What Are Marital Trusts?
A marital trust is a legal arrangement created as part of an estate plan to provide financial security to a surviving spouse after the death of the first spouse. These trusts are often designed to maximize tax benefits and ensure that assets are distributed according to the couple’s wishes.
Marital trusts are irrevocable upon the death of the first spouse, meaning the terms of the trust cannot be altered by the surviving spouse. They allow the surviving spouse to use and benefit from the assets within the trust during their lifetime while ensuring that the remaining assets eventually pass to designated beneficiaries, such as children or other heirs.
Types of Marital Trusts
There are several types of marital trusts, each serving a different purpose in estate planning:
1. A-B Trust (Bypass Trust or Credit Shelter Trust)
- This type of trust is used to minimize estate taxes.
- When the first spouse passes away, the trust splits into two parts:
- Trust A (Marital Trust): Holds assets for the surviving spouse’s benefit.
- Trust B (Bypass Trust): Holds assets up to the estate tax exemption limit and benefits other heirs, such as children.
- The surviving spouse can receive income from both trusts but cannot alter the Bypass Trust.
2. Qualified Terminable Interest Property (QTIP) Trust
- A QTIP trust allows the first spouse to pass assets to the surviving spouse while ensuring that the remaining assets go to chosen beneficiaries upon the second spouse’s death.
- The surviving spouse receives income from the trust but does not have control over the principal.
- This trust is commonly used in blended families to ensure children from previous marriages inherit their intended share.
3. General Power of Appointment Trust
- The surviving spouse has more flexibility with this type of trust.
- They can use, manage, and even distribute trust assets.
- This trust is beneficial when the surviving spouse needs financial control but still allows estate tax benefits.
Why Are Marital Trusts Important?
Marital trusts play a critical role in estate planning. Here’s why they are essential:
1. Protecting a Surviving Spouse
- A marital trust ensures that a surviving spouse will have financial support after the first spouse’s passing.
- It can be structured to provide income, access to certain principal distributions, or other financial security measures.
2. Minimizing Estate Taxes
- Assets in a properly structured marital trust qualify for the marital deduction, meaning no estate taxes are due upon the death of the first spouse.
- This allows assets to pass to the surviving spouse tax-free while deferring estate taxes until the second spouse’s passing.
3. Ensuring Asset Distribution to Intended Beneficiaries
- A marital trust ensures that assets pass to the designated heirs upon the surviving spouse’s death.
- This is particularly important in blended families, where a spouse may want to protect their children’s inheritance while still providing for their surviving spouse.
4. Providing Asset Protection
- Assets held in a trust may be protected from creditors, lawsuits, or remarriage complications.
- This ensures that wealth is preserved for the intended beneficiaries rather than being lost due to unforeseen circumstances.
5. Avoiding Probate
- Marital trusts bypass probate, allowing assets to be transferred more efficiently and privately.
- This speeds up the distribution process and prevents family disputes over asset allocation.
How to Set Up a Marital Trust
Creating a marital trust involves several key steps:
- Work with an Estate Planning Attorney
- An experienced estate planning attorney can help determine the best type of marital trust based on your financial goals and family situation.
- Draft the Trust Document
- The trust document outlines how assets will be managed, distributed, and who the trustees and beneficiaries are.
- Select a Trustee
- The trustee manages the trust assets according to the trust’s terms.
- The surviving spouse can be the trustee, or a third-party trustee can be named for additional protection and oversight.
- Fund the Trust
- Assets such as real estate, investments, and bank accounts must be transferred into the trust for it to function effectively.
- Update Beneficiaries
- Ensure that beneficiary designations on retirement accounts, life insurance policies, and other financial instruments align with the trust’s objectives.
How We Can Help
Setting up a marital trust requires careful planning to ensure that your assets are protected and distributed according to your wishes. At Allenby Law, we specialize in smart estate planning strategies that simplify the process for our clients. Whether you need assistance selecting the right trust structure or navigating complex tax implications, our team is here to help. Contact us today to discuss your estate planning needs and secure your family’s financial future.
