Marital Trust

What Is a Marital Trust?

A marital trust is a fiduciary relationship between a trustor and trustee for the benefit of a surviving spouse and the married couple's heirs. Also called an "A" trust, a marital trust goes into effect when the first spouse dies.

Assets are moved into the trust upon death and the income that these assets generate go to the surviving spouse—under some arrangements, the surviving spouse can also receive principal payments. When the second spouse dies, the trust passes to its designated heirs.

Key Takeaways

  • A marital trust is a legal entity established to pass assets to a surviving spouse or children/grandchildren.
  • When a spouse dies, their assets are moved into the trust.
  • A general power of appointment, an estate trust, and a QTIP trust are three types of marital trusts.
  • A couple with a martial trust allow their heirs to pay less in estate taxes and avoid probate court.

How a Marital Trust Works

A marital trust allows the couple's heirs to avoid probate and take less of a hit from estate taxes by taking full advantage of the unlimited marital deduction—a provision that enables spouses to pass assets to each other without tax consequences.

However, when the surviving spouse dies, the remaining trust assets will be subject to estate taxes. To avoid this situation from playing out, a marital trust is sometimes used in conjunction with a credit shelter trust—also called a "B" trust.

An example of when a marital trust might be used is when a couple has children from a previous marriage and wants to pass all property to the surviving spouse upon death, but also provide for their individual children. Should the surviving spouse remarry, a deceased spouse's assets will then go to their children instead of to the new spouse.

There are three types of marital trusts: a general power of appointment, a qualified terminable interest property (QTIP) trust, and an estate trust.

A martial trust protects the assets and benefits of a surviving spouse and children.

Additional Types of Trusts

In addition to a marital trust, a family member may set up a personal trust and formally name themselves as the beneficiary. A personal trust can accomplish a variety of objectives for one person or many. For example, it can fund education expenses, meet the special needs of heirs, or allow them to avoid or reduce estate taxes.

Another option is to create a bare trust, a type of trust in which the beneficiary has an absolute right to the capital and assets within the trust, as well as any income generated. While a trustee often oversees the investments within a bare trust, the beneficiary has the final say over how the trust's capital or income is distributed.

An alimony substitution trust, meanwhile, is an agreement in which a divorced person agrees to pay spousal support via a trust’s generated income. With regard to taxation, the ex-spouse responsible for providing payments is not required to pay income taxes on the trust’s income, nor qualifies to receive a tax deduction.