Trusts for Married Couples

Trusts specific to married couples are created to provide for your surviving spouse, not necessarily make all of your assets available to them, while arranging to have your descendants or adopted children inherit part of your estate. It may be referred to as a family trust, but is another type of family trust.

These trusts allow you to put aside a certain amount of tax-free money or other assets for your children at the time of your death and/or limit the amount of your individual assets available to your surviving spouse, especially if they are not financially responsible or are not a parent of your children.

If all you want to do is to transfer your estate to your spouse, a will or simple trust will do. These trusts are not necessary if your total estate is under the federal ($11,700,000 in 2021) and/or any state estate tax exemption limit (may be as low as $1,000,000) or you do not want to restrict how your surviving spouse uses the assets.

Trusts for married couples can only be created for spouses who are United States citizens with combined marital assets, whether jointly owned or not. The legal definition of spouse may vary from state to state, so it may or may not be available to domestic partners or couples in civil unions. For a noncitizen spouse, you can create a Qualified Domestic Trust (QDOT).

The type of trust, how individual assets are handled, and the estate tax exemption limit for your heirs depends on the specific trust chosen and if your assets are individually or jointly owned.

The 100% marital deduction rule allows you to give your spouse any amount in either your will or a trust estate tax free. This also applies if your children are minors.

Trusts that involve spouses are subject to the portability of the estate tax exemption, and the federal estate tax exemption is transferable between them.

  • Children could inherit up to twice the federal limit without estate tax.
  • This could happen even if one of the trusts is under the limit and the other is over it.
  • Only Hawaii and Maryland have portability of state estate tax exemptions.

Estate taxes are only assessed on assets transferred to your adult heirs.

  • Any assets they receive after your death will be taxed if the amount was above the estate tax limit ($11,700,000 in 2021).
  • Any assets they receive after your surviving spouses death will be taxed if the estate is above:
    • The estate tax limit the year of your spouse’s death, plus any amount remaining after your death when there is portability between trusts, if they already received part of the your estate (this is not true if your surviving spouse does not name the same beneficiaries, such as a second marriage where they name their own biological and/or adopted children); or
    • Twice the estate tax limit the year of your spouse’s death if they did not receive any of your estate after your death (QTIP Trust).
  • The law on estate tax limits is due to expire after December 2025.
    • If allowable in your state, the doubled limit might apply to state estate taxes. See State-specific Tax Law to see if your state has a State Estate Tax.

Since Gift taxes are tied into the federal estate tax, they will be reduced as well.

Trusts for married couples can either be a single trust or a combination of trusts. Some will be created while you are alive (living trust) or after your death (testamentary trust). These trusts are considered a separate taxpayer and require its own tax return, Form 1041.

Understanding the different choices of trusts for married couples can be confusing since the terms marital trust, bypass trust, credit shelter trust, and QTIP trust are all used in different contexts in many references. When used in the context of trusts for married couples:

  • A Marital Trust refers to any trust that provides benefits for your surviving spouse after your death;
  • A Bypass Trust refers to any trust created to protect your children’s inheritance if your surviving spouse remarries by having some of your assets go directly to your heirs after your death, which can also be used to provide benefits to your surviving spouse;
  • A Qualified Terminable Interest Property (QTIP) trust is a single trust that provides benefits for your surviving spouse after your death while protecting some of your children’s inheritance if your surviving spouse remarries, and has assets remaining after your spouse’s death go directly to your heirs; and
  • A Credit Shelter Trust refers to any trust that provides for the beneficiary and shelters them from creditors, lawsuits, and estate taxes up to a certain limit.
    • The bypass and QTIP trusts are all credit shelter trusts.
    • Unless your surviving spouse is trustee and beneficiary and the trust is revocable, marital trusts are credit shelter trusts.

There are four options when married couples are trying to create a plan for your estate that provides for the surviving spouse and your children.

Trust Options

Type of Trust

Ownership Transferred to Heirs

Total Estate 2021 Tax Exemption Limit for Adult Heirs 

A single Qualified Terminable Interest Property (QTIP) Trust

Testamentary

Your surviving spouse’s death

$23,400,000

A-B or ABC living trust, which splits at your death into a bypass and marital trust

Living

Your surviving spouse’s death

$23,400,000

Dual trusts

  1. A credit shelter trust for your heirs
  2. A marital trust for your spouse

Testamentary

Your death

$23,400,000

A simple bypass trust for your children and leaving your surviving spouse assets in your will

Testamentary

Your death

$11,700.000, unless your spouse creates a trust with their inherited assets

 

The QTIP, marital trust, and the bypass trusts only exist after your death.

QTIP trusts, two types of marital trusts, and trusts for your heirs are considered bypass trusts because ownership bypasses your surviving spouse and goes to your children.

  • This will protect those assets from being given by your surviving spouse to new spouses, stepchildren, etc. without permission of the trustee.

QTIP, simple bypass, and all irrevocable marital trusts have many features in common with other trusts and each other. These trusts will:

  • Allow you to instruct and guide how the trust will be used, including how the trustee should manage the assets and how to distribute the remaining assets when it expires, such as in stages, at certain ages, for particular reasons, or after certain accomplishment;
  • Protect the estate from creditors since they are no longer in your name at your death;
  • Be managed by a trustee until your children are ready to take control of it:
  • Be irrevocable and unable to be altered unless the trustee is given the power to do so (power of appointment); and/or
  • Avoid probate court when passed onto the next generation and therefore do not become part of the Public Record. This is not true of any trust for your spouse or the current generation created in your will.

There are four possible situations for a marital trust based on the ultimate beneficiary and whether or not your surviving spouse is the trustee.

Personal Marital Trusts

1. Your spouse is the only beneficiary of the trust, as well as the trustee (simple trust).

Although your surviving spouse may not feel obligated to follow instructions in the will, the probate court continues to oversee trusts created in a will to make sure it is being handled properly until it expires.

This form of marital trust can either be revocable, such as the A trust from the split of an A-B or ABC trust, or irrevocable if desired for other marital trust options. Your spouse will be able to manage the estate according to your instructions in the trust and/or change the trust in designated ways if made revocable.

If given the power of appointment, they will be allowed to make decisions about the trust based on changing conditions rather than strictly by your instructions.

Making the trust revocable or giving your spouse the power of appointment would:

  • Make more money in the trust estate accessible to your surviving spouse in the event they need the money; but
  • Not protect your spouse if they are fiscally irresponsible, or duress for any reason such as a threat, intimidation, and/or pressure from a family member that may deplete the trust before their death.

2. Your spouse is the only beneficiary of the trust, but not the trustee (bare trust).

A trustee will manage the trust to provide for your surviving spouse according to your instructions and guidance.

  • This trust is irrevocable and will essentially protect your surviving spouse from themselves if they are fiscally irresponsible or easy to exploit.
  • Since assets cannot be given out without permission of the trustee, the assets will be protected from being given by your surviving spouse to new spouses, stepchildren, etc.

Your spouse would choose beneficiaries for the trust and how the trust is dispersed after their death.

Bypass Marital Trusts

3. Your children are the beneficiary of the trust and your spouse is the trustee.

Although your surviving spouse may not feel obligated to follow them, they will be able to manage the estate according to your instructions in the trust but not able to change beneficiaries or how the trust is dispersed after their death.

Power of appointment can be given in this situation, but this impacts your children as well.

  • This allows them to choose different beneficiaries for the trust and how the trust is dispersed after their death if circumstances require this, such as death of a beneficiary or changing financial situations of the different beneficiaries.
  • They will be able to respond to specific circumstances such as the need to fund certain medical, educational, or maintenance expenses when emergencies arise.
  • If unchecked, this would be similar to leaving them assets in your will.
    • This may allow assets to be given by your surviving spouse to new spouses, stepchildren, etc.
    • You can try to protect some assets by limiting the amount that can be given, but your instructions may be ignored and your spouse could have the final say unless the terms of the trust are enforced due to close scrutiny of the probate court.

The estate could be in jeopardy if your surviving spouse was fiscally irresponsible.

4. Your children are the beneficiary of the trust, and your spouse is not the trustee but are entitled to benefits from the trust.

This is the equivalent of a Qualified Terminable Interest Property (QTIP) Trust with a few differences.

  • Spouses are not restricted to fixed allotments and can access the interest/earning of the trust at any time.
  • If you would like your spouse to have more income, you can instruct the trustee to access the principal in the trust fund for your spouse. There are a few drawbacks to this.
    • Using the assets in the trust will result in less interest over time and fewer assets available to be passed on to your heirs when your spouse dies.
    • More assets will be vulnerable to bad financial advice, scammers, or influence by other family members with their own interests in mind.

Qualified Terminable Interest Property Trust

The Qualified Terminable Interest Property (QTIP) Trust is the most common method of creating a marital trust, especially for second marriages. It is a single testamentary trust that both provides for your surviving spouse while limiting access to the entire estate, and protects the remaining assets for your children after your spouse dies. A QTIP trust works with both jointly and individually owned assets. The QTIP can be a combined trust or each spouse can create one with their individual assets. 

The assets in the QTIP are for the benefit of your surviving spouse therefore protected by the 100% or unlimited marital deduction rule allowing transfer of your entire estate without tax.

  • This means that all of the estate placed in the trust after your death is not taxable until your surviving spouse dies (Section 2056 of the Internal Revenue Code).
  • This is also true of estates left to minor children.

Your surviving spouse is entitled to any income specified in the trust for the rest of their life, otherwise known as a life estate.

  • The income is given in fixed allocations and is usually based on the expected earnings/interest income of the trust. 
  • Allocations must be given at least yearly and are fixed for the duration of the trust.
  • There are two common means of determining your spouse’s yearly income.
    • They can get a set amount of income. This runs the risk of reducing the assets/principal in the trust if payout is too high.
    • They can get an income based on a fixed percentage of trust assets. The amount will vary based on the annual evaluation of the trust’s worth, but will not affect the assets/principal in the trust.
  • You may give them the option to use some of the principal under specific circumstances such as the need to fund certain medical, educational, or maintenance expenses.
  • Your children will be named as the final/remainder beneficiaries for when your surviving spouse dies. This will happen whether your surviving spouse is a biologic parent or stepparent.

Since there are two trust owners, the total estate tax exclusion is doubled. In addition, the estate tax limits are portable between spouses and any amount below the current limit ($11,70,000 in 2021) can be claimed by the spouse for the QTIP trust and added to their limit when they pass away and leave the trust to your heirs.

  • Example of how portability works:
    • If you die in 2021 and leave an estate of 10 million dollars, the QTIP trust would have an additional $1,700,000 tax credit to use when your spouse dies ($11,700,000 minus $10,000,000).
    • If your surviving spouse dies before December 2025 (when the law expires), the estate would be tax-free if left to adult children if under $1,700,000 plus the exemption limit in the years they die.
  • This will not happen automatically; it needs to be claimed by making an “election” on your estate tax return.
  • See the Estate Tax section for details of making an election on an estate tax return.

A trustee will manage the trust for both your surviving spouse’s benefit and to preserve the  estate for your children’s benefit.

  • Your surviving spouse could be named as the trustee if you are certain they would not mismanage the estate or abuse the power to manage it.
  • They could only change the beneficiaries or distribution of the estate if they were a trustee and were given the right to (Power of Appointment), otherwise they cannot even if they are pressured or tempted to.

Dividing Trusts

A-B and ABC trusts are only useful if each of you has individual assets. Any joint assets would all go to your surviving spouse even with one of these trusts.

  • They are created as revocable living trusts while you both are alive with each spouse placing their individual assets in the trust.
  • They both divide into different trusts after your death, the major difference is how the trust splits after your death.

A-B Trust

The A-B trust is a joint trust created by a married couple where each names suitable beneficiaries other than their spouse. Upon your death, an A-B trust will split into two trusts: a B or bypass trust for your heirs, and an A or personal trust for your spouse usually referred to as a marital trust.

The B trust is an irrevocable trust created with marital assets usually for your heirs, but could also be used to benefit your surviving spouse by allowing them to access property or draw income. The B trust can’t be altered by your surviving spouse, although they can manage and use the trust as the trustee if designated in the trust document.

  • This trust, also called the decedent’s trust, allows assets you want your children to receive to bypass your spouse and have ownership go to your children estate tax free upon your spouse’s death. This ensures your descendants receive their inheritance by removing assets from your surviving spouse’s control.
  • The trust is useful for blended families when you and possibly your spouse have children from a previous relationship. This can be designated as a “Family” trust and only available to your biological and/or adopted children.
  • You could consider using this with your first marriage if you are concerned about how your spouse will use the assets This would prevent your spouse’s new spouse (i.e. your child’s stepparent) from getting the assets.
  • To avoid estate taxes, it can be funded up to the amount allowed by the federal government ($11,700,000 in 2021) and/or your state.
  • If the amount in the bypass trust for your adult children is less than the limit, an exemption would allow them to inherit the trust without estate tax after your surviving spouse dies, even if the value was above the limit the year of their death.

Your and your spouse’s remaining individual assets are transferred to the A trust which can only be used for your surviving spouse’s benefit.

  • The A trust remains revocable. It may be called a Survivor’s or Marital Deduction Trust.
  • All property left or gifted to your surviving spouse in the A trust is inherited free of estate tax (I.R.C. § 2056(a)).
  • If your surviving spouse is the trustee, the A trust will not be a credit shelter trust and protect them from creditors or lawsuits.
  • The A trust is subject to estate taxes when your surviving spouse dies if over the limit. This means that if your spouse names the same beneficiaries as you, they can inherit twice the estate tax limit without paying the tax.

If your assets in the A-B trust are between the estate tax limit and twice the limit, you can:

  • Add the limit to the B trust so your children would receive the maximum allowable amount; and/or
  • Put the remainder in the A trust up to the limit available to your surviving spouse and any of their future spouses. This may not be true of any individual assets they have in a trust.

ABC Trust

The ABC Trust trust, also known as “gap trust planning” trust, is a joint trust created by a married couple. You may consider this when you are getting close to twice the estate tax exemption. Upon your death an ABC trust will split into three trusts.

The A created for your surviving spouse’s benefit is similar to the A trust from an A-B trust.

  • You would typically transfer half of your marital assets into this trust, but it can also be used to limit the assets available to your surviving spouse
  • This trust is revocable and taxable according to federal and state exemptions. 
  • If your spouse names the same beneficiaries as you, they can inherit twice the estate tax limit without paying the tax.

Trust B is similar to the B trust from an A-B trust and will only include assets for your heirs up to the amount of the federal and/or state estate tax exemption limits.

  • The B trust is irrevocable and any growth of the assets are tax exempt.
  • It is often referred to as the “exemption” trust because of this and it bypasses your surviving spouse and goes to your children. You can limit the beneficiaries to your biological and/or adopted children.

 

Trust C is irrevocable and will contain your additional assets.

  • This trust is included as part of your surviving spouse’s taxable estate, but is only taxable by the state government if over the limit.
  • State estate taxes will usually only be due if the combination of trusts A and C is over state limit.

Dual Trusts

This is usually called a marital trust because it describes the inheritance of combined marital assets after you die, but it is actually the combination of two trusts. Instead of a living A-B or ABC trust that automatically creates two irrevocable trusts after your death, a bypass trust for your children and marital/personal trust for your surviving spouse are created in your will.

Since there are two trusts and both spouses are entitled to the federal limit, you will also be able to protect at least twice the federal estate tax limit, $23,400,000 in 2021.

Although not a combination of two trusts, dividing the marital assets by creating a bypass trust for your children and leaving the remainder to your spouse in your will is considered a form of marital trust. Your adult children could inherit up to the limit in the year of your death without estate tax, unless your spouse creates a trust with their inherited assets that allows them to inherit an additional amount up to the limit in the year of their death without estate tax.

Trust vs Will

When it comes to how and what your children and spouse inherit, there may be some differences between a trust and a will that may help you decide. The primary differences are the cost and time involved. Wills are usually simple and less expensive to create, while most trusts for married couples are complicated and expensive to create and manage. 

Your Children’s Inheritance

The primary source of your children’s inheritance after your death will come either from your will or any credit shelter trust created, either after splitting of an A-B/ABC trust or created directly in your will.

After your spouse dies, your children will inherit the entire marital estate if a QTIP trust was created and may inherit your surviving spouse’s share in their will or from any marital or personal trust in their name if named as a beneficiary

If your estate is under the federal and/or estate tax limit, it will be much easier and less expensive to create a will.

If the circumstances or value of your estate merit using a trust, it will probably be better to do so.

  • Since your children are usually your primary concern, you should fund the bypass trust first — especially when your spouse is a stepparent.
  • For adult children you can fund the trust up to the federal and/or state limit without estate tax when your children take ownership after you die. There is no limit while your children are minors.
  • If your estate is over $11,700,000, you could consider giving your children up to the maximum allowable amount tax free before funding your spouse’s trust.

Your Spouse’s Inheritance

Once you have taken care of your children, you can proceed to make decisions about how to take care of their biological parent and/or stepparent. It’s more complicated, since there are many options to consider and you need to choose the option that is best for your situation and requirements.

You can elect to transfer the remaining marital assets to a trust for your surviving spouse’s benefit or you could elect to give part of your estate directly to your spouse in your will. Since all property left or gifted to your surviving spouse is inherited free of estate tax (I.R.C. § 2056(a)), estate tax limits are not a consideration in choosing between the two and other factors come into play.

Leaving it in Your Will

When you elect to leave the remainder of your estate to your spouse in your will, you have lost any control over those assets. Your spouse would be free of any restrictions placed on them by the instructions in a trust, fixed allotments, and trustee approval

Other things to consider when you leave assets to your surviving spouse in your will.

  • They are free to manage, use, and give away the assets any way they choose, including possibly running out before they die.
  • They can choose any person and/or charities as beneficiaries in their will or any trust they create.
  • Since the probate court will be involved, the accounting of assets are available for the public to see.

These and other reasons may make them extremely vulnerable to bad financial skills and advice, scammers, or influence by other family members or subsequent spouses with their own interests in mind.

Creating a Trust for Your Spouse

Although there are no estate tax limit considerations, there are many other things to consider when choosing the type of trust you want for your spouse. These are only generalizations and you will want to individualize the trust for your circumstances and wishes. 

Unless you choose a QTIP trust, your spouse’s trust is usually funded after you have funded the children’s trust. Once you have created and funded a separate trust for your children, you may be less concerned about how your surviving spouse uses that trust, giving you more options.

  • Your first decision may be whether you want your surviving spouse to control the trust or just benefit from it. If they control the trust and it is revocable, the trust is not protected from creditors.
  • The second decision would be if you want them to have access to some or all of the original assets (the principal) or just the interest or other gains of the trust. This is closely linked to whether or not you would like your children to inherit this trust’s assets after your spouse’s death.
  • Finally, consider whether you want to give the trustee power of appointment, i.e. the ability to alter the trust to adapt it to any unanticipated problems or future changes. 

Totten Trust

The Totten Trust is technically a revocable living trust, but is actually a type of payable-on-death account. You can easily set one up without a formal written document. However, it can be established as a formal trust by simply naming a beneficiary on the title document for the account using language such as “In Trust For,” “Payable on Death To” or “As Trustee For.” See the Payable on Death section for more detail.

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