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.
Estate taxes are only assessed on assets transferred to your adult heirs.
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:
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.
Type of Trust
Ownership Transferred to Heirs
Total Estate 2021 Tax Exemption Limit for Adult Heirs
A single Qualified Terminable Interest Property (QTIP) Trust
Your surviving spouse’s death
A-B or ABC living trust, which splits at your death into a bypass and marital trust
Your surviving spouse’s death
A simple bypass trust for your children and leaving your surviving spouse assets in your will
$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.
QTIP, simple bypass, and all irrevocable marital trusts have many features in common with other trusts and each other. These trusts 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:
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.
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.
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.
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.
Your surviving spouse is entitled to any income specified in the trust for the rest of their life, otherwise known as a life estate.
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.
A trustee will manage the trust for both your surviving spouse’s benefit and to preserve the estate for your children’s benefit.
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.
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.
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.
If your assets in the A-B trust are between the estate tax limit and twice the limit, you can:
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.
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.
Trust C is irrevocable and will contain your additional assets.
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.
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.
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.
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.
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.
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.
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.
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.