A Marital Trust is a specialized legal arrangement commonly used in estate planning to safeguard the financial interests of a surviving spouse and strategically manage estate taxes. It becomes active usually upon the death of the first spouse and holds assets for the surviving spouse’s benefit, often deferring federal estate taxes using the unlimited marital deduction.
The core advantage of a Marital Trust lies in its ability to transfer assets to the surviving spouse free from estate taxes at the first spouse’s death by utilizing the unlimited marital deduction provided under U.S. tax law (see IRS Publication 559). This defers taxation until the surviving spouse’s death, providing liquidity and financial security during their lifetime.
How a Marital Trust Operates
Upon the death of the first spouse (the grantor), assets specified in their will or trust agreement fund the Marital Trust. A trustee—either an individual or a professional trust company—manages the trust assets, providing income to the surviving spouse and sometimes limited access to principal for their health, education, maintenance, and support. The trust ensures that after the surviving spouse’s death, remaining assets pass to the designated remainder beneficiaries, such as children or other heirs, according to the original grantor’s instructions.
Common Types of Marital Trusts
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Qualified Terminable Interest Property (QTIP) Trust: Requires that the surviving spouse receive income annually and restricts their control over principal and remainder beneficiaries. It’s ideal for blended families wanting to provide for a spouse while protecting children’s inheritance.
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General Power of Appointment Trust (A-Trust): Grants the surviving spouse control over the ultimate disposition of the trust assets, including the ability to change beneficiaries. This trust provides more flexibility but may expose assets to the surviving spouse’s creditors.
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Estate Trust: Allows income to be accumulated rather than distributed annually, with assets passing to the surviving spouse’s estate upon their death, potentially exposing the assets to probate.
Why Consider a Marital Trust?
Marital Trusts are beneficial for households with substantial estates that may face estate tax liabilities either federally or at the state level. They are also essential in blended family situations, where a spouse wants to ensure children from a prior relationship inherit as intended while still providing for the surviving spouse.
Additionally, these trusts help protect assets from creditors and potential complications from remarriage, maintain privacy by avoiding probate, and allow professional management of trust assets if a corporate trustee is appointed.
Setting up a Marital Trust
Establishing a Marital Trust requires the expertise of an experienced estate planning attorney who can tailor the trust terms to meet specific family and tax planning goals. It involves drafting the trust document, selecting a suitable trustee, funding the trust upon the first spouse’s death, and regularly reviewing the trust to adapt to life changes or tax law updates.
Marital Trust vs. Bypass Trust
While a Marital Trust defers estate taxes until the second spouse’s death by including the trust assets in the surviving spouse’s taxable estate, a Bypass Trust (or Credit Shelter Trust) aims to exclude certain assets from the surviving spouse’s estate, thus potentially avoiding estate taxes at the second death. Combining both trusts can optimize estate tax advantages.
Important Considerations
- Most Marital Trusts are irrevocable, which limits flexibility after establishment.
- Complexity and costs may be higher compared to simpler estate planning tools.
- Surviving spouse’s control may be limited in certain trust types.
- State-level estate or inheritance taxes might still apply even when federal taxes are deferred.
Additional Resources
Explore related topics on Estate Planning, Trustee Roles, and Credit Shelter Trust for deeper understanding.
For official guidance on estate tax rules and the unlimited marital deduction, the IRS website is an authoritative resource: IRS Publication 559.
By utilizing a Marital Trust, married couples can ensure their surviving spouse’s financial security, manage estate tax exposure efficiently, and maintain control over how their assets are ultimately distributed, providing peace of mind and a clear legacy plan.