What is a Marital Trust and How Does it Work?

Estate planning presents a delicate balancing act for many American families as they navigate the complexities of wealth transfer between generations. As diverse family structures become increasingly common and investment portfolios grow more sophisticated, couples often face the challenge of providing financial security for a surviving spouse while maintaining control over how assets are ultimately distributed to specific beneficiaries. This fundamental tension requires thoughtful planning strategies that can accommodate seemingly competing priorities without requiring extensive legal expertise.

Marital trusts offer a strategic solution to this planning dilemma, providing lifetime financial support for a surviving spouse while preserving the original asset owner’s intentions for eventual distribution. These specialized trust arrangements can substantially reduce estate tax burdens while simultaneously protecting family wealth from potential creditors or claims that might arise from future relationships. Understanding what a marital trust is and how it functions represents an essential step toward creating a comprehensive estate plan that balances immediate family needs with long term financial goals.

What is a marital trust?

A marital trust, also known as a marital deduction trust, is a trust set up by an individual to provide for their surviving spouse upon their death. It also allows the spouse establishing the trust, the settlor, to specify how the assets should be distributed after the death of the surviving spouse.

In addition to ensuring that the surviving spouse is financially provided for, the marital trust is also used by couples to avoid lengthy probate proceedings, reduce or eliminate estate taxes, and protect family wealth. This type of trust is often used by couples who have children from a prior marriage or who intentionally want to place certain limits on the use of the assets by the surviving spouse to ensure the assets last longer to protect the surviving spouse or the interests of future beneficiaries.

A marital trust can be one of the most effective estate planning strategies for couples who wish to take advantage of the unlimited marital deduction and pass on a greater share of their wealth by combining their estate and gift tax exemptions.

How does a marital trust work?

When setting up a marital trust, one of the spouses establishes the trust and names their surviving spouse as the beneficiary. The trust can be funded with cash, investments, or tangible property and comes into effect when the creator of the trust dies. At this point, the assets are transferred to the surviving spouse who has the right to the trust income for the rest of their life. Because of the unlimited marital deduction, the surviving spouse will not be subject to any estate taxes at the time of this transfer.

The surviving spouse will start receiving income from the trust as outlined in the trust by the settlor. Depending on the terms of the trust, the surviving spouse may also have access to the trust principal. If the settlor gives the surviving spouse a power of appointment, the surviving spouse may be able to instruct the trustee to transfer trust assets based on their needs or wishes, subject to the terms of the trust.

Upon the death of the surviving spouse, the remaining assets in the trust go to the remaining beneficiaries named in the trust such as children, grandchildren, charity, or other beneficiaries. The assets in the trust aremight now be subject to estate taxes, and estate tax may be due depending on the value of the assets at death and whether the second spouse has used up all of their estate and gift tax exemption. This is where it’s important for the spouses to plan ahead so they can take advantage of the portability election provision to allow the surviving spouse to receive any unused exemption from the deceased spouse combine their exemptions and potentially shield up to $25.84 from estate taxes in 2023.

Marital trust requirements

Setting up a marital trust involves several key steps to ensure the trust is legally valid and achieves its intended purpose. It’s advisable to enlist the help of an estate planning attorney to help you set up the trust agreement in accordance with your state’s guidelines. You can also use estate planning software to draft the initial trust documents and then execute them with an estate planning attorney.

In creating a marital trust, the settlor must outline the terms and conditions of the trust, how it will be funded, how income and principal will be distributed, and who the ultimate beneficiaries will be. In order for the marital trust to effectively preserve the unlimited marital deduction, the surviving spouse must be named as the beneficiary of the trust for their lifetime.

The settlor must also name a trustee or trustees to manage or distribute the trust assets. The trustee can include the surviving spouse, another family member, or a professional trustee who will administer the assets based on the terms and conditions established by the settlor.

Marital trusts come in various types, each serving a specific purpose and each with its own requirements and nuances. Some of these trusts can include QTIPs, QDOTs, SLATs, and general power of appointment trusts. The marital trust (also known as an “A” trust) can also be combined with a Bypass trust (“B” trust) to create an AB trust.

Is a marital trust revocable or irrevocable?

A marital trust is an irrevocable trust, meaning that once it’s created, its terms and conditions cannot be easily amended or revoked by the person who created the trust. Making any changes to the trust might be subject to consent of the beneficiaries and, in some cases, court approval. 

While a marital trust is irrevocable, the settlor can include a power of appointment clause so that the surviving spouse can modify the trust terms in accordance with the guidelines set by the settlor. With a general power of appointment, the appointor (the surviving spouse in this case) can choose any person or entity, including themselves, as the recipient of the assets. Under a limited power of appointment, the appointor can only appoint the assets to a specified group of individuals or entities, such as the descendants of the appointor, a particular family member, or a charitable organization.

What’s the difference between a marital trust vs a family trust?

While the marital trust is designed specifically to protect the surviving spouse by naming them as the beneficiary of the trust after the settlor dies, the beneficiaries of a family trust can include the settlor, the settlor’s spouse, children, grandchildren, and other family members.

Family trusts can be used for a variety of purposes, including avoiding probate, providing for minor or incapacitated family members, and managing family wealth. Marital trusts, on the other hand, are often used to care for the surviving spouse and take advantage of the marital deduction for estate tax purposes. While a marital trust is typically irrevocable, a family trust can be either revocable or irrevocable.

Who is entitled to marital trust income distributions?

In order to preserve the unlimited marital deduction, only the surviving spouse is entitled to receive income distributions from the trust after the settlor’s death. Once the surviving spouse dies, the marital trust then passes onto other beneficiaries. The terms of the trust will then dictate how the beneficiaries will receive the income or principal from the trust.

Easily create marital trusts for clients

Marital trusts provide valuable benefits that make them worth considering in your estate plan. The unlimited marital deduction allows assets to transfer to your surviving spouse without triggering estate taxes. These trusts also shield assets from potential creditors while giving you control over how your wealth is distributed after both spouses have passed away. This combination of tax benefits, protection, and control helps preserve family wealth for future generations.

Setting up a marital trust does involve certain challenges to consider. Once established, these trusts are generally irrevocable, meaning the terms cannot be easily changed later. The various types available such as QTIP trusts, QDOTs, and others each have specific requirements that must align with your particular situation. Given these complexities, working with qualified estate planning attorneys and financial advisors is essential to create a trust that achieves your goals.

Financial advisors looking to improve their estate planning services for clients can benefit from Vanilla’s estate planning software. The platform makes creating and managing complex trust arrangements more straightforward, allowing advisors to efficiently generate tailored estate plans that meet each client’s specific needs. By automating document preparation and providing clear visual tools to explain trust structures, Vanilla helps advisors save time while improving accuracy across client portfolios. Adding Vanilla to their practice allows financial advisors to enhance client service, showcase their expertise in sophisticated wealth transfer strategies, and strengthen their position as trusted advisors in an increasingly competitive field.