What is the Purpose of a Marital Trust?
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Passing assets to your spouse and children with a marital trust.
What Is a Family Trust and a Marital Trust? Estate planners use trusts to minimize estate taxes, avoid probate court, reduce court fees, and allow funds to pass more quickly to beneficiaries. Generally, a trust allows a third party to hold onto assets on behalf of a beneficiary through a fiduciary agreement. Many types of trusts vary by purpose and how the trust’s creator intends for its funds to be used.
What is the Purpose of a Marital Trust?
The Marital Trust shelters the assets from the surviving spouse’s creditors and future spouses. The Bypass Trust can also be crafted to ensure that the property passes to the deceased spouse’s children or family at the surviving spouse’s death, keeping them out of the hands of the second husband/wife. Family and marital trusts are two types that allow married couples to care for the surviving spouse and children while preserving the federal estate tax exemption and providing protection from creditors and claims from future spouses. These trusts are often called AB trusts—the marital trust is the “A” trust, and the family trust is the “B” trust.
Federal Estate Tax Exemption
The federal estate tax exemption is an amount that’s subtracted from an estate’s gross value before calculating estate taxes on the remaining amount. The tax exemption amount is adjusted each year for inflation. For example, for 2018, the tax exemption amount is $10 million per person, and the 2018 revised amount is $11.18 million per person.
Before 2011, the exemption amount was applied to each spouse individually. But, beginning in 2011, the tax exemption amount was made portable between married couples. The exemption or any unused amount of the exemption can be transferred from the deceased spouse to the surviving spouse. If you choose to make this election, you must do so on a federal estate tax return.
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The Unlimited Marital Deduction
In the United States, married couples have an unlimited marital deduction. The marital deduction allows the entire estate of the first spouse to die, to pass to the surviving spouse tax-free. If any, the idea is that estate tax is deferred until the surviving spouse’s death. A Marital Trust qualifies for the unlimited marital deduction. The surviving spouse is the sole lifetime beneficiary of the trust and can maintain the right to withdraw income and principal from the trust. The assets in the trust avoid probate on the surviving spouse’s death – but are included in the surviving spouse’s estate.
How a Marital Trust Works
If a married couple chooses to create a martial trust or A trust, they must include the appropriate marital trust language in their will or revocable living trust. The couple divides their assets evenly in their names or the name of the revocable living trust. Do not leave the marital assets in joint accounts, as these assets pass outside the trust.
If one spouse died in 2018, the first $11.18 million would be funded into the family trust or the B trust. If the deceased spouse’s assets exceed $11.18 million, the excess assets fund the marital trust. Any assets above the exemption are not subject to estate taxes until the surviving spouse passes away.
They still have their estate tax exemption when the surviving spouse passes away. The second exemption is then applied to the assets in the marital trust. If any assets exceed the exemption, those assets are taxed as part of the second spouse’s estate – any assets remaining after the tax bill is paid pass to the beneficiaries of the marital trust. The beneficiaries of the marriage trust may be the same or different than those of the family trust.
How a Family Trust Works
Because the assets in the family trust are up to the estate tax exemption of the first spouse, the assets pass to the final beneficiaries free of estate taxes. Depending upon how long the second spouse lives, the assets in the family trust could grow to a significant balance with earnings over time.
Estate planning is complex. To ensure you’re correctly using exemptions and credits, protecting your spouse, and protecting your children or other family members, you may want to hire an online service provider or attorney. Consulting a legal service provider or estate planning attorney helps save you time and gives you peace of mind knowing you’re protecting your loved ones in life and death.