Marital Trusts

A marital trust can help a married couple seeking to protect their family’s wealth and facilitate inheritances for their children and grandchildren. However, developing a marital trust tailored to your circumstances and goals that complies with applicable estate and tax laws requires a careful legal approach. Let a Washington estate planning lawyer from ELG Estate Planning help you determine whether you and your spouse need a marital trust and incorporate it into your family’s estate plan. Contact us today for an initial case evaluation to discuss your situation and legal options.

What Is a Marital Trust?

A marital trust is a type of trust in which a married couple places their family’s assets. The trust assets will pass tax-free to a surviving spouse upon the other spouse’s death by leveraging estate tax exemptions. Marital trusts may allow the surviving spouse to use and enjoy the marital property during their life before passing those assets to designated beneficiaries like children and grandchildren.

When spouses create a marital trust, they become the grantor or settlor of the trust. Grantors determine the initial terms of the trust document, which designates one or more individuals or organizations to serve as a trustee or successor trustee. Trustees manage the trust’s assets per the terms and scope of authority established in the trust document. The trust pays income or principal from trust assets to one or more designated beneficiaries per the trust’s terms.

Married couples can use marital trusts to leverage estate tax exemptions to preserve family wealth as one spouse predeceases the other. These trusts also allow couples to pass inheritances to children or grandchildren without the need for probate. Couples with children from prior marriages or relationships may also use marital trusts to ensure their children and grandchildren receive inheritances and avoid potential conflicts between the sides of a blended family after spouses pass away.

Types of Marital Trusts

Some of the most common forms of marital trust include:

Qualified Terminable Interest Property (QTIP) Trust – QTIP trusts represent one of the most commonly used marital trusts, especially in marriages involving blended families. In a QTIP trust, the surviving spouse serves as the initial beneficiary, receiving income from the trust. However, the grantor can designate successor beneficiaries, such as children from a prior relationship or marriage.
Bypass Trust (A/B Trust) – A bypass trust structure leverages a married couple’s estate tax exemptions. This strategy involves two separate trusts created after the death of one spouse. The deceased spouse’s portion of the marital estate goes into a B or bypass trust, an irrevocable trust that passes to beneficiaries other than the surviving spouse, such as the couple’s children or grandchildren. The surviving spouse may sometimes receive income from the B trust. Their portion of the marital estate and, in some instances, assets from the deceased spouse’s portion over the federal estate tax exclusion limit go into an A trust in which the surviving spouse has full use and control. Both trusts pass their assets to the named successor beneficiaries when the surviving spouse passes.
Power of Appointment Trust – In a power of appointment trust, a grantor gives the beneficiary or beneficiaries the power to change the trust in various ways. A grantor may provide a general power of appointment, which allows a beneficiary to change the trust however they see fit, or a limited power of appointment, which restricts the beneficiary’s authority to change the trust.
Estate Trust – Also called a marital deduction or testamentary trust, an estate trust can provide an alternative to other types of marital trusts. It is an irrevocable trust created by a person’s will that manages the deceased spouse’s assets and distributes income and principal from those assets.

Benefits of Marital Trusts

Marital trusts can offer couples various legal and financial benefits, such as:

Tax Advantages – Marital trusts use the federal “marital deduction rule” to enable spouses to pass marital assets to one another tax-free when one spouse passes away. Couples may also structure trusts to leverage their estate tax exemptions fully.
Managing Family Dynamics – For blended families, marital trusts can help couples manage their assets while avoiding potential disputes between both sides of the family. Couples can use marital trusts to ensure that children from prior marriages and relationships receive their inheritances as intended.
Asset Protection – Depending on how a couple structures their marital trust, the trust may also protect the family’s wealth from creditors and other liabilities.
Securing Resources for Long-Term Care – Couples can structure their marital trust to ensure that the couple or a surviving spouse has the financial resources to afford long-term care in their final years.

Considerations When Setting Up a Marital Trust

Couples should keep various considerations in mind as they structure their marital trusts, including:

Trustee Selection – Couples should consider who will serve as the trustee of their marital trust, including deciding between selecting a family member or hiring a professional trustee (which can increase administration expenses). They should also determine the scope of the trustee’s duties and authority.
Funding the Trust – Spouses must determine what assets they wish to put in their marital trust, such as business interests, investments, or real estate. Identifying the assets to fund the trust may also depend on family dynamics, such as whether a couple has a blended family that can raise concerns about keeping each family’s wealth separate from the other.
Legal and Tax Concerns – Couples must ensure their trust structure complies with applicable state and federal estate and tax laws. Working with an experienced estate planning attorney can help couples create a valid trust tailored to their needs and goals. An estate planning lawyer can also help couples revise their marital trust and estate plan in response to changing family circumstances or new tax laws.

Tax Implications of a Marital Testamentary Trust

Marital testamentary trusts allow spouses to preserve more of their estate tax exemptions at the federal and state levels by passing assets from a deceased spouse to a surviving spouse through a trust. Marital trusts use the unlimited marital deduction, which enables one spouse to transfer an unlimited amount of assets to their surviving spouse upon death. Thus, marital trusts can delay estate taxes on a couple’s assets until the surviving spouse’s death. Furthermore, a surviving spouse can “capture” and use the unused portion of their deceased spouse’s estate tax exemption when the surviving spouse passes away.

Furthermore, passing assets through certain types of marital trusts, such as a QTIP trust, allows families to take advantage of not just one but a second “step-up in basis.” Initially, the first step up occurs when an asset passes to a surviving spouse through a marital trust, the surviving spouse inherits the asset at the value on the date of their spouse’s death. For example, suppose a spouse purchased a property for $200,000. When the spouse passes away, they pass that property—which has appreciated to $500,000—to their surviving spouse. In this case, if the surviving spouse immediately sells the property after their spouse’s death, they have a $500,000 basis in the property for capital gains tax purposes, which means the surviving spouse may not owe capital gains taxes upon selling the property. A second step up in basis may occur on the death of the second spouse, depending on tax elections made, thus reducing capital gains taxes on sale of assets held in the trust.

Challenges and Complexities of Marital Trusts

Various challenges and complexities can arise when couples structure and manage marital trusts. For example, marital trusts may generate personal and legal conflicts among children and grandchildren named as beneficiaries, especially in blended families. Families must also remain aware of the potential for mismanagement by trustees, which can dissipate family wealth. Couples may also face challenges in ensuring adequate funding for their marital trust to avoid situations where the trust cannot meet its obligations to the ultimate beneficiaries.

How Can an Attorney Help?

An experienced trust lawyer from ELG Estate Planning can help you and your spouse evaluate the suitability of a marital trust and create a trust tailored to your estate planning needs and goals by:

Having a detailed discussion about your family’s circumstances and your concerns, wishes, and objectives
Identifying the trust structure best suited to achieve your estate planning goals
Explaining the benefits and potential pitfalls of marital trusts
Working with you to structure your trust, including choosing a trustee or successor trustees
Drafting and helping you execute the trust document and other legal paperwork necessary to fund the trust, such as retitling of assets or changing ownership designations
Advising you down the road as you review your estate plan and make changes to reflect new laws or altered family circumstances

Contact Our Firm to Discuss Your Options

When you and your spouse are considering establishing a marital trust, talk to an experienced estate planning lawyer about the suitability of such a trust for your needs and goals. Contact ELG Estate Planning today for a confidential consultation with our legal team serving Spokane, Tri-Cities, and Seattle to learn more about marital trusts and discuss your options for incorporating a trust into your and your spouse’s estate plan.

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