Marital Trust

What is a Marital Trust?

You really never know someone until you share an inheritance with them.

In this section from his book, “Pankauski’s Probate Litigation: Top 10 Estate Mistakes Revealed”, John Pankauski explains.

Mistake: putting your last spouse and your other beneficiaries in the same trust

If marital trusts were written as a piece of legislation by Congress, instead of a document written by a trust lawyer, the title would be: The Probate Litigators’ Full Employment Act.

What is a marital trust?

The marital trust is a trust which is typically created for the benefit of a surviving spouse and other family members. For example, the typical marital trust may provide for all the income to be distributed to the surviving spouse during his or her lifetime. The trustee may also distribute trust principal and make distributions of money or property to, or for the benefit of, the surviving spouse (widow), during the surviving spouse’s lifetime.

In this example, the marital trust doesn’t permit distributions to anyone but the surviving spouse during his or her lifetime. After the death of the surviving spouse, if there is any money left in the trust, the residue – or trust remainder – “goes to” the trust creator’s children, heirs, or other beneficiaries.

So, in Palm Beach, a wealthy 70-year-old gentleman might create a marital trust upon his demise. That marital trust would provide income and principal distributions to his 35-year-old third spouse, with the trust remainder going to his 40-year-old son from his first marriage, after the death of the 35-year-old, third spouse.

If this doesn’t fit the definition of a “Palm Beach marriage,” nothing does, right? It also might as well be called a “Palm Beach marital trust.”

Why anyone would want to place adult children from a prior relationship in a trust with someone’s latest spouse is beyond me. Why make these people beneficiaries of the same trust?

In our Palm Beach example, you’ve probably recognized that the much younger, third spouse’s life expectancy is statistically greater than the 40-year-old adult son’s (from the prior marriage).

Ok – so, let’s replace the 35-year-old third spouse with a second spouse who is 60. You’ll still usually hit the same problems or challenges.

Years ago, when the amount of money that one could leave, free of the US estate tax, was significantly smaller,

Marital trusts were much more important. In fact, marital deduction planning was an important sub-specialty of the estate planning world. Marital trusts were created to take advantage of a big estate tax deduction known as the “marital deduction.”

Why?

This was because married couples who planned their estates together could avoid – or, rather, defer – paying an estate tax on the death of the first spouse to die by creating a certain type of marital trust.

Since the passage of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, and the 2013 American Taxpayer Relief Act – both major tax laws – marital trusts have become less important from a tax planning perspective and more of a device to avoid.

Why?

Now, a married couple who plans their estates together can give away up to $10 Million free of the US estate tax. Even if you don’t plan your estate with your spouse, saving US estate taxes is easier than ever before. You don’t need marital trusts like you used to.

Also, because people fight over money when you’re gone…

…you never really know someone until you share a trust with them.

Today, since you can leave $5.4 Million free of the US estate tax, marital deduction planning has simply been rendered a moot issue for estates smaller than $5 million.

This means that you don’t necessarily have to throw beneficiaries together into a marital trust. In fact, trust litigators might tell you to keep your family members and their inheritances or trusts separate. You can create separate trusts for separate beneficiaries or simply leave an inheritance to beneficiaries outright, directly, and without a trust.