Understanding The Marital Trust
Nothing is more confusing to an estate planning client than the Marital Trust. To understand the Marital Trust requires stepping back in time.
History of the Unlimited Marital Deduction
In 1976, my grandfather passed away suddenly. I can still see my grandmother’s tears and look of anguish as we approached the farmhouse door. Then later, her look of bewilderment as she wrote a check to the IRS to pay estate tax on my grandfather’s property passing to her, his spouse. Shortly after, Congress decided that perhaps a surviving spouse should not have to pay estate tax. Congress created the unlimited marital deduction.
Since then, property passing outright to a surviving spouse who is also a U.S. Citizen is not subject to federal estate tax. The important word is “outright”. A gift in trust did not qualify because a gift in trust is not an outright gift. Spouses wanted the ability to pass property on to the surviving spouse but do so in trust and still get the unlimited marital deduction (no estate tax). Reasons included wanting professional money management, creditor protection, and control over the ultimate beneficiary when the second spouse died.
Marital Trust Created
Congress passed additional laws allowing the unlimited marital deduction for a gift in trust so long as the surviving spouse agreed to have the property taxed at their death as part of their estate. The Marital Trust was one of two trusts created when the first spouse died. One trust being the estate tax planning trust (often called the Family Trust) and the other being the Marital Trust.
In the early 1990’s, the exemption from federal estate taxes was $600,000. Assuming a deceased spouse with assets of $1,000,000 and a tax planning estate plan, the first $600,000 was directed into the Family Trust using up the deceased spouse’s exemption and the remaining $400,000 directed to the Marital Trust. In most cases, the surviving spouse was the primary beneficiary of both trusts, and both trusts had very liberal distribution options. Keep in mind that the surviving spouse’s separate property and their half of any joint property is in addition to the deceased spouse’s $1,000,000. None of the surviving spouse’s property goes into either the Family Trust or the Marital Trust.
Marital Trust – Family Trust Confusion
Clients had difficulty understanding the Marital Trust. The Marital Trust has very confusing, bassackwards language dividing the deceased spouse’s estate into the Family Trust and Marital Trust, complicated language about how distributions are made, and mandatory, mind-numbing IRS language in order for the Marital Trust to qualify for the unlimited marital deduction.
In most cases, the Family Trust was never fully funded, and no property was available to fund the Marital Trust. Opting for simple over complex, we began drafting estate plans that only created the Family Trust upon the first death and then an outright gift to the surviving spouse of anything in excess of the deceased spouse’s exemption from federal estate tax. And so did other estate planners.
Fast Forward to Today
Fast forward from the 1990’s to today. While we still subscribe to simple over complex, the estate tax exemption is in flux and we have more clients with assets in the $5,000,00+ category. When the client’s goal is to provide for the surviving spouse but control who gets the property when the second spouse dies, we may include the Marital Trust. In a joint trust plan (one trust for both spouses), two additional trusts are created upon the death of the first spouse to die – a Family Trust (tax planning trust) and a Marital Trust. At this point there are three trusts – Family
Trust, Marital Trust, and Survivor’s Trust. For administrative purposes we identify the surviving spouse’s property as the Survivor’s Trust, but this is the original joint trust using the original joint trust name.
Factors we consider when adding a Marital Trust are the uncertainty about the exemption from estate tax, the married couple’s net worth, and a spouse’s desire to ensure their children get any remaining property. For those reasons, we may recommend a plan containing a Marital Trust. And as a result, I find myself back in the 1990s with intelligent clients who are understandably confused by the written document.
