A Marital Trust is a specific type of trust in estate planning designed to provide financial benefits and security to the surviving spouse after the death of one spouse. This trust can help manage and protect assets, ensure the surviving spouse’s financial stability, and provide significant tax benefits, especially related to estate taxes.
Key Characteristics of a Marital Trust
Types of Marital Trusts
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AB Trust (Marital and Bypass Trusts):
- Divides into two trusts upon the death of the first spouse: Trust A (the marital trust or survivor trust) and Trust B (the bypass or credit shelter trust).
- Trust A benefits the surviving spouse, and Trust B shelters assets to maximize tax benefits.
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QTIP Trust (Qualified Terminable Interest Property Trust):
- Allows the grantor to provide for the surviving spouse and maintain control over the distribution of the trust’s assets after the spouse’s death.
- The surviving spouse receives income from the trust, but principal decisions can be deferred.
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Power of Appointment Trust:
- Provides the surviving spouse with the power to control the disposition of assets upon their death.
- Offers flexibility to adapt to changing circumstances and needs.
Special Considerations
- Tax Benefits: Marital trusts can defer estate taxes on assets until the death of the surviving spouse.
- Control: The grantor can control how assets are distributed after the surviving spouse’s death, ensuring the welfare of other heirs.
- Probate Avoidance: Helps in avoiding the lengthy probate process, ensuring a smoother and quicker transfer of assets.
Examples of Marital Trusts in Practice
Consider a scenario where John and Jane, a married couple, establish an AB Trust. Upon John’s death, the trust splits into Trust A and Trust B:
- Trust A holds assets that provide for Jane during her lifetime.
- Trust B shelters a portion of assets from estate taxes.
Alternatively, if John had opted for a QTIP Trust, Jane would receive income from the trust’s assets for her lifetime, but the trust’s principal would eventually pass according to John’s specified instructions after Jane’s death.
Historical Context
The concept of Marital Trust has evolved significantly to accommodate changes in tax laws and estate planning strategies. The Economic Recovery Tax Act of 1981 (ERTA) introduced the unlimited marital deduction, making the use of marital trusts more advantageous by allowing deferral of estate taxes until the second spouse’s death.
Applicability of Marital Trusts
Marital Trusts are particularly applicable in situations where:
- Estate tax minimization is a priority.
- The grantor wishes to ensure the surviving spouse’s long-term financial security.
- There is a need to provide for children from a previous marriage while still caring for the current spouse.
- The estate includes significant assets that require careful management and distribution.
Comparison with Other Trusts
- Revocable Trust: Can be altered or revoked by the grantor during their lifetime and provides flexibility but does not offer the same tax benefits.
- Irrevocable Trust: Provides more robust estate tax savings but cannot be altered after creation.
- Living Trust: Established during the grantor’s lifetime, primarily to avoid probate and manage assets during incapacitation.
Related Terms
- Estate Planning: Preparing for the management and disposal of a person’s estate during their life and after death.
- Bypass Trust: A trust designed to pass assets to beneficiaries other than the surviving spouse, often used in conjunction with a marital trust.
- Probate: The legal process through which a deceased person’s will is verified and executed.
FAQs
What happens to a marital trust when the surviving spouse dies?
Can a marital trust be revoked or altered?
What are the tax advantages of a marital trust?
References
- Economic Recovery Tax Act of 1981 (ERTA)
- Internal Revenue Code Section 2056: Marital Deduction.
- “Estate Planning Basics” by Denis Clifford, 10th Edition.
- American Bar Association: Estate Planning Resources.
Summary
A Marital Trust is a critical tool in estate planning, crafted to secure the financial future of the surviving spouse while offering tax advantages and flexible asset control. By understanding the different types and their specific applications, individuals can create a strategic plan to ensure their loved ones are well-protected and their legacy is preserved.
