Estate planning can be difficult to face, but it is one of the most important ways to make sure families are provided for after losing a loved one. When spouses and children are mourning, an organized estate plan can help simplify the legal aspects of a death, ensuring assets are distributed as intended, and taxes and expenses are minimized.
Many people include a marital trust in their estate plan. In this article, we’ll provide a broad overview of this aspect of estate planning to help you learn if it’s an option for your family.
What Is a Marital Trust?
To review, a trust is where one party (the Grantor) establishes a legal document that gives a second party (the Trustee) the right to hold title to property or assets (the Principal) for the benefit of a third party (the Beneficiary). Typically, when trusts are established the Grantor serves in all these roles—as Grantor, Trustee, and Beneficiary—but after they pass, the role of Trustee and Beneficiary are given to previously chosen individuals.
A marital trust, also known as a spousal trust, is specifically used to provide for a surviving spouse, while also ensuring that the assets ultimately pass to designated beneficiaries, such as children, when the surviving spouse dies. In this scenario, the surviving spouse typically serves as the Trustee and receives income from the trust assets for the remainder of their life, and sometimes has access to the Principal as well. However, the surviving spouse does not have direct control over how assets are distributed after their death; instead, the trust document has structures in place and passes assets to the predetermined beneficiaries after the surviving spouse has passed.
Marital trusts are a way to ensure your family is taken care of in the manner you see fit and leaves behind a clear plan. The other benefit is that marital trusts allow loved ones to take advantage of estate tax exemptions and defer taxes until after the surviving spouse dies. This can be particularly useful in situations where one spouse has significantly more assets than the other. The purpose is to help heirs pay less in estate taxes and avoid probate court.
Beyond the tax benefits, this type of trust works well when there are children from previous marriages that the deceased spouse wants to provide for. In this case, a marital trust can be used to pass all real estate property (the house) to their surviving spouse upon death, and all assets (the money) can be preserved to eventually pass to their individual children when the surviving spouse passes. Marital trusts can provide for stipulations like these, as well as set parameters such as if the surviving spouse remarries, the deceased spouse's property will go to the children.
Possible Tools Used In Marital Trusts
Each estate plan is unique and can be tailored to your needs, but there are three types of marital trusts to be aware of:
- General Power of Appointment: This is when the Grantor, or creator of the trust, gives legal authority to an individual (the Beneficiary) to designate who will receive certain property or assets upon the Beneficiary's death. With a general power of appointment, the Beneficiary has broad discretion to appoint the assets to anyone they choose, including their children, their creditors, their estate, or any other individuals or entities.
- Qualified Terminable Interest Property (QTIP) Trust: This is often used when a grantor has children from different marriages. The surviving spouse still serves as the initial Beneficiary, but the Grantor can also designate additional Beneficiaries after the spouse passes. During the surviving spouse’s lifetime, these Beneficiaries must receive the income the QTIP generates at least annually.
- Unlimited Marital Deduction: This estate tax provision went into effect in 1982 and allows spouses to transfer an unlimited amount of property and assets to one another, during their lifetime or upon death, without penalty or tax. The benefit being this allows married couples to delay the payment of estate taxes upon the first spouse's death. When the surviving spouse dies, all assets in the estate are subject to taxes, unless they have been spent or gifted during the surviving spouse's lifetime.
How Does a Marital Trust Work?
You will create a marital trust with the help of an attorney who specializes in estate planning and they will guide you through each step to ensure your trust is rock solid. That being said, this is generally how a marital trust works:
Creation
An individual creates a marital trust as part of their estate planning process, often through a revocable living trust. The trust document specifies the terms and conditions under which the assets are to be held and distributed.
Asset Transfer
Upon the creation of the revocable trust, their assets are transferred into the trust. These assets can include cash, investments, real estate, and other property. Some assets may also be transferred upon the death of the trust creator.
Beneficiary
The surviving spouse becomes the primary beneficiary of the marital trust. They are entitled to receive income generated by the trust assets, and in some cases, they may also have access to the principal for their support and maintenance. The surviving spouse does not typically have direct control over the distribution of the trust assets.
Taxes
The assets transferred into the marital trust are not subject to estate tax—they are tax free because they qualify for the unlimited marital deduction. Estate taxes are deferred until the surviving spouse dies.
Death of the Surviving Spouse
After the death of the surviving spouse, the trust assets are distributed according to the terms specified in the trust document. This could involve distributing the assets outright to children or other beneficiaries, or it could involve continuing the trust for the benefit of subsequent generations. At this point, the assets are subject to taxes.
Conclusion
Overall, a marital trust provides a flexible and tax-efficient way to provide for a surviving spouse, while also controlling the ultimate disposition of assets so your family doesn’t end up in probate. An experienced estate planning attorney can help you determine if a marital trust is appropriate for your situation and set one up properly according to your wishes and applicable laws.
Sherwood & Robert has decades of experience helping people plan for the future. Contact us to learn more about marital trusts and how we can help you, too.
