What Is the Purpose of a Marital Deduction Trust?

If you’re married, you may be wondering what happens to your assets once you or your spouse passes. The answer to that question depends on various factors, including whether or not you have a marital trust.

There are numerous benefits for beneficiaries of marital trusts, including asset allocation and tax benefits. An estate planning attorney will be able to determine if they’re the right fit for you, according to a recent article titled “Guide to Marital Trusts” from Forbes.

A marital trust is an irrevocable trust used to transfer a deceased spouse’s assets to the surviving spouse without creating any tax liabilities. Placing the assets in the irrevocable trust also protects assets from creditors and future spouses. When the surviving spouse dies, the assets in the trust are outside of their estate, which means their estate taxes will be lower.

Three parties are involved in creating, managing and distributing a marital trust:

  • Grantor: the person establishing the trust.
  • Trustee: the person managing the trust and the assets it contains.
  • Beneficiary: the person or persons to receive assets in the trust as per directions of the trust.

For a marital trust, the term “principal” is used to refer to assets placed in the trust when it’s established. These may be investment accounts used to generate income for the beneficiary. Real property, retirement accounts and investment accounts may also be placed inside the trust.

A marital trust doubles a couple’s estate tax exemption limit. Estate tax is the federal tax paid on someone’s estate after they die. The federal estate tax exemption is high now, but it won’t always be this high. Therefore, planning for coming years should be done now.

In 2022, the estate tax exemption is $12.06 million. Using a marital trust would increase the exemption to $24.12 million, potentially shielding $24 million of a couple’s net worth.

Let’s say a grantor passes $5 million to a surviving spouse through a marital trust. The surviving spouse will be able to pass an additional $19 million to the couple’s children through the same trust, tax free, because of the marital trust. However, this tax move must be made now before the per spouse exemption drops to roughly $6 million automatically on January 1, 2026.

A marital trust also can provide income to the surviving spouse, tax free. The grantor may set a limit on how much can be withdrawn from the trust, something the couple and their estate planning attorney should discuss when the trust is created. When the surviving spouse passes, the trust is passed on to whomever the first spouse’s will says should get the trust—only a surviving spouse may be the beneficiary of a marital trust.

Why should anyone consider a marital trust? This is a way to ensure individuals outside of the immediate family don’t have access to the family’s wealth.

There are other spousal trusts, including Qualified Terminable Interest Property Trusts (QTIP), bypass trusts and Spousal Lifetime Access Trusts (SLAT). The latter may be a very tax-savvy move right now because it uses your full, current estate tax exemption without “claw-back” when the exemption amount is reduced. Ask your estate planning attorney about this. He or she will help you determine which one is best suited to you and your spouse.

Reference: Forbes (July 10, 2022) “Guide to Marital Trusts”