A marital trust (also known as a marital deduction trust) takes advantage of provisions within the federal estate tax laws that allow for property to pass from a decedent (someone who has died) to a surviving spouse without being taxed.
Instead, the property is deductable from the taxable estate of the decedent. This is known as a marital deduction. The marital deduction is unlimited in amount.
There are a few types of trusts and provisions that qualify as marital trusts. Read more about them to decide which arrangement will work best for your estate:
The credit shelter trust is the most common type of marital trust.
Under a credit shelter trust (also called an AB trust), when the first spouse dies, the trust is split into two separate trusts: Trust A (sometimes known as the Family Trust) will contain the property of the first spouse to die, and Trust B will hold the property of the surviving spouse.
When the first spouse dies, the property in Trust A technically goes to named beneficiaries. However, the surviving spouse usually retains the right to use the property for life. When the surviving spouse dies, the property in Trust B passes to the beneficiaries.
This technique reduces the likelihood that the surviving spouse’s estate will be taxable, because their trust (trust B) only contains part of the original estate, but they still retain the right to use the property in trust A.
A qualified terminable interest property (QTIP) trust allows the decedent to transfer the entire principal of the trust to someone besides the surviving spouse, but gives the spouse all the income from the trust for life.
These types of trusts are most often used by people in a second marriage. If a husband has children from a previous marriage, and wants the property from his estate to pass to those children when he dies, but also desires to ensure that his surviving spouse will benefit from the estate for the rest of her life, then this type of trust may be appropriate.
Although the trust is created before the death of the settlor (the person who created the trust), the trust only qualifies as a QTIP trust if the surviving spouse decides to treat the property as qualified terminable interest property on their estate tax return (which qualifies for the marital deduction).
The settlor can also qualify for the marital deduction by leaving the residue of their estate in trust to their surviving spouse, who will benefit from any income generated by the trust, and will, upon death, distribute the principal of the trust to the beneficiaries named in the surviving spouse’s will.
This arrangement is created by a provision in the will of the decedent. It gives the surviving spouse power of appointment: the authority to dispose of property listed in the will as they see fit.
A life estate with power of appointment is a simpler arrangement than a QTIP trust or a credit shelter trust, but it gives the settlor less control over which beneficiaries will ultimately receive their estate, and it doesn’t carry some of the tax advantages of a credit shelter trust.
One can also make use of the marital deduction by placing a simple distribution outright clause in their living trust, which will allow for the surviving spouse to gain full access to (and full control of) all property within the trust upon the death of the settlor.
However, the transferred property, being within the surviving spouse’s estate, could be subject to probate, and fully taxable, once the surviving spouse dies. This is also not a preferable method of transfer for those who want their surviving spouse to gain the benefit of their estate, but not control over it.
To qualify for the marital deduction, a marital trust must meet specific requirements found in the Internal Revenue Code. Please consult with an estate planner or a tax professional to decide what course of action is right for you.
If you live in Michigan and need experienced estate planning help, contact Michael Einheuser for a free consultation. Michael helps families in Bingham Farms, Troy, Farmington Hills, Rochester Hills, Southfield, West Bloomfield Township, Bloomfield Township, and the surrounding Michigan areas.
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