Marital trusts protect couples and their families.
Family gatherings are common during the holidays.
For some, these are fairly simple logistically and emotionally.
Loved ones live nearby and get along reasonably well.
For many, the time is filled with stress around scheduling and relationship dynamics.
It can be hard enough to manage holidays between the families of two spouses.
Blended families often find greater challenges, especially when coordinating “family” time for their various family units.
Enhanced stress levels around these relational dynamics are not uncommon during the holidays.
They are also present in estate planning discussions and decisions.
While marital trusts can benefit any couple, they can be particularly helpful for those in second marriages or who have blended families.
Marital trusts can help achieve a major win-win: a secure financial future for your spouse and an inheritance for your children.
While they have disadvantages and advantages, these trusts can direct assets to their beneficiaries in a tax-friendly manner.
What is a marital trust?
A marital trust is a type of irrevocable trust.
The trust provisions benefit the surviving spouse through managed asset distributions.
The nature of irrevocable trusts can protect against undesirable outside influences and poor financial decisions.
Although some couples may foresee few complications with an outright inheritance to the surviving spouse, there can be concerns regarding financial management.
If one spouse has little experience with financial management, there may be a concern about their ability to utilize the funds well after the death of the other spouse.
Additionally, single seniors are common targets for scammers or other financial predators.
A marital trust protects against these possibilities.
How do marital trusts work?
These trusts work because of clearly defined roles and responsibilities.
The first individual is the grantor, the owner of the assets used to “fund” the marital trust.
This person initiates the creation of the trust.
The second party is the trustee.
The trustee can be a person or organization responsible for managing the trust and its assets.
The third party involved is the beneficiary, the surviving spouse.
After the death of the grantor, the beneficiary is the individual who receives assets from the trust.
Although other trusts have more flexibility regarding beneficiaries, marital trusts require that the surviving spouse is its sole beneficiary.
After the death of the surviving spouse, it is common for the children of the first decedent spouse to receive the trust assets.
For the trust to be effective, it must be funded.
The assets funding the trust are traditionally referred to as the principal.
While not a party to the trust, estate planning attorneys play a vital role in creating the trust as part of a comprehensive estate plan.
What are the benefits of a martial trust?
A variety of benefits exist and can apply to various dynamics.
A marital trust must provide the surviving spouse with all its net income.
It is not uncommon for “discretionary” principal to be distributed as needed.
In addition to providing for the financial security of the surviving spouse, let’s review some of the other vital benefits of marital trust planning.
How do marital trusts protect blended families?
Outright inheritances to a surviving spouse can unintentionally lead to the disinheritance of children from previous marriages.
The surviving spouse would receive the entire inheritance, placing the inheritance under the control of their estate plan.
In this scenario, the surviving spouse could disinherit the children of the spouse who died first in favor of their own children.
The money could also be accessible to the reckless spending of a new spouse if the surviving spouse were to remarry.
By placing assets for inheritance into a marital trust, the surviving spouse can benefit from the assets, and the inheritance of children from a previous marriage can be safeguarded.
Although couples may hope their partner will not disinherit the other’s children, appropriate estate planning is the only way to ensure this happens.
Marital trusts are one tried and true means of creating these safeguards.
What if you do not have a blended family?
Are there circumstances where couples should consider using a marital trust?
Marital trusts are beneficial if there are concerns about the capability of the surviving spouse to use money wisely or the possibility of undue influence.
With older couples, declining health is often a reality.
Sometimes, health issues lead to dementia, while others require greater dependence on others.
This dependence can allow self-serving individuals to take advantage of the vulnerability of the surviving spouse.
A marital trust can shield assets from unsavory characters.
Perhaps you have heard of the controversy surrounding the death of actor Tony Curtis in 2010.
When his last will was submitted to the court, it was found he had disinherited his five children.
Many people wonder whether Tony Curtis chose to leave his children out of the last will due to undue influence.
Why might his last will be questioned?
The change to his estate planning documents was made shortly before his death.
According to the MoneyWise article titled “Hollywood legend Tony Curtis cut his kids out of his will and $60 million fortune when he died. Here’s how to avoid leaving behind messy inheritance disputes,” the update to his last will where he named his fifth wife as the primary beneficiary of his estate was made mere months before his passing.
The children of Tony Curtis disputed his last will.
As a result, the family was left with emotional stress and wounds.
A marital trust could have prevented this unfortunate scenario.
In addition to addressing relational concerns, marital trusts can reduce tax burdens through the estate tax exemption and the unlimited marital deduction.
How can estate tax exemptions be taken into account?
With a marital trust, couples can effectively double their tax exemption.
What does this mean?
Couples with high net worth can transfer much of their wealth tax-free.
As a result, more money is left for the surviving spouse and any future beneficiaries.
The unlimited marital deduction allows the assets of the first spouse to pass to the surviving spouse without triggering estate taxes when the first spouse dies.
Consequently, the surviving spouse will receive an income from the marital trust without incurring an immediate tax burden.
Are there disadvantages to using a marital trust?
While they have many benefits, marital trusts have drawbacks.
The most obvious relates to the fact they are irrevocable trusts.
By nature, they have little flexibility after they have been established.
Making changes or terminating them is no small task and may prove impossible.
Another consideration involves funding.
The trust cannot function according to its design without funding.
Unfortunately, this step can easily be overlooked.
Finally, tax exemptions are limited according to the federal estate tax threshold.
As mentioned, an experienced estate planning attorney is foundational to successfully creating a marital trust.
While marital trusts can address tax concerns and complex family dynamics like blended families or vulnerable spouses, they must have the appropriate language and terminology for governing the management and distribution of assets and for designating the trustee.
Working with an experienced estate planning attorney can help you incorporate a marital trust into your comprehensive estate plan to protect everyone you love and everything you have.