What it means
When one spouse dies, they can leave assets to the survivor outright, or they can place them in a trust. A marital trust is the trust option designed to qualify for a tax benefit on transfers between spouses.
The surviving spouse receives the income and, depending on the terms, may be able to draw on capital. The tax logic is as follows.
In some countries, including the United States, transfers to a surviving spouse are deducted from the taxable estate of the first spouse to die, so no estate tax is due at that point. The tax is postponed, not removed, because the trust assets are normally included in the surviving spouse's estate on their death.
Control is the other attraction. With an outright gift, the survivor can leave the assets to anyone, including a new partner or someone the first spouse would not have chosen.
A marital trust can name the final beneficiaries, such as the children from an earlier marriage, while still providing for the spouse during their life. There are different kinds of marital trusts.
A general power of appointment trust gives the spouse wide control over who receives the assets at the end, while a qualified terminable interest property trust, known as a QTIP, lets the first spouse fix the final beneficiaries. To qualify, the spouse typically must receive all the income at least annually and no one else may benefit during the spouse's life.
Trusts need a trustee to manage the investments, keep records and file tax returns. Fees and complexity are a cost to weigh against the benefits.
Tax rules and thresholds change over time and differ by country, so professional advice is essential. Planning must also allow for changes in family life.
A trust drafted years ago may no longer fit a larger estate, a remarriage or new tax rules, so couples should review their documents regularly with their advisers.
In practice
Real-world examples.
Example
A business owner wants to make sure his wife is supported after his death but that his shares eventually pass to his two children from his first marriage. He leaves the shares in a marital trust, with the children as final beneficiaries. His wife receives the dividends for the rest of her life.
Example
A couple with a large estate use a marital trust to postpone estate tax. At the first death, all of the assets pass to the trust and qualify for the deduction. The family pays no estate tax at that stage.
Example
A widow receives income from a marital trust every month. The trustee, a bank, invests the assets and distributes the income, while the capital stays intact for the children. She can ask the trustee to review the investments each year.
Formula
Calculation
Estate tax deferred at first death = Amount placed in the marital trust x Estate tax rate
A husband dies leaving $2,000,000 in a marital trust for his wife, with his children as final beneficiaries. Assume, for illustration only, an estate tax rate of 30% on amounts above any exempt threshold. Because the transfer qualifies for the marital deduction, the tax deferred at his death is $2,000,000 x 0.30 = $600,000. If the trust has grown to $2,400,000 when his wife dies, it is included in her estate at that point, and the tax then due on it would be $2,400,000 x 0.30 = $720,000.Case study
Seen in the real world.
Orrin and Delia Vance are an illustrative, fictional couple with a $5,000,000 estate and children from earlier marriages. Orrin was worried that if he left everything to Delia outright, his children might receive nothing.
His estate planner suggested a QTIP-style marital trust. Delia would receive all the income for life, the trustee would be a trusted advisor, and on Delia's death the capital would go to Orrin's children.
In this illustrative story, Orrin died first and the trust worked as planned, postponing tax and securing his wishes. Delia had a comfortable income, and the children later received their inheritance, though part of it was reduced by estate tax at the second death.
Watch out
Common mistakes.
- Assuming the trust avoids estate tax altogether, when it usually postpones the tax until the second death.
- Leaving the trust terms vague, which can lead to disputes between the surviving spouse and other beneficiaries.
- Choosing a trustee without considering fees, skills and conflicts of interest.
Questions
People also ask.
Who benefits from a marital trust?
The surviving spouse receives income, and often capital, during their life, and the final beneficiaries receive the assets afterwards.
What is a QTIP?
A qualified terminable interest property trust gives the spouse the income for life while the first spouse decides who inherits the remainder.
Do all countries recognise marital trusts?
No, the tax treatment depends on the local law, and some countries have no equivalent deduction.
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