In the US, a marital trust is a type of irrevocable trust.
A marital trust comes with many benefits and tax considerations if you’re looking to safely transfer your assets to your spouse in the event of your death. We'll dive into this more deeply in this article about marital trusts in the US.
Keep in mind that this article is not a substitute for seeking advice from an attorney or your wealth management team. If you don’t have a financial advisor or wealth management team helping you with your estate planning and investment management, we recommend that you schedule a call with a 360 Financial advisor.
What Is a Marital Trust?
Also referred to as a spousal trust, a marital trust is a legal relationship that allows an individual (grantor) to transfer their assets to their surviving spouse in the event of their death.
Assets can include cash, property, stocks, and bonds.
Because a marital trust is a type of irrevocable trust, assets can be transferred to the surviving spouse tax-free, making marital trusts a popular inclusion in an estate plan for many high net-worth Americans. However, estate taxes still apply at the second spouse’s death.
How Does a Marital Trust Work?
There are typically three parties involved in a marital trust.
The trust grantor establishes the trust and transfers their assets into it. The surviving spouse is usually the sole beneficiary, receiving income or support from the trust during their lifetime. The trustee, which may be an individual or an organization, manages the trust assets and ensures the terms of the trust are followed.
The marital trust utilizes the "marital deduction rule" under section 2056 of the Internal Revenue Code (IRC), which allows the transfer of assets to the surviving spouse without incurring estate taxes at the first spouse's death.
When the surviving spouse passes away, the remaining trust assets are distributed to the designated beneficiaries, such as children or other family members. At this point, the assets may be subject to estate taxes, depending on their value and applicable exemptions.
Is a Marital Trust Revocable or Irrevocable?
In the US, a marital trust is irrevocable.
Revocable trusts and irrevocable trusts are two typical trust structures. Revocable trusts are “easier” to set up and can also be modified during the grantor’s lifetime.
Irrevocable trusts typically cannot be modified without court approval or utilizing specific legal mechanisms, which depend on state law.
Keep in mind that this is a simplified explanation. Modifications depend on specific legal allowances, state law, and the terms of the trust. You should speak with your attorney to find out all the details of how a marital trust works.
Benefits of a Marital Trust
If you have a spouse and children, you may consider setting up a marital trust. Here are some common benefits:
Seeks to ensure your family is supported according to your wishes after your passing.
Utilizes the unlimited marital deduction to defer federal estate taxes until the surviving spouse passes away.
It can help maximize the use of estate tax exemptions, reducing overall tax liability.
Especially beneficial when one spouse has significantly more assets, balancing financial security for the surviving spouse.
It avoids the probate process, which can be time-consuming, costly, and emotionally taxing.
May allow for custom provisions, such as protecting assets for children from previous marriages.
Consult an attorney and financial advisor to tailor a marital trust to your specific needs and goals.
When Should You Consider a Marital Trust?
Estate planning can be difficult, but doing an estate plan may allow your spouse and children to be provided for during the period of mourning.
Creating a marital trust as part of your estate plan can help simplify the asset transfer process and minimize unnecessary expenses and taxes.
There are several tools that can be used in marital trusts depending on your relationship with your spouse and your children. For example, you can give legal authority to your spouse as the beneficiary (general power of appointment), which allows them to appoint the assets to any person or organization of their choosing after your death—including creditors, their estate, or various entities.
If you have children from different marriages, the Qualified Terminable Interest Property (QTIP) trust may allow you to designate additional beneficiaries after your spouse passes away. QTIP trusts may be especially useful for ensuring that children from previous marriages are provided for, while still allowing the surviving spouse to benefit during their lifetime.
Tax Implications of Marital Trusts
Marital trusts come with important tax considerations that you should consider.
While the trust is irrevocable, the assets placed in it are not immediately subject to estate taxes due to the unlimited marital deduction. This provision may allow you to transfer an unlimited amount of assets to your surviving spouse without incurring estate taxes upon your death.
However, the assets in the marital trust are typically included in the surviving spouse’s taxable estate. When the surviving spouse passes away, any remaining assets may be subject to federal estate taxes if the total value exceeds the applicable estate tax exemption.
It’s crucial to work with an estate planning attorney or financial advisor to structure a marital trust in a way that aligns with your financial goals and minimizes tax liabilities.
Common Questions
What is the purpose of a marital trust?
A marital trust aims to provide financial support for the surviving spouse while preserving the remaining assets for other beneficiaries, often children.
It also offers estate tax benefits, such as deferring taxes until the second spouse's death.
What happens to a marital trust when the second spouse dies?
When the second spouse dies, the remaining assets in the marital trust are distributed to the designated beneficiaries, as outlined in the trust agreement.
These assets may be subject to estate taxes if they exceed the applicable exemptions.
How does a marital trust protect a beneficiary from death taxes?
A marital trust helps defer estate taxes until the surviving spouse passes away.
The trust uses the unlimited marital deduction, allowing assets to pass tax-free to the spouse, reducing or eliminating estate taxes at the first spouse’s death.
Can anyone be a marital trust beneficiary?
No, marital trust beneficiaries are typically limited to the surviving spouse and designated heirs, such as children or grandchildren.
This rule aims to ensure that the assets serve their intended purpose and remain within the family or specified beneficiaries.
Can only a spouse be a marital trust beneficiary?
Initially, the surviving spouse is the primary beneficiary of a marital trust.
However, after their death, the remaining assets are distributed to other beneficiaries, such as children or other heirs specified in the trust agreement.
Can I set up a trust without my spouse?
Yes, you can establish certain types of trusts without involving your spouse.
However, marital trusts specifically require the inclusion of both spouses, as their purpose is to benefit the surviving spouse and defer estate taxes.
What's the difference between a marital trust and a family trust in the estate planning process?
A marital trust primarily benefits the surviving spouse and defers estate taxes.
Family trusts aim to support multiple family members, minimize estate taxes, and preserve assets for heirs after the first spouse's death.
What happens to a deceased spouse's assets if there is a marital trust?
The deceased spouse's assets placed in the marital trust are managed according to the trust terms.
The surviving spouse receives income or support from the trust, while the principal is preserved for eventual distribution to the designated beneficiaries.
What is the federal estate tax and lifetime gift exemption amount?
The federal estate and lifetime gift tax exemption is the amount of assets an individual can pass to heirs without incurring estate taxes.
For 2024, the exemption is $13.61 million per single taxpayer. Married couples making a joint gift get double that exemption amount.
Marital trusts can help maximize the use of this exemption.
Note that this exemption amount is subject to legislative changes, so future limits may differ.
Is a marital deduction trust irrevocable?
Yes, a marital deduction trust is generally irrevocable.
Once established, its terms cannot be changed. This ensures that the surviving spouse benefits as intended and that the assets are distributed according to the original plan.
Summary of Key Points
Marital trusts are a type of irrevocable trust in the US.
While an irrevocable trust cannot be modified after being set up, marital trusts come with many benefits for your spouse, children, and estate taxes. Creating a marital trust can be complex, especially if you have many financial assets and requirements, which is why working with an estate planning attorney and financial advisor is important.
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