For Jacksonville residents who have been married or in a longstanding relationship, it’s almost certain…
If you’re married, you may be wondering what happens to your assets once you or your spouse passes. The answer to that question depends on various factors, including whether or not you have a marital trust.
Marital trusts have multiple benefits for beneficiaries, including asset allocation and tax benefits, and are worth considering in your estate plan.
A marital trust is an irrevocable trust that lets you transfer a deceased spouse’s assets to the surviving spouse without incurring any taxes. The trust also protects assets from creditors and future spouses the surviving spouse may encounter.
Additionally, when the surviving spouse dies, the assets in the trust are not included as part of their estate—which will keep the taxes on their estate lower.
Similar to other trusts, there are three parties involved in setting up, maintaining and ultimately passing along the trust, including a:
- Grantor. The person who establishes the trust
- Trustee. The person or organization that manages the trust and its assets
- Beneficiary. The person who will eventually receive the assets in the trust once the grantor dies
A marital trust also involves the principal, which refers to the assets initially put into the trust. These assets can be investment products that generate income for the beneficiary over time.
A marital trust is a useful tool that minimizes tax implications for married couples who are high-net-worth individuals (HNWIs).
Using a marital trust essentially doubles the couple’s estate tax exemption limit. Estate tax refers to the federal tax that must be paid on someone’s estate after they die. The estate tax limit refers to how much of an estate will be tax free.
In 2022, the estate tax limit is $12.06 million, which means utilizing a marital trust would essentially double that amount to $24.12 million. Essentially, about $24 million of a couple’s net worth would be shielded from estate taxes by taking advantage of a marital trust.
Suppose a grantor passes $5 million to a surviving spouse through a marital trust, for example. The surviving spouse can pass an additional $19 million to the couple’s children through the same trust—tax free—because of the doubled estate tax limit benefit of using a marital trust.
A marital trust is also beneficial since it can provide income to the surviving spouse, tax free. However, the grantor may set a limit on how much can be withdrawn from the trust over time. Only a surviving spouse can be a beneficiary of a marital trust; once the surviving spouse dies, the trust will then be passed on to whomever the first spouse’s will governs.
When Should You Consider a Marital Trust?
If keeping wealth within your family after you pass is important to you, then a marital trust is an estate planning tool that will ensure individuals outside of your family do not have access to the wealth. You can put a variety of assets into a marital trust, including property, retirement accounts and investment accounts.
There are other types of spousal trusts, including a qualified terminable interest property trust (QTIP), bypass trust and spousal lifetime access trust. These different trusts have varying tax benefits and require the assets to be used in certain ways. Consult with an estate planner and certified public accountant to learn more about these different types of spousal trusts.
Pros and Cons of a Marital Trust
There are multiple advantages to using a marital trust, including that they:
- Double your estate tax exemption amount to $24.12 million
- Provide income and financial stability to the surviving spouse
- Keep assets within the family
- Protect assets from creditors and potential new spouses
- Can provide financial stability to the remaining beneficiaries once the surviving spouse dies
Like any financial tool, however, there are also downsides of using a marital trust. Those downsides include that they:
- Are irrevocable trusts, meaning once they are established, it’s extremely difficult to dissolve them or change their terms
- Only offer up to $24.12 million in estate tax exemption
- Require transferring assets into the trust, which can be a lengthy process
A marital trust can be a beneficial estate planning tool that will take care of your surviving spouse after you’re gone. By using this strategic tool, you can essentially double the amount of your estate that won’t be taxed at a federal level. You can also ensure that your wealth stays within your family by transferring assets into a marital trust.
Marital trusts require extensive tax and asset planning, so be sure to consult with a certified public accountant in addition to an estate planner when creating one.
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