What Are Marital Trusts?
Marital trusts are left by the grantor, the person who creates the trust, to his or her surviving spouse. Marital trusts are designed to minimize the taxes paid on the grantor’s postmortem estate and those payable after the spouse’s death. The amount of control the surviving spouse has over the trust assets determines whether you’re dealing with an unlimited marital trust, a marital estate trust, or a qualified terminable interest trust.
Unlimited marital trusts: Giving the surviving spouse free rein
In an unlimited marital trust, the surviving spouse is entitled to as much of the principal as he or she desires and all the net income of the trust. Net income includes interest, dividends, rents, business income, income from other trusts or estates, and state tax refunds, but excludes capital gains, and the expenses paid from income for administering the trust.
The power to decide who will be the ultimate owner of the trust property is known as power of appointment. Unlimited marital trusts, sometimes referred to as power of appointment trusts, contain one of two power appointments:
A general power of appointment
The trust beneficiary may name anyone, including himself or herself, at any time during his or her lifetime or upon his or her death, as the recipient of the trust property.
A limited power of appointment
The grantor designates a group of acceptable appointees for the beneficiary to choose from.
The powers of appointment can be exercised in the will of the power holder or in a separate document during his or her lifetime. This trust also contains provisions for distributing the assets if the trust beneficiary, the surviving spouse, fails to exercise the power of appointment.
Marital estate trusts: Where do the assets go?
A marital estate trust may be funded with almost all the grantor’s estate just like the unlimited marital trust. However, the terms of a marital estate trust are typically more restrictive.
The trustee of a marital estate trust may have the discretion to distribute income as well as principal. The surviving spouse, who is also the trust beneficiary, has no say over who will get the assets after his or her own death. Instead, the assets are paid directly into his or her estate where they’re included for estate tax purposes.
Qualified terminable interest trust: Reining in the surviving spouse
In qualified terminable interest trusts (QTIP) the beneficiary is entitled to all the net income but none of the principal. Unlike unlimited marital trusts, where the trust beneficiary designates where the principal goes during his or her lifetime or after his or her death, the grantor of a QTIP trust makes that determination in the trust instrument.
No matter what type of marital trust you’re administering, the value of that trust on the surviving spouse’s date of death is included in his or her estate tax calculations after he or she dies.