A marital trust is another name for the “A” portion of an AB trust, which is in itself a method of maximizing both spouse’s lifetime gift and estate tax exemptions.
Planning years in advance for the creation of a marital trust can ensure that a couple’s intended heirs get to keep as much of their inheritance as possible. In addition, the marital trust portion of an AB trust can be accessed freely by a surviving spouse, in most cases, giving them the ability to support themselves while planning ahead for the final disposition of the assets.
Consult with New Mexico Financial & Family Law to learn more about these complex but highly beneficial trust arrangements. You can schedule an appointment with a New Mexico marital trust lawyer with no obligation when you call us today at 505-503-1637 or contact us online.
A marital trust is created after the death of one of the spouses. To prepare for this event, the couple should contact a New Mexico marital trust attorney while both are still alive and healthy as soon as they feel they are ready to plan for the future — or as soon as they know, they have questions that require a professional’s insight.
Put another way: a marital trust has to be arranged while both spouses are capable of making sound financial decisions. Don’t delay reaching out to our New Mexico marital trust law firm because the sooner you have your plans arranged, the more confident you can feel about the financial future of your family.
Marital trusts are most appropriate for a couple that is in danger of exceeding their lifetime gift, estate, or generation-skipping transfer tax (GSTT) limit. As of writing, that limit is an unprecedented $13.61 million per spouse.
Combined, that amounts to a $27.22 million exemption for the couple.
However, the large exemption amount is set to expire at the end of 2025, reverting to a lesser amount of around $7.2 million an individual.
Further, the exemption amount only applies while each spouse is alive. If one spouse transfers ownership of their property in its entirety to their surviving spouse, then there is a risk that the surviving spouse’s total estate will exceed their exemption amount.
A marital trust is created at the time of the first spouse’s death precisely so that this situation won’t happen. The deceased spouse’s portion of the estate will remain in a separate trust, also known as a bypass trust or a credit shelter trust.
The financial and legal aspects of a marital trust can be complicated, even for professionals. Since these trusts are irrevocable, there is also the risk that a mistake or a lack of foresight could lead to a financially undesirable outcome for the family.
Because of the complex nature of these trusts and the need to get them right on the first try, it is advisable to reach out to one of our New Mexico trust lawyers for guidance. We can help you review your entire estate plan, consider your goals, and recommend a tailored set of solutions to help your family thrive.
A marital trust usually starts out as a joint trust, owned and controlled by both spouses in a married couple. At this point, both spouses are considered grantors, and the trust is revocable.
Both spouses can also be trustees, and a third non-party trustee can be chosen to assist them in managing the trust.
After one of the spouses dies, the joint trust splits into two irrevocable trusts:
This arrangement essentially designates the maximum estate tax-free gift that the deceased spouse can give to their beneficiaries in advance. Because the property in the bypass trust will be distributed as a future interest, legally, they can count it as a direct gift from the deceased spouse to their heirs.
When the surviving spouse passes, they can similarly maximize their tax-free gift to their beneficiaries through their own separate marital trust.
This arrangement is also referred to as an “AB trust,” where the A portion represents the marital trust or survivor’s trust, and the B portion is the deceased spouse’s bypass trust.
Let’s say that it’s 2026, and the maximum estate/gift tax exemption per person has reverted to $7 million because Congress has failed to renew the higher exemption amount.
Two spouses, Leslie and Sam, collectively have an estate valued at exactly $14 million. No problem, right? They have enough to gift their estate to their children or other heirs tax-free.
Here’s the catch: if Leslie dies and leaves the entire portion of her estate to Sam, Sam now has $14 million as one individual. This amount exceeds the exemption amount by quite a bit, which would trigger hefty estate taxes when Sam eventually dies.
To avoid this situation, Sam and Leslie put all of the $14 million into a joint trust with rules stating that it would split into two when one of them died. Now, when Leslie dies, their half goes into a trust, and Sam’s half goes into their own trust.
Because the original transferor remains designated as Sam, his children can inherit the remainder of both trusts while making use of the maximum exemption.
In the above example, Sam might actually get to use both portions of the $7 million exemption because of an IRS rule called portability. However, this rule can get pretty complicated if Sam decides to remarry at some point after Leslie dies.
They now have their own spouse with their own exemption — and that’s where things can get pretty complicated.
In addition, portability does not apply to generation-skipping transfer taxes (GSTTs), which are incurred when an inheritance goes to a grandchild or anyone younger than the property gifter by 37.5 years or more.
A marital trust can prevent complications that come with portability in situations where a family is blended, meaning that there may have been a previous marriage or there may be one after the first spouse dies.
Either trust can also name grandchildren or other young beneficiaries while still making use of the maximum GSTT exemption.
In an AB trust arrangement, the surviving spouse can receive an annuity from the proceeds of one or both trusts. They may also have permission to access a certain amount of the principal of either trust (what was originally deposited) in the event of a qualifying expense, such as a health emergency or needed home repair.
However, in order to make full use of the exemption amount, the surviving spouse cannot have full control and access to the deceased spouse’s trust. If they did, the contents of the trust may be considered to be owned by the surviving spouse, as far as the IRS is concerned.
At that point, the special circumstances of the trust would be broken, and the contents of the trust may be made subject to an estate tax when the second spouse passes.
On the other hand, the surviving spouse may be given permission to access the marital trust, as opposed to the bypass trust.
A qualified terminable interest property trust is nearly identical to a marital trust, except the surviving spouse does not have permission to access the principal of the trust. Instead, they will only receive an annual distribution, which will last until the remainder of their life.
This arrangement preserves the contents of the trust for future generations while still using its proceeds to support the surviving spouse. It also allows for the trust to qualify as part of the deceased spouse’s unlimited marital gift exemption for estate tax calculation purposes.
One unique feature of a QTIP trust is that the surviving spouse can elect whether to transform all or a portion of a joint trust into a QTIP trust upon the death of the spouse.
A marital disclaimer trust similarly delays the decision of whether or not to turn a joint trust into a bypass trust, make use of portability, or count the trust as a direct gift to the spouse. To allow for this flexibility, a disclaimer is included in the trust language, stating that the surviving spouse can elect to create a bypass trust using an AB structure or to consider the entire deceased spouse’s portion as a marital gift.
A general power of appointment basically gives the designated person the same abilities as a grantor who creates a revocable trust.
In a revocable trust, the grantor is able to access the contents of the trust or modify it at any time. When a grantor assigns general powers of appointment to their surviving spouse, they are giving that spouse these same permissions without having to include them in the original trust formation process.
The person with general powers of appointment still has to honor the terms of the trust; however, they are obligated to care for the contents of the trust and not deplete them before they are distributed to beneficiaries. Remember that beneficiaries carry legal rights in trust arrangements, so they can hold someone accountable for misusing the trust’s assets.
General powers of appointment trusts are similar to QTIP trusts, except they are not as restrictive.
Both trusts can be an option for families who are not worried about exceeding their exemption amounts for estate, gift, and GST taxes.
While the estate tax exemption amounts have reached record-high levels, many couples who aren’t anywhere close to breaching their lifetime exemption still elect to form a bypass trust and a marital trust.
The reason, often, is that one or both spouses were previously married. There may be children from a previous marriage, and either spouse may have received property from their former spouse upon divorce.
An AB trust structure allows each spouse to designate where their property will go after one of the spouses dies. That way, they can set aside assets like money from alimony or an inherited home inside of a trust.
They can also designate children from the former marriage as beneficiaries without worrying about whether their spouse will honor that intended inheritance after they die.
A marital trust can make life more predictable, in other words, because certain property has been legally separated and legally promised to someone else.
And, as mentioned before, if a spouse does remarry, there’s no risk of them promising assets from the former marriage to their new children or relatives. They have a duty to honor the terms of the trust and ensure that distributions occur as intended.
Marital property issues can get complicated quickly, especially in blended families. There is also the concern for high net-worth families that they could exceed their exemption amounts for estate and gift taxes.
Planning well in advance with the help of a New Mexico marital trust attorney can help you anticipate these complications and make the most financially sound decision possible.
When you are ready to discuss your future and create the best possible situation for your family, call New Mexico Financial & Family Law. We’ll provide you with clear and direct advice with regard to your specific finances and goals for the future.
Book your appointment with our New Mexico marital trust law firm today by calling us at 505-503-1637 or contacting us online.
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