Table of Contents
What is a marital trust?
How does a marital trust work?
Does one need a marital trust?
Types of marital trusts
Alternatives to marital trusts
The bottom line
Oct 14, 2022
8 min read
A marital trust minimizes the impact of estate taxes for spouses with high net worth. It can provide a surviving spouse with financial security, and help support heirs.
A marital trust is an estate-planning tool used to transfer assets to a surviving spouse after death. It helps avoid the complications associated with probate, which can be a yearslong and costly process. This type of trust has significant tax advantages, especially for individuals with estates valued over $12.06 million (or $24.12 million combined for couples).
A marital trust, or spousal trust, is a type of trust fund for married couples who want to make sure their assets go to the right beneficiaries after they die—typically the surviving spouse. It is an irrevocable trust, meaning once the trust document is created, it can’t be changed unless the trust includes instructions allowing modification by trustees or beneficiaries.
When a marital trust is established, three parties play a role:
Also known as a trustor, the grantor is the spouse creating the trust. The grantor sets the rules for the trust and what assets will transfer to the other spouse after death.
The trustee is a third-party administrator—it could be the surviving spouse, a family member, or professional fiduciary—who manages the trust fund and distributes funds to the surviving spouse in accordance with rules established by the grantor.
The beneficiary is the recipient—the surviving spouse— and in some types of trusts, other heirs. The receipt of trust assets may have conditions attached, such as limiting the beneficiary to income from the assets but not principal.
The grantor can use a marital trust to shield these assets from a complex and potentially costly legal process known as probate, which settles the deceased’s estate by paying debts and distributing assets to heirs and beneficiaries. The marital trust also shields assets from federal estate taxes. So when the granting spouse dies, the assets are transferred to the surviving spouse tax-free under the IRS unlimited marital deduction.
When the grantor dies, their designated assets are moved into the trust. The trustee then distributes the trust assets in the form of income (and potentially principal), to the surviving spouse named as beneficiary. When the surviving spouse dies, any money that remains in the trust passes to the grantor’s other named beneficiaries, such as children, as specified in the trust document.
For example, let’s say the grantor had children from a previous marriage. The trust could be designed to provide the current surviving spouse with generated income only, with the remaining principal going to the children from the first marriage.
Whether a marital trust is necessary depends on several factors including the size of the estate and how the married couple’s estate plan uses tax exemptions and deductions, as well as portability elections.
is a tax on the fair market value of property owned at the time of death. The federal estate tax rate has been 40% since 2013. Married couples, however, can take advantage of a lifetime estate tax exemption, though. Estates falling under the exemption dollar limits set by the IRS can be passed to a surviving spouse without owing federal estate taxes—all this without having to set up a marital trust.
This lifetime estate tax exemption increased in 2018, from $5.49 million to $11.18 million. As of 2022, the federal estate tax exemption was $12.06 million ($24.12 million for couples). Unless extended by Congress, the elevated levels are sunsetting in 2025. The exemption limit will drop back to $5 million, or about $6.2 million, if adjusted for inflation.
Ultra-high-net-worth individuals with estates valued at more than $12.06 million, the lifetime estate tax exemption limit, can set up a marital trust to protect their assets from both federal estate taxes and the probate process.
In addition to the estate tax exemptions, an IRS provision called the unlimited marital deduction allows the granting of assets to a spouse in any amount, free from gift and estate tax.
The unlimited marital deduction delays collection of estate taxes until after the surviving spouse dies, when all combined estate assets above the $12.06 million lifetime exemption amount are included in the survivor's taxable estate and subject to the 40% tax—a financial risk for heirs. One way to address this risk is to utilize the federal gift and estate tax exemption to make a “portability election” between married couples.
A portability election is a process in which a surviving spouse can carry over a deceased spouse’s unused portion of the federal estate tax exemption and add it to their own exemption. For the left over amount to be portable, or able to travel from one person to another, the estate would have to fall below the estate tax exemption limit of $12.06 million. This only applies to the federal level; the estate may not be exempt from state taxes.
The portability elections were introduced during the Obama administration and became permanent in the 2013 American Taxpayer Relief Act. If electing to use this option, the deceased spouse’s estate files a federal estate tax return Form 706. Survivors can take up to five years after the death of a spouse to elect portability.
Portability elections can accomplish the same outcome, traditionally, as what’s called an AB Trust, or marital deduction trust. An AB trust is a type of joint trust for high-net worth spouses where their estate (after death of a spouse) is typically divided into two trusts—an A trust, or marital trust, which includes any amounts exceeding the exemption, and is free from the federal estate tax because of the unlimited marital deduction. The other (B trust) is funded in the amount covered under the federal estate tax exemption.
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When speaking of a marital trust, it is the same as referring to an “A trust,” the basic structure for the multiple variations of marital trusts. Typically, an A trust may be necessary when the married couple anticipates having assets in excess of the estate tax exemption limits. When a spouse dies, assets are moved into the trust and the income generated from the assets (sometimes principal, too) goes to the surviving spouse. After the surviving spouse dies, trust assets pass to designated heirs.
The marital trust definition changes depending on the type of trust. The differences may seem subtle, but they can impact marital trust income distribution and the assets passing to family members. Guidance from an estate planning expert can help in sorting through the details.
Other marital trust types include:
. This type provides a lifetime income to the surviving spouse, who has full authority to dispose of the trust’s assets as they wish. This contrasts with other types that don’t give the spouse access to principal, only income from principal. The trust becomes part of the taxable estate of the surviving spouse.
. A QTIP trust ensures that the surviving spouse is taken care of, while also providing for other beneficiaries (such as children or grandchildren) after the surviving spouse dies. Income from assets in the trust is paid to a surviving spouse, who is restricted from accessing principal. Whatever is left in the trust after the second spouse dies is paid to beneficiaries. With this type of trust, the grantor has greater control on asset allocation and can limit income to the surviving spouse.
. Also known as B trust, AB trust, family trust, or credit shelter trust, a bypass trust is generally used as part of a joint AB trust estate planning strategy. It funnels a portion of assets to a surviving spouse via a marital trust (trust A), and transfers remaining assets to other beneficiaries (typically children) via a trust B family trust. The B trust is not included in the surviving spouse’s estate, so it is not subject to their estate tax. The surviving spouse’s access is limited to an “ascertainable standard,” meaning it can be used for items like health, education, and living expenses.
Marital trusts may or may not be suitable for based on one’s financial picture, but there are plenty of other trust options available, including:
. This type gives the beneficiary all rights to principal and income from the trust. A third-party trustee might oversee the investments, but the beneficiary has the power to determine how the assets are used.
. A person names themself as the beneficiary. It can be a living trust or testamentary trust (created after death). A personal trust might be used to fund higher education for oneself or minor children, or as a means for passing on an individual retirement account (IRA) and controlling who will benefit and when. Usually an investment advisor will be appointed to manage the trust assets on behalf of the grantor/beneficiary.
. These trusts can be part of a separation agreement when determining what happens to assets in a divorce. A divorcee pays support to the ex-spouse using income generated from the trust. The grantor won’t pay income tax on payments to the ex-spouse from the trust, and the grantor isn’t eligible for an alimony deduction.
A marital trust minimizes the impact of estate taxes for spouses with high net worth. It keeps estates out of probate (a potentially costly and convoluted legal process), can provide a surviving spouse with financial security, and help support heirs after the surviving spouse dies.
Many couples may not see the need for a marital trust due to the increased estate tax exemption, currently at $12.06 million per individual. Or, they may decide to take advantage of portability elections to pass unused estate tax exemption amounts to the surviving spouse.
Ultra high-net-worth couples above the estate tax exemption limits, however, might still benefit from a marital A trust or one of the many variants. Many high-net-worth individuals turn to financial advisors, or legal and estate planning professionals to help sort through the various types of trusts, their pros and cons, and what options meet your personal finance needs.
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