What Is a Marital Trust? Benefits, Types and How It Works

If you’re married, you may be interested in learning what happens to your belongings once you or your spouse pass away. Making plans for the future is a sign of maturity.

The response to that question is influenced by a number of variables, including whether you have a marital trust. Along with other things, you are thinking about the sum of your assets, your beneficiaries, and much more.

It would be beneficial if you included marriage trusts in your estate planning because they benefit the beneficiaries in a number of ways, including asset allocation and tax benefits.

Learn more about the many kinds of marital trusts and the advantages and disadvantages of trust marriage rules.

A marital trust: what is it?

A marriage trust is a type of legal organization that holds and oversees another person’s assets for their benefit. As an analogy, think of a trust as a safe that someone else can use to store their assets.

So why establish a trust?

It could protect assets for your kids.

Assets can be shielded from potential creditors.

It may reduce estate taxes.

The expenses and wait times associated with probating a will may be reduced.

It might transfer some of your income tax burden to those who pay less in taxes.

It may create a support fund in the event that you become disabled.

Before you investigate trusts, it’s crucial to comprehend three concepts related to their creation:

The individual who establishes trust is known as a trustmaker. Additionally known as a Trustor, Grantor, or Settlor.

The person or organization in charge of managing the assets that the trustmaker places in the trust is known as a trustee.

The person or organization designated to enjoy the advantages of the trust’s assets is known as a beneficiary.

Family trusts and marriage trusts are distinct from one another.

A marriage trust can only be created to take effect after the first spouse’s passing, whereas a family trust can be created throughout the spouses’ lifetimes.

How marital trusts work

The marriage trust agreement must first detail all of the trust’s possessions and assets. This includes almost everything that is valuable. Included are securities such as stocks, bonds, mutual funds, money, and tangible property.

Upon the death of the trust grantor, trust assets are transferred to the surviving spouse tax-free. Federal estate taxes won’t be applied to those assets by the IRS.

The good news about marital trust tax exemptions is that neither spouse will pay taxes on the transfer. This has been made possible by the “marriage deduction rule,” or Internal Revenue Code Section 2056.

If a unique condition arises, the trustee may transfer to the surviving spouse any portion of the trust’s primary or initial investment.

The “general power of appointment,” which allows the surviving spouse the power to direct the trustee to distribute trust assets, may also be granted by the trust founder to the surviving spouse.

The grantor may, nonetheless, set a maximum withdrawal amount. What happens if the couple has kids?

An example of when a marital trust might be used is when a couple had children from a previous marriage and wants to leave all of their assets to the surviving spouse upon death while simultaneously caring for each of their children.

If the surviving spouse remarries, the assets of the deceased spouse will go to their children rather than the new husband.

5 benefits of a marriage trust

Real estate, retirement savings, and investment accounts are just a few of the many assets that might be held in a marriage trust. Thus, giving it some thought is crucial, especially if you have substantial assets.

We cannot, however, make decisions based just on what is popular or what sounds appealing. We need to learn more about marital trust, just like we should learn more about investing.

What benefits and drawbacks does a marital trust have? Using the list below, consider what is effective for you.

A marriage trust can provide protection for you, your partner, and your kids. If you choose to create a marriage trust, you will gain a lot of advantages, such as:

1. Your estate tax exemption will quadruple to $24.12 million.
The federal estate tax exemption shields $12.06 million from taxation beginning in 2022 and rising to $12.92 million in 2023. If you have a marriage trust, you can increase your exemption from estate taxes. This is really significant if your assets are larger.

2. Safety for all of your possessions
All assets covered by a marriage trust would be safeguarded should the surviving spouse remarry. The creditors of the surviving spouse are also subject to this.

As a result, you won’t need to worry that your hard-earned assets or debts will be taken by the new spouse. It’s an effective strategy to safeguard your possessions.

3. Provides your surviving spouse with a stable source of income.
The loss of a spouse can be too much, and the surviving spouse may also face financial challenges.

If the assets of a marital trust provide income, the surviving spouse may get financial security and recompense.

4. Maintain all of your possessions inside the family
We wish to shield our assets from potential creditors, future spouses, and other parties who might want to take a piece of what a deceased person left behind. A marriage trust guarantees that all assets will go to the family members who deserve them.

5. If the surviving spouse passes away, it can give the beneficiaries who are still alive security.
What happens if the survivor spouse likewise passes away? What will become of all the resources? A marital trust has the advantage of passing to the surviving children or grandchildren in the event that the surviving spouse passes away.

5 drawbacks of a marriage trust

Just like other financial strategies, using a marriage trust has disadvantages. We must consider more of what is provided to us than just its positive aspects.

We must also be aware of the drawbacks that we can experience if we decide to create a marital trust.

The following are some of these drawbacks:

1. You can’t modify an irrevocable trust anymore

Irrevocable trusts provide a lot of advantages, but they also have certain disadvantages. You cannot alter your designated beneficiary or take a loan against your life insurance policy once you have completed the transfer to an irrevocable trust.

What if an unforeseen event occurs? What if you decide to change your policy in a unique situation?

2. Your assets are no longer yours after they are transferred to an irrevocable trust.

Before you choose an irrevocable trust, give it some serious thought since once it is implemented, all of the assets you have listed on this insurance policy will no longer be your property.

Because of this, before making a choice, you must consider all available information and seek the advice of individuals you trust.

3. Your estate tax exemption is limited to $24.12 million.

Although we may see this as a plus, if you have large properties, it becomes a disadvantage. Nevertheless, depending on your needs, you may occasionally be able to obtain numerous trusts.

4. You lose the rights to all income coming from your income-generating assets

Some assets have the potential to generate income, which is particularly advantageous because it can be a source of income and financial security.

You must understand that you will forfeit your right to that income if you ever include this in a trust. A lot of people might disregard this and try to change the trust later. That won’t work any longer, though.

5. If you decide to change your mind, you won’t be able to regain control.

In contrast to a revocable trust, if you acquire a serious health condition that necessitates placement in a nursing facility in accordance with federal Medicaid rules, you cannot assume the assets.

Even though these are unforeseeable events, a trust that has been signed is binding.

How to create a marital trust

Are trusts regarded as marital property? is a question we must answer before moving on to the stages for forming a marital trust.

Trust assets are normally regarded as the specific property of the beneficiary spouse and are not subject to equitable distribution unless they incorporate marital property.

If you’re interested, how should you begin forming a marriage trust?

A marriage trust is a complex estate planning technique that requires meticulous drafting. Your marital trust cannot simply be planned.

Working together with an estate planner and a certified public accountant is recommended if possible due to the marital trust’s tax advantages.

Once the ideal professionals to collaborate with have been chosen, you must develop a trust document.

This document addresses the donor (you), the trustee (who will manage the trust), and the beneficiaries.

You won’t be able to alter or abolish marriage trusts once they have been formed since they are irrevocable.

The best course of action is to keep this in mind while you create your marital trust. Take your time and make sure you understand everything before creating a marital trust.

Types of marital trust

You should consider the various kinds of marital trusts that are accessible and evaluate their unique qualities in order to have a better understanding of marital trusts. The many kinds of marital trusts are as follows:

1. Revocable trusts

The question “Is a marital trust revocable or irrevocable?”

The kind of trust you should have in place will depend on what your intentions are. There may be times when you require more than one trust. Revocable, irrevocable, and testamentary trusts are the three types of trusts most frequently used in estate planning.

A revocable trust is one that you establish while you are still alive to hold property and can change at any moment. It is often referred to as a living or inter vivos trust. The following are reasons why these trusts are crucial:

Making preparations for mental disability (therefore having a disability trustee administer the assets rather than a court-appointed guardian).

preventing probate, allowing the assets to pass to the beneficiaries directly.

After your passing, protect the beneficiaries of your property and their privacy (by avoiding making the distribution public).

2. Irrevocable trusts

An irrevocable trust cannot be amended once it has been drafted, the trustmaker has passed away, or after another specified time period. There are three crucial tasks that revocable trusts perform:

Asset protection (by putting assets in a trust, the owner renounces access to and control over the assets).

Removal from personal assets (the taxes on the estate are reduced after assets are transferred to the trust since they are no longer considered personal assets).

Reduction in estate taxes (removing the value of the property from the estate to avoid estate taxes upon death).

When establishing an irrevocable trust, the following things need to be taken into account:

When you establish an irrevocable trust, you lose control over your assets and are unable to modify your mind. There may be ways to influence what happens to the property in the future, but the trust must expressly state this.

Contrary to a revocable trust, you cannot take over the assets if you develop a significant health condition that necessitates placement in a nursing home under federal Medicaid requirements.

Because of the irrevocable trust, things that you previously assumed wouldn’t happen may now be desired but avoided as a result of inevitable life changes.

You forfeit your entitlement to any income derived from trust assets.

When assets are transferred into an irrevocable trust, the transfer is liable to gift tax.

Only items specified in the trust may be added to or changed by the trustmaker.

What kind of trust suits married couples best?

A marital trust cannot be used in every situation. The ideal marital trust for another couple might not be the same for you.

Your assets, circumstances, anticipated outcomes, and even how you and your spouse feel about trusts will all play a role.

If you want to protect all of your possessions and the individuals you’ll leave behind when you pass away, getting marital trusts has several positive and useful benefits. But we can’t just make a decision like that.

Obtaining marital trusts involves a lot of complexities. Before obtaining the proper kind of trust that would be beneficial to them, one should invest time, effort, and understanding.

If you’re unsure, a legal advisor could help you comprehend the specifics, benefits, and drawbacks of the many marital trusts.

To determine if this kind of investment is suitable for you and your current scenario, you may also speak with therapists that specialize in marriage counseling.

Final conclusion

A marriage trust is a smart financial decision. Leaving money behind for your surviving spouse and children is a wise estate planning move.

By using this strategic tool, you can virtually triple the percentage of your estate that won’t be subject to federal taxation with careful preparation and awareness.

Already, that is a sizable investment. Along with that, you can guarantee your fortune stays within your family by placing your assets in a marital trust.

There should be safety measures taken while setting up a marital trust. As they require careful tax and asset preparation, make sure to collaborate with both an estate planner and a certified public accountant.

Making a marital trust can be a difficult task. Although there are numerous complications and unknowns, the advantages far outweigh them.

The best marriage trust is built via education, patience, working with the appropriate people, and making decisions on your own terms.