A trust is a legal document that outlines how assets can be used and who benefits from them. Trusts come in many different varieties, depending on the goals and objectives to be achieved. In this article we will discuss Marital Trusts and how they may benefit your family.

What is a Marital Trust?

A Marital Trust directs that certain assets fund a trust for the grantor’s spouse upon the grantor’s death. Usually, these provisions appear in the original trust document that managed the assets during the grantor’s life. These rules take effect upon the grantor’s death.

Why might you consider a Marital Trust?

The marital tax deduction lets assets pass to a grantor’s spouse tax-free. The grantor can use the unlimited marital deduction for assets transferred to a Marital Trust, just as if they were transferred directly to the spouse. This applies only if the Marital Trust meets certain requirements or provides certain benefits to the spouse.

Second, transferring assets to a Marital Trust allows the grantor to exclude these assets from his or her estate for estate tax purposes while still maintaining control of the ultimate distribution of assets upon the death of their surviving spouse, so long as the spouse receives certain benefits from the trust during his or her life.

How to Qualify as a Marital Trust

We’ll review two types of trusts known as “Marital Trusts.” Both qualify for the unlimited marital deduction, allowing you to defer estate tax until your spouse’s death. These trusts are similar but give your spouse varying levels of control. Before diving into the details, let’s outline a few useful terms.

• Principal: The original assets or growth in the value of those assets (ex., land/property, stocks, cash received from selling an asset).
• Income: The earnings on the principal assets of the trust (ex., rent, interest, and dividends, partnership profits).

» Power of Appointment: The authority to choose who receives the assets from the trust. These powers can be limited to (i) certain persons or classes of persons; (ii) triggering events for making the election (ex., death); and (iii) the method for exercising the power (ex., by Will only). A general power of appointment is exercisable in favor of anyone, including the power holder themselves or their creditors.

We will call the first option the “Appointment Trust.” To qualify for the unlimited marital deduction, an Appointment Trust must meet four requirements:

1. The spouse must be able to receive all income at least once a year.
2. The spouse must have the power to direct the trustee to make the assets income-producing.
3. The spouse must be the only beneficiary during their lifetime.
4. The spouse must have the right, during life or at death, to appoint the assets to anyone, including themselves or their creditors (a general power of appointment).

The second Marital Trust is the QTIP Trust. QTIP stands for qualified terminable interest property. A terminable interest is simply a right in property that terminates upon a specific triggering event or condition. In this case, that event is the death of the surviving spouse.

A QTIP has the same first three requirements as the Appointment Trust (all income annually, power to direct assets to produce income, spouse as the only lifetime beneficiary), but does not include the general power of appointment. Instead, the grantor has identified the persons or entities who will receive the assets or benefit from them.

Both of these Marital Trusts allow the grantor to receive an unlimited marital deduction, but the QTIP also allows the grantor to control the ultimate recipients of the trust assets, making it a popular choice among grantors who need to provide additional guidance to the trustee regarding the final disposition of their assets.

The Marital Trust is a reliable, proven option for protecting your legacy. It is available to estates of all sizes, though those with taxable estates (over $15,000,000) may especially benefit.

As always, reach out to your attorney, CPA, or trust advisor to discuss how these options may support your estate goals.