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What is a marital trust and how do they work?
In this article, you’ll learn about:
Let’s dig in.
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A marital trust is a legal arrangement that a person creates to transfer assets to their spouse after their death.
It provides the surviving spouse with financial support and potentially offers significant tax benefits.
There are two types of marital trusts:
An AB Trust, also known as a bypass trust, splits into two upon the death of the first spouse.
The deceased spouse’s half goes into a “B Trust.”
This provides income to the surviving spouse but keeps the principal intact for beneficiaries, often children.
The surviving spouse’s half goes into an “A Trust,” which the spouse can use as they please.
A QTIP (Qualified Terminable Interest Property) Trust allows the first spouse to die to control how the assets are eventually distributed after the death of the second spouse.
The surviving spouse receives income from the trust during their lifetime but doesn’t have control over the principal.
In both types, the trust’s assets bypass the surviving spouse’s estate, reducing or eliminating estate taxes.
To set up a marital trust, it’s important to work with an experienced estate planning attorney who:
Read More: What Has To Go Through Probate
Marital trusts are an essential tool for estate planning.
First, they provide financial security to the surviving spouse after one’s passing.
By placing assets in the trust, the surviving spouse gets the benefit of the income generated from those assets.
Secondly, they offer significant tax benefits.
Assets transferred into a marital trust can qualify for the unlimited marital deduction.
This reduces or even eliminates federal estate taxes upon the death of the first spouse.
This tax advantage allows more wealth to pass directly to the beneficiaries.
Lastly, they aid in managing the estate’s assets.
The trust is managed by a trustee who handles administrative duties like:
This can relieve the surviving spouse from the burden of these tasks and ensure professional handling of the assets.
In essence, marital trusts are vital in:
Read More: How To Set Up A Trust
A marital trust is a legal arrangement created to protect and manage assets for the benefit of a surviving spouse.
When one spouse passes away, assets move into the trust.
The surviving spouse becomes the beneficiary.
The trustee, chosen beforehand, manages the trust.
This can be the surviving spouse or a third party, like our trust lawyers.
The trustee makes sure the assets provide for the beneficiary’s needs.
Assets in a marital trust often include cash, stocks, bonds, real estate, and personal belongings.
The specifics depend on the couple’s wishes and financial situation.
The main advantage of a marital trust is its tax benefits.
Assets transferred into the trust are exempt from estate tax until the surviving spouse passes away.
Marital trusts follow state and federal laws.
These laws ensure the trust functions as intended and provides for the surviving spouse.
Finally, it’s essential to review the marital trust periodically.
Life changes may require updates to the trust to:
Read More: Who Needs A Trust Instead Of A Will?
Here are the steps to set up a marital trust:
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A marital trust requires the following:
Read More: How To Put House In Trust With Mortgage
Pros of Marital Trusts:
Cons of Marital Trusts:
Read More: How Long Does An Executor Have To Settle An Estate
Here are the primary types of marital trusts used in estate planning:
Read More: What Are The Disadvantages Of Putting Your House In A Trust?
The primary difference between a Family Trust and a Marital Trust lies in:
A Family Trust aims to manage and protect assets for the benefit of an entire family.
This can include spouses, children, grandchildren, or other relatives.
The trustor has control over the distribution of assets.
And this type of trust is often used to ensure that assets are handled according to the trustor’s wishes, even after their death.
A Marital Trust, on the other hand, is designed specifically to benefit the surviving spouse after the other spouse passes away.
The main purpose is to provide financial security for the surviving spouse, while also taking advantage of certain estate tax benefits.
Read More: How To Put A House In A Trust
A Survivor’s Trust is created from an A-B trust structure.
When one spouse dies, the original trust (often a revocable living trust) splits into two:
The Survivor’s Trust contains the surviving spouse’s property and any property the deceased spouse gives to the survivor outright.
The surviving spouse typically has full control over this trust, including the power to spend down the principal and change beneficiaries.
On the other hand, a Marital Trust, also known as an A-B trust, is a type of trust structure used by married couples to minimize estate taxes.
When the first spouse dies, the trust splits into two trusts: the Survivor’s Trust (or ‘A’ Trust) and the Bypass Trust (or ‘B’ Trust).
The Marital Trust, in this case, refers to the overall structure of the A-B trust, not a separate entity.
Read More: What Assets Cannot Be Placed In A Trust?
A marital trust and a marital deduction trust are not exactly the same, but they are closely related.
A marital trust is a general term for trusts set up to provide financial benefits to a surviving spouse.
A marital deduction trust, on the other hand, is a specific type of marital trust.
Its main purpose is to take advantage of the unlimited marital deduction in U.S. federal estate tax law.
This means assets transferred into a marital deduction trust, and subsequently to a surviving spouse, aren’t subject to estate taxes at the time of the first spouse’s death.
Instead, the tax liability is deferred until the surviving spouse’s death.
So, in essence, a marital deduction trust is a type of marital trust designed with a particular tax strategy in mind.
It helps to maximize the estate’s value by deferring estate taxes until the second spouse’s death.
Here’s an explanation of income distributions from a marital trust.
In a marital trust, the surviving spouse typically has the right to the trust’s income.
This income is usually distributed at least annually.
The trust income might consist of interest, dividends, rents, or other types of earnings that the trust’s assets generate.
In some cases, the terms of the trust might also allow the trustee to distribute the principal (the original assets put into the trust) to the surviving spouse.
This is often in situations where the income is insufficient for the spouse’s needs, as defined by the trust agreement.
After the death of the surviving spouse, the remaining trust assets (both income and principal) are distributed to the final beneficiaries, usually the couple’s children or other heirs.
In terms of taxation, the surviving spouse is generally responsible for the income tax on the income distributed from the trust.
However, if the trust retains some income (doesn’t distribute it), the trust itself may be responsible for the income tax on that undistributed income.
Read More: How Much Money Do You Need To Start A Trust Fund For A Child?
Yes, a marital trust does indeed need to file a tax return.
A marital trust becomes a separate entity upon the death of the first spouse.
From this point, the trust must file an annual fiduciary income tax return, IRS Form 1041.
This form reports the trust’s income, deductions, and any credits.
The trust only pays income tax on income retained by the trust.
If the income is distributed to beneficiaries, it’s the beneficiaries who are responsible for the tax.
The trust should provide the beneficiaries with a Schedule K-1 detailing the income distribution, which the beneficiaries then report on their personal tax returns.
State-specific tax filing requirements for trusts may also apply, so it’s wise to review those rules.
The IRS Form 1041 instructions and a qualified professional can provide more guidance.
Read More: How Much Does A Living Trust Cost?
Here are other questions about marital trusts that our clients ask us.
A Marital Trust becomes irrevocable upon the death of the first spouse.
Initially, while both spouses are alive, they can make changes to the terms of the trust, such as the named beneficiaries or the distribution of assets.
This makes the trust revocable during this period.
However, once the first spouse passes away, the terms of the Marital Trust cannot be altered.
This means the trust becomes irrevocable, and the surviving spouse cannot make changes.
The trust’s assets are typically used to provide income for the surviving spouse, and upon their death, the remaining assets are passed on to the beneficiaries as outlined in the trust agreement.
Read More: How To Set Up A Family Trust
Marriage does not typically override a trust.
A trust is a legal arrangement, and its terms continue to apply regardless of marital status unless the trust document explicitly states otherwise.
When a trust is created, the grantor lays out specific terms and conditions about how the trust assets should be managed and distributed.
These terms stay in place even if the grantor gets married after the trust is established.
However, if you get married and wish to include your spouse in your trust, you may need to modify the trust or create a new one.
A spouse may have a legal right to claim a portion of your estate (known as a “spousal elective share”) despite what your trust or will states.
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