Married couples who have revocable trusts are often counseled to balance their assets between the trusts. There are many reasons for this, some obvious and others not so obvious. In order to understand what’s right for you and your family, you should first understand why a married couple often has two revocable living trusts.

Many married couples have two revocable living trusts in an effort to utilize both of their exemptions from estate tax. If a married couple holds all of their assets jointly, or in one trust that does not contain any tax planning, then, generally speaking, the entire value of their assets will be included in the surviving spouse’s estate for federal estate tax purposes.

The way to “double” this exemption is to have two revocable living trusts. Rather than all of the assets from the first decedent spouse’s trust distributed outright to the surviving spouse, the assets are held in a “credit shelter” trust for that surviving spouse’s benefit. She can even be the trustee over the trust, so long as the trust is drafted with the proper safeguards to prevent inclusion of the decedent spouse’s trust assets in the surviving spouse’s estate.

So in a world where there is a $3.5 million estate tax exemption, that exemption can be doubled to $7 million with proper planning. Since a majority of married couples have combined net worth of something less than $7 million, with proper planning estate tax may be avoided or at least minimized.

But this holds true only if the couple’s assets are balanced between the two trusts, since none of us can know which of us will survive the other. In other words, it is important that the act of balancing the assets between two spouses’ trusts occurs before one of the spouses dies.

Achieving this goal is actually more difficult than it sounds. Consider that some assets are distributed outright to the surviving spouse outside of the trust planning. Life insurance, annuities and IRAs are common examples, as they name a beneficiary outside of the trust instrument.

Another difficulty concerns the Florida homestead. Placing one half of the homestead into each trust only works if proper measures are taken to avoid the “invalid devise” rules regarding Florida homestead. I’ve written about that in the past and it is too detailed of a discussion to place in this column. If you are interested go here.

In the above instances those assets mentioned above end up in the surviving spouse’s column. So if you planned on those assets being exempted under the first decedent spouse’s estate, then you will not have balanced your trusts properly.

To balance your trusts, you need to consider the assets that will be actually titled into the trusts. These generally include your money market accounts, stocks, bonds and mutual funds outside of qualified retirement plan accounts, real estate, business interests and other such assets. Those are the assets that should be balanced.

Be careful to provide liquidity to each trust. In other words, it is generally not a good idea to put all of the illiquid assets such as real estate in one spouse’s trust and the liquid assets into the other. It makes sense to have ready available cash in each trust, even if they both are to be held for the surviving spouse’s benefit.

Also, if your trusts have different beneficiaries, then throw this discussion out the window. Balancing your trusts is only appropriate where both trusts have the same remaindermen beneficiaries. In second marriage situations, for example, the husband may want all of his assets to eventually end up with his children while the wife may want all of her assets to eventually end up with hers. In this scenario, it is appropriate to maintain separate trusts without the worry of balancing the trusts.

Where the trusts have common beneficiaries, however, balancing remains appropriate. When the stock markets and real estate markets fluctuate as much as they have in recent months it is easy for trusts that were once balanced to fall out of balance. It’s therefore a good idea to review not only the provisions of your trust, but also how your assets are allocated between your trusts.

©2009 Craig R. Hersch