No matter your age, if you are married, one of your primary concerns is caring for your spouse.
But what about when you pass away? If you’re like most people, you probably worry about how to ensure your spouse is cared for even when you’re not around.
The good news is that there’s a solution to this problem.
It’s called a marital trust.
We’ll cover all you need to know about marital trusts in this article, but if you’re curious to learn about other options, take a look at our complete guide on trusts.
What is a Marital Trust?
A marital trust (also called an “A” trust) is a type of irrevocable trust that is designed to hold specific assets of a married couple. Upon the death of one of them, the assets in the trust can be transferred to the surviving spouse without incurring any tax penalties. Combined with the federal gift and estate tax exemptions, a marital trust can also help preserve the estate of the surviving spouse so that more can eventually be passed along to other beneficiaries.
The Details of How a Marital Trust Works
There are four main elements in a marital trust that you need to understand:
- Trustor – The individual who establishes the trust and transfers assets into it.
- Beneficiary – The surviving spouse who will receive the assets in the trust upon the death of the trustor. Although the assets in the trust can eventually be passed on to other beneficiaries through other means, in a marital trust the surviving spouse must be the sole beneficiary.
- Trustee – The individual or institution responsible for managing the trust and its assets. Upon the death of the trustor, the trustee is responsible for transferring the assets to the beneficiary.
- Principal – The assets that are initially placed in the trust. Assets can include things that appreciate in value, such as stocks, bonds, property, etc. As such, the trust can provide income for the surviving spouse while they are still alive.
Marital trusts are usually created with the assistance of an estate planning attorney. Together, you and the attorney will create a trust document that outlines the specific details of the trust. This document will include the name of the trust, who the trustee and beneficiary are, what the principal assets are, and how and when the assets will be transferred to the beneficiary.
Almost any type of asset can be put into a marital trust, including cash, mutual funds, real estate, stock portfolios, and life insurance policies. Upon the death of the trustor, the trustee will distribute the assets to the beneficiary in accordance with the terms of the trust. Because of the IRS “marital deduction rule“, all the assets are exempt from federal estate taxes.
The beneficiary may earn income from the trust itself, as well as the principal. In the trust document, the trustor can give the trustee the authority to transfer some of the initial assets to the beneficiary if unexpected needs arise. The trustor can also grant general power of appointment to the surviving spouse, which means they can direct the trustee on how to distribute the assets upon the death of the trustor. As a limiting factor, the trustor can set limits on how much the beneficiary can withdraw from the trust.
What are the Benefits of a Marital Trust?
There are a number of benefits that come with establishing a marital trust.
First and foremost are the tax benefits. As noted, the assets in the trust are not subject to federal estate taxes. This can save the surviving spouse a considerable amount of money, which they can then use to maintain their lifestyle or pass on to other beneficiaries.
After the remaining spouse dies, the assets in the trust are subject to federal estate taxes. However, through strategic use of the federal gift and estate tax exemptions, the amount of taxable assets can be reduced significantly. These two exemptions specify how much you can pass on to beneficiaries before estate taxes kick in.
As of 2019, a person could use these exemptions to protect up to $11.4 million from federal estate taxes. However, tax law also allows couples to combine their exemptions, meaning that up to $22.8 million could be passed on to beneficiaries tax free.
What is a QTIP Trust?
A QTIP trust is a special type of marital trust that is typically used when the trustor has children from another marriage. The surviving spouse must still be the initial beneficiary, but the trustor can specify who the beneficiaries are after the surviving spouse dies. This can include children from another marriage, grandkids, etc.
This arrangement gives the trustor autonomy over how their assets are used after the surviving spouse dies. For example, if the surviving spouse remarries, it ensures that the assets in the trust don’t go to the new spouse, but rather to the beneficiaries specified in the trust document.
Should You Create a Marital Trust?
A marital (“A”) trust may be right for you if you meet the following conditions:
- You want to be able to transfer a significant amount of assets to your spouse upon your death without those assets being subject to estate taxes
- You want to provide your spouse with ongoing income even when you aren’t around anymore
- You and your spouse want to preserve as much of your estate as possible to pass on to your beneficiaries after both of you have died
- You have children from another marriage and want to ensure that they receive the assets you intend to give them
If you check the above boxes, then you should consider establishing a marital trust. To get the process started, meet with an estate planning attorney. They can guide you through the process and ensure that everything is done correctly.