Marital Trust

Key Takeaways

• A marital trust allows assets to pass to a surviving spouse or heirs tax-efficiently.
• The trust enables heirs to avoid probate and reduces estate taxes using the unlimited marital deduction.
• Marital trusts can ensure assets go to children rather than a new spouse if the surviving spouse remarries.
• Types of marital trusts include a general power of appointment, a QTIP trust, and an estate trust.
• A marital trust can be used with a credit shelter trust to minimize estate taxes.
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What Is a Marital Trust?

A marital trust is a legal entity established to pass assets to a surviving spouse and subsequently, to children or grandchildren. The trust is a fiduciary relationship between a trustor and trustee, for the benefit of such heirs and becomes effective at the death of the first spouse. When that happens, their assets are moved into the trust and income generated by the assets goes to the surviving spouse. A marital trust makes it possible for the heirs to pay less in estate taxes and avoid probate court. A general power of appointment, an estate trust, and a QTIP trust are three types of marital trusts.

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Understanding the Functionality of a Marital Trust

A marital trust allows the couple's heirs to avoid probate and take less of a hit from estate taxes by taking full advantage of the unlimited marital deduction—a provision that enables spouses to pass assets to each other without tax consequences.

However, when the surviving spouse dies, the remaining trust assets will be subject to estate taxes. To avoid this situation from playing out, a marital trust is sometimes used in conjunction with a credit shelter trust—also called a "B" trust.

An example of when a marital trust might be used is when a couple has children from a previous marriage and wants to pass all property to the surviving spouse upon death, but also provide for their individual children. Should the surviving spouse remarry, a deceased spouse's assets will then go to their children instead of to the new spouse.

There are three types of marital trusts: a general power of appointment, a qualified terminable interest property (QTIP) trust, and an estate trust.

Important

A martial trust protects the assets and benefits of a surviving spouse and children.

Exploring Other Trust Options

In addition to a marital trust, a family member may set up a personal trust and formally name themselves as the beneficiary. A personal trust can accomplish a variety of objectives for one person or many. For example, it can fund education expenses, meet the special needs of heirs, or allow them to avoid or reduce estate taxes.

Another option is to create a bare trust, a type of trust in which the beneficiary has an absolute right to the capital and assets within the trust, as well as any income generated. While a trustee often oversees the investments within a bare trust, the beneficiary has the final say over how the trust's capital or income is distributed.

An alimony substitution trust, meanwhile, is an agreement in which a divorced person agrees to pay spousal support via a trust’s generated income. With regard to taxation, the ex-spouse responsible for providing payments is not required to pay income taxes on the trust’s income nor qualifies to receive a tax deduction.

Every country has regulations overseeing the types of trust allowed and how they can be structured to distribute wealth and avoid taxes. As an example, the U.S. has an estate tax based on the total estate's value, and Canada has a deemed disposition tax imposed on the estate.