Everything You Need to Know About Marital Trusts

A couple holding hands.

With all the different kinds of trusts available, as well as the specific ways they differ from state to state, it can be hard to figure out exactly what a marital trust is, much less whether or not you and your spouse need one.

What is a martial trust?

Let’s start with the basics. A trust is a legal arrangement that allows a third party to hold valuable assets — like physical property, stocks and bonds, or money — on behalf of beneficiaries. Possible advantages of trusts generally include tax exemptions and avoiding the probate process.

The term “marital trust” refers to a trust that qualifies for the marital deduction. That is an unlimited estate tax deduction for property that passes from a decedent to his or her surviving spouse.

There is a corresponding marital deduction granted for gifts made during someone’s lifetime.

Outright gifts to a surviving spouse are the simplest example of a property interest which qualifies for the marital deduction.

The marital trust serves the tax objective of obtaining a deduction, for estate or gift tax purposes, for property transferred in a qualifying trust for the benefit of a spouse.

The Code has some pretty complicated rules.  Only trusts with certain provisions will qualify for the marital deduction.

What are the 3 types of trusts?

There are 3 forms of trusts that qualify for the marital deduction.  The common feature of all marital trusts is that the trust assets will be taxed in the estate of the surviving spouse.

The first type of trust qualifying for the marital deduction is the Estate Trust.  The terms of an estate trust provide that upon the surviving spouse’s death, the trust for his or her benefit will terminate and the trust property will pass to the estate of the surviving spouse. As a result, there is no “terminable interest” and the “gift” to an estate trust qualifies for the marital deduction.  These trusts are rarely used because they do not address the common objective behind much of marital trust planning, which is control.

The second type of trust qualifying for the marital deduction is the Power of Appointment Trust.  To be effective, this type of trust must include the following terms:

  1. the spouse is entitled to all trust income for life, payable annually or at more frequent intervals
  2. the spouse alone has the power to appoint trust property (during life or by will) in favor of the spouse or the spouse’s estate (so, a general power of appointment), though the spouse may exercise it in favor of others
  3. no other person has the power to appoint any part of the trust to any person other than the surviving spouse

The effect of giving the surviving spouse the general power of appointment is that the assets will be included in his or her estate for estate tax purposes.

The last type of trust is the most common: the QTIP Trust. QTIP stands for “qualified terminable interest property.” The required terms for a QTIP trust are that the spouse is entitled to all trust income for life, payable at least annually, and that no person has a power to appoint any part of the property to any person other than the surviving spouse.

How does a marital trust differ from other types of trusts?

Marital trusts function very similarly to other kinds of trusts. The key differences are usually who the beneficiary is and the amount of control the trustmaker has over assets in the trust after it’s been set up.

Virginia Hammerle is a lawyer and president of Hammerle Finley Law Firm.  For ongoing updates regarding legal issues and the COVID-19 pandemic, see her blog at legaltalktexas.hammerle.com and Timeless in Texas.