the surviving spouse.   And that with proper structuring, the joint trust can provide a full step-up in basis for all the trust assets. It is, obviously, a very significant publication, which I am not even going to attempt to summarize here, with all rights of reproduction reserved by LISI. But I can state that the structure includes the creation of up to four separate trusts after the death of the first spouse: two QTIP Trusts and two Credit Shelter Trusts.  For those subscribers to LISI, I encourage you to read and study this closely.   Although not without risk or some uncertainties, planners who want to recommend to clients a strategy that is capable of achieving a stepped-up basis for all assets contributed by both spouses to a joint trust, and to maximize use of credit shelter trust funding on the first death, this should give this serious consideration. 

Conclusion.  Joint living trusts aren't the right choice for every couple. And, just to be clear, a JEST is not the only form of joint trust that may be considered. Some couples will want to use separate trusts if each spouse owns most of their property separately, or if they want to keep complete control over their own trust property. For other couples, a basic joint living trust isn't sufficient because they have more complex needs. This is commonly true for couples in their second or subsequent marriage (or relationship), when they want to provide for their spouse or partner while protecting their children's inheritance. These are the non-tax reasons to consider. But for those practitioners (i) with clients others have labeled as “middle rich” (with combined assets between $15M and $30M), where Federal estate taxes are not a concern, but where income taxes are paramount; and (ii) who are willing to put in the work and invest the necessary time to understand the tax issues, and to develop trust documents that take into account many of the considerations described herein and in the LISI Newsletter cited above; and (iii) who are confident your clients will understand the risks and possible advantages of a JEST, the holy grail just may be in reach. 

Joel S. Luber, Senior Counsel and Chair of Reger Rizzo & Darnall’s Wills, Trusts & Estates Group, focuses on sophisticated estate planning, asset protection, estate administration, and related tax matters. He approaches estate planning as a collaborative process with clients and their trusted advisors, and with his Wharton and NYU Law background, he is uniquely equipped to lead across disciplines and make complex tax law understandable and practical.

[1] Center on Budget and Policy Priorities, Dec. 2025.

[2] The foregoing would still be necessary to maximize the use of the generation-skipping transfer tax exemption (the “GST tax exemption”) and most state estate taxes, as portability does not apply to the GST tax exemption and most state estate tax exemptions.

[3] Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin

[4] Tenant by the entirety property (TBE) provides protection from attachment by the creditors of either spouse alone.  Only joint creditors can attach TBE property. That protection may be lost if the asset is transferred into a trust. Several states have enacted specific statutes that allow married couples to transfer TBE property into a joint revocable trust while maintaining the same level of creditor protection originally afforded to the individual spouses, including DE [12 Del. C. §3334], and FL [Fla. Stat. §736.0505(1)(a)]. But not PA.

[5] Property contributed to a joint trust by the spouses may be unequal in value. In this case, a gift occurs. The spouse with a shorter life expectancy may have made a gift. This is because the actuarial value of the second spouse’s interest in the trust is larger.

[6] The exemption amount in 2013 was $5,250,000.