What is a marital trust and what does it accomplish?

| Dec 17, 2014 | Trusts |

One of the key goals of estate planning for many Michigan residents is tax planning and providing for their relatives and heirs. People want to figure out the best way to set up their wills and inheritances so that the maximum amount possible of the estate is preserved for heirs and beneficiaries instead of going toward taxes. Trusts can be a very valuable tool for tax planning and estate planning purposes.

One particular kind of trust is called a marital trust. One of the most attractive and useful features of a marital trust is that it allows the transfer or passing of property into the marital trust upon a person’s death and the property transferred to the trust benefits from the federal estate tax marital deduction. Regardless of the type of marital trusts, however, the value of the trust’s assets is included in the estate of the surviving spouse benefitting from the trust. This means that transferring or bequeathing property and assets to a marital trust only defers the estate tax but does not fully eliminate it.

There are basically three different forms of marital trusts: a general power of appointment marital trust, a qualified terminable interest property trust and an estate trust. A general power of appointment marital trust and a qualified terminable interest property trust are similar in that they both are created to solely benefit the surviving spouse during the duration of his or her lifetime and provide the surviving spouse with an income interest for life. The difference between these two forms is primarily that the general power of appointment trust can–in addition to the income interest for life–also give the spouse a power of appointment (either inter vivos or testamentary) that is in favor of the spouse or the spouse’s estate.

An estate trust differs from the first two forms because its use is to provide distributions–according to discretion–during the surviving spouse’s lifetime. After the death of that surviving spouse, the remaining part of the trust passes to that spouse’s estate. This means that the original creator of the trust will be unable to control what ultimately happens to the trust upon the surviving spouse’s death because at that point the trust will pass to the surviving spouse’s estate and not be subject to the creator’s wishes any longer.

Source: Colorado Bar Association, “Funding Marital Trusts,” accessed on Dec. 15, 2014