Understanding Marital Trusts for Your Financial Planning
Are you planning to secure the financial well-being of your spouse while reducing your estate tax burden? Look no further than a marital trust.
This legal entity allows you to manage assets in a way that maximizes the benefits to your beneficiaries. Let’s dive into the details of what a marital trust can do for you.
What is a Marital Trust?
Simply put, a marital trust is a legal entity created by a trustor to hold assets for the benefit of their spouse.
The beneficiary of the trust is usually the spouse, though it can include other beneficiaries as well. This trust can help preserve assets, protect them from creditors, minimize taxes, and avoid probate.
It can also shift the income tax burden to a lower tax bracket and provide a support fund for your spouse.
The Four Terms Associated with Trusts:
- Trustor: The person who creates the trust
- Grantor: The person who funds the trust with their assets
- Settlor: The person who sets up the trust and provides instructions
- Trustee: The person or entity in charge of managing the trust’s investments
- Beneficiary: The person or people who benefit from the trusts assets
Marital Trust vs. Family Trust:
The primary difference between a marital trust and a family trust is the establishment point. A marital trust is established when the trustor passes away, while a family trust is established during the trustor’s lifetime.
Marital trusts are often established to reduce the estate tax burden on surviving spouses, while family trusts are used for ongoing asset protection and estate planning purposes.
Marital Trust Working Process:
To create a marital trust, the trustor must first list all their assets to determine the value of their estate.
They may also want to take advantage of available tax exemptions or transfer some of the trust’s investments to their spouse. Additionally, the trustor may grant their spouse a general power of appointment, which allows them to have some control over the trust’s assets.
For those with children from previous marriages, a marital trust can also provide a way to ensure that their assets pass to their current spouse while still providing for their children.
Pros and Cons of Marital Trusts:
Pros:
- Double Estate Tax Exemption: A marital trust allows for both spouses’ estate tax exemptions to be utilized, reducing the total amount of estate taxes owed upon the death of the second spouse.
- Asset Protection: Marital trusts can protect assets from creditors or lawsuits, ensuring that they pass to the intended beneficiaries.
- Financial Stability: A marital trust can provide a stable source of income for the surviving spouse.
- All Assets Go to Family: Because the trust is designed to provide for the spouse and any other beneficiaries, it ensures that all the assets will be distributed to those intended by the trustor.
- Stability for Beneficiaries: A marital trust ensures that beneficiaries receive a stable source of income, even if their spouse passes away.
Cons:
- Inability to Change Irrevocable Trust: Once a marital trust is established, it’s difficult, if not impossible, to change or revoke. This means that the trustor loses control over their assets.
- Loss of Asset Control: The trustor cannot control the assets held within the trust, which can be frustrating for some.
- Limited Estate Tax Exemptions: While a marital trust can reduce estate taxes, the trustor’s own estate tax exemption is still limited.
- Loss of Income Rights: The trustor may lose some income rights to their assets, which can be problematic for those who rely on those assets for retirement income.
- Inability to Take Back Control: Once the trustor sets the trust in motion, they can’t take the assets back or change the terms of the trust.
Creating a Marital Trust:
Creating a marital trust requires confidentiality, continuity, and the help of an estate planner and CPA. Together, these professionals can draft a trust document that meets the trustor’s goals and objectives.
It may be established as an irrevocable trust, which offers more asset protection but less flexibility than a revocable trust. The type of marital trust you choose will depend on your specific needs and objectives.
Types of Marital Trusts:
- Revocable trusts: These trusts can change or revoke during the trustor’s lifetime, giving greater flexibility.
- Irrevocable trusts: These trusts cannot be changed or revoked, but they offer greater asset protection.
- Testamentary trusts: These trusts are established upon the trustor’s death and are designed to distribute assets to the surviving spouse or other beneficiaries.
- Inter-vivos trusts: These trusts are established during the trustor’s lifetime and are used to distribute assets to the trustor’s spouse or other beneficiaries.
- AB trusts: These trusts are designed to maximize the use of estate tax exemptions by splitting assets between two trusts.
- ABC trusts: These trusts are a variation of AB trusts and are used to eliminate estate taxes upon the second spouse’s death.
In conclusion, a marital trust is a legal entity that can help you secure your spouse’s financial future while reducing your estate tax burden. With careful planning, it can also provide asset protection and support for your family.
Speak to an estate planner and CPA to determine the right type of trust for your needs.
Benefits of Marital Trusts:
Marital trusts have become a popularly recognized legal tool for effective estate planning, not only for reasons of reducing the estate tax burden, but for reasons of asset protection, succession planning and preservation of families wealth and history.
A primary benefit of a marital trust is that it can help to quadruple the tax exemption available to the trustor, thereby reducing the amount of estate taxes owed upon the death of the second spouse. This benefit promotes ensuring that every penny earned or saved stays within the family unit rather than depleting a vast amount on taxes.
A marital trust also comes with the advantage of preserving the trustor’s fortune within the family. This idea of family legacy preservation is a trend that reflects how today’s society values a strong, stable family unit and the ability to pass wealth and tradition from one generation to the next.
The trustor can also ensure provision for their surviving spouse and children well into the future with a marital trust, which allows for income to be disbursed regularly in the form of interest and principal payments. This is important for those with a preference for the administration of their estate to occur long after they pass.
Precautions in Establishing Marital Trusts:
When creating a marital trust, caution must be taken and careful planning in terms of asset and tax planning must be made with the collaboration of a suitable estate planner and CPA. The choice to create a marital trust comes with a range of risks, such as the loss of the trustor’s control over their assets and income rights.
The choice to establish an irrevocable trust, for example, is a complex and crucial decision that cannot easily be undone in the future. Therefore, having ongoing communication with an estate planner and CPA is fundamental to preventing missteps and the risk of substantial financial loss due to poorly managed trusts.
Also important, the trustor must think carefully about the terms of the trust, explaining what they want to happen to their assets upon their death. Choosing the right trustee is also critical.
The trustee will be responsible for managing the trust’s assets and ensuring they are distributed according to the trust’s instructions. Finally, understanding and complying with the legal and tax regulations is also important to successfully and efficiently create the marital trust.
Tax regulations and laws controlling trusts are often complicated and murky, so it’s vital to obtain professional guidance from an experienced estate planner and CPA.
In conclusion, the benefits of a marital trust cannot be overemphasized, in terms of protecting assets, minimizing taxes, supporting the surviving spouse and family, and maintaining family legacy.
However, because creating the marital trust presents risks, the trustor must be careful throughout the process. Having competent and experienced estate planners and CPAs to guide and oversee dealings through every critical point is necessary for realizing the full benefits of this tool and achieving the full breadth of the trustor’s intentions.
The use of marital trusts is indeed a crucial tool for effective estate planning, asset protection, succession planning, and wealth preservation. Marital trusts come with a host of benefits, including reducing the estate tax burden, preserving wealth within the family, providing for the surviving spouse and children, and maintaining a family legacy.
However, it is important to establish these trusts carefully. Engaging competent and experienced estate planners and CPAs is fundamental to successfully creating, administering, and managing the trust.
With this tool, it is possible to ensure that every penny earned or saved stays within the family unit and becomes available for future generations.
