A marital trust is a type of irrevocable trust that allows you to transfer assets to a surviving spouse tax-free. It can also shield the estate of the surviving spouse before the remaining assets pass on to their children. Knowing how and when you should use a marital trust can have major benefits for you and your family. You may also want to find a financial advisor who can guide you through the complex rules of a marital trust, along with other estate planning strategies.
What Is a Marital Trust?
Before we explain the marital trust fund, you should be aware of some common terminology you’ll come across in the process. Here are some of the most common terms:
- Trust grantor: The person who establishes the trust.
- Beneficiary: The surviving spouse who benefits from the marital trust upon the death of the trust grantor. Within the framework of a marital trust, the surviving spouse must be the sole beneficiary who can receive trust assets during his or her lifetime.
- Trustee: The person, persons or organization that manages trust assets. The trustee transfers the property to the beneficiary. A marital trust must have at least one named trustee to be valid.
- Principal: The assets initially put into the trust. As these can be investment products, the trust can generate income during the beneficiary’s lifetime.
Because a trust can be a complex entity, it’s wise to seek the help of a qualified attorney who is versed in estate planning. A financial advisor and a certified public accountant (CPA) can also help you navigate the tax rules and asset management decisions that surround it.
How Does a Marital Trust Work?
You can establish a marital trust with the help of an attorney who specializes in estate planning. The trust document must specify all assets and property held in the trust. This can include nearly anything of value. That includes stocks, bonds, mutual funds, cash and physical property.
Upon the death of the trust grantor, trust assets pass on to the surviving spouse tax-free. This means the IRS won’t level federal estate taxes on those assets. So neither spouse owes taxes on the transfer. This is made possible through Section 2056 of the Internal Revenue Code, also known as the “marital deduction rule.”
The surviving spouse can receive income from the trust as well as the principal. The trust grantor can give the trustee the right to transfer some of the trust’s principal or initial investment to the surviving spouse if a special need arises. The trust creator can also give the surviving spouse “general power of appointment.” This allows the surviving spouse to instruct the trustee to transfer trust assets. However, the grantor may limit the withdrawal to a set amount.
In most cases, the trust assets pass on to the couple’s children or other family members when the surviving spouse passes. However, the rules of different types of marital trusts dictate who can be named beneficiary after the surviving spouse’s death (more on that below).
Why Establish a Marital Trust?
A properly drafted marital trust can provide a family with significant tax benefits. As we mentioned, a spouse can transfer assets to a surviving spouse tax-free.
In the case of a marital trust, the IRS subjects the remaining trust assets to federal estate taxes when the surviving spouse passes. However, a couple can take advantage of the federal gift and estate tax exemption. This is the amount that you can pass on to heirs before you’d ever owe an actual estate tax.
The new tax laws that recently went into effect essentially doubled that rate. It climbs with inflation each year. So for 2024, an individual can shield $13.61 million from estate taxes. However, the portability provision in the tax law allows a couple to combine their exemptions. So with careful estate planning, a couple can protect up to $27.22 million from the IRS. These numbers increase to $13.99 million and $27.98 million, respectively.
Here’s an example of how it works in the case of a marital trust. Suppose the grantor passes on $10 million to the surviving spouse through a marital trust. Then let’s say the surviving spouse ends up passing on $15 million total to the couple’s children through that same trust.
Even though the surviving spouse breached his or her exemption, it doesn’t cross the couple’s combined exemption. However, without the presence of a marital trust, the surviving spouse’s remaining estate would have paid federal estate tax on the transfer amount that exceeded the individual exemption.
Nonetheless, the federal gift and estate tax exemption hike is set to expire at the end of 2025 unless Congress takes action to make it permanent. And the tax laws can change even more in any married couple’s lifetime. So it’s a good idea to seek the help of a qualified financial advisor and estate planning attorney when managing a marital trust.
QTIP Trusts and Estate Trusts
A qualified terminable interest property (QTIP) trust is a type of marital trust. They’re often used when a grantor has children from different marriages. The surviving spouse still serves as the initial beneficiary. But upon the creation of the trust, the trust grantor can designate a specific beneficiary or beneficiaries. This may include children from another marriage, grandchildren or anyone else.
During the surviving spouse’s lifetime, however, this beneficiary must receive the income the QTIP generates at least annually. As you can see, one of the main benefits of the QTIP is that the trust creator can designate additional beneficiaries rather than the surviving spouse.
An estate trust, otherwise termed marital deduction trust or testamentary trust, can be an alternative to a marital trust. It is an irrevocable trust created by a will. It’s normally set up to manage the deceased person’s assets and distribute them accordingly. They can help you navigate this complicated process and make sure your interests remain protected along the way. Estate trusts are often established in a last will.
Power of Appointment
A power of appointment is an ability a grantee or beneficiary receives from the grantor or creator of a trust. The power of appointment allows the beneficiary to change trust in specific ways in specific contexts. For example, a grandparent might place his or her assets in a trust and give their grandchildren the power of appointment over the trust once the grandparent passes away.
In addition, a power of appointment affects irrevocable trusts – which, as the name implies, are not easy to change. Fortunately, a power of appointment means beneficiaries can modify a trust within the boundaries the trust’s creator sets.
There are two types of powers of appointment: general and limited. General power of appointment allows the appointed individual to change and direct the trust however he or she wishes. In essence, a general power of appointment gives over complete control of the trust, and the person who has that power can allocate the trust’s assets how that person sees fit. On the other hand, a limited or special power of appointment has boundaries the holders must follow.
Bottom Line
A marital trust can be a powerful estate planning tool for those looking to provide for a surviving spouse while maximizing tax advantages. By utilizing a marital trust, couples can ensure that their assets are passed on in a tax-efficient manner and that their family’s financial future is protected. However, the complexities involved in setting up and managing a marital trust, as well as ever-changing tax laws, make it beneficial to seek guidance from experienced professionals such as financial advisors.
Estate Planning Tips
- If you’d like some professional guidance in creating a solid marital trust, a financial advisor can help. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Estate planning can be a challenge, and bad decisions can be costly. To help, check out SmartAsset’s comprehensive guide on the five estate planning mistakes you can’t afford to make.
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