A marital trust is a type of irrevocable trust that allows one spouse to transfer assets to a surviving spouse tax free, using the unlimited marital deduction, while providing benefits not available if transferred outright. When drafting Wills for married couples, we usually include a Marital Trust to provide estate tax planning, spousal care, and Medicaid protection.

The Unlimited Marital Deduction

In the United States, married couples have what is called an unlimited marital deduction. The marital deduction allows the entire estate of the first spouse to die, to pass to the surviving spouse tax free. The idea being that estate tax, if any, is deferred until the surviving spouse’s death. A Marital Trust qualifies for the unlimited marital deduction. The surviving spouse is the sole lifetime beneficiary of the trust and can maintain the right to withdraw income and principal from the trust. The assets in the trust avoid probate on the surviving spouse’s death – but are including included in the surviving spouse’s estate.

By-Pass Trusts and Estate Tax Exemptions

A Marital Trust often works in conjunction with a By-Pass Trust to capture the deceased spouse’s estate tax exemption. By passing all assets to the surviving spouse using the unlimited marital deduction – the deceased spouse’s federal and state estate tax exemption is basically lost. The federal exemption can be captured by filing a portability election with the IRS – but not the New York State $5.93 million-dollar exemption. This is a problem with larger estates because the surviving spouse may need that exemption or estate taxes will be due on the survivor’s death. With a By-Pass Trust, assets equal to the NYS estate tax exemption are funneled into the By-Pass Trust. This B trust captures the exemption and can be structured so that the surviving spouse has full access during his or her lifetime. Any assets over the exemption amount pass to the Marital Trust, the A Trust. This A-B trust structure is seldom used due to the current high federal estate and gift tax exemption of $11.7 million per person – but this historically high exemption is due to sunset in January 2026 and may be lowered much sooner.

Supplemental Needs Trusts and Medicaid Qualification

If there is an anticipated need for long term care down the road, it is important to ensure assets are not being passed to the surviving spouse outright, thus disqualifying him or her from Medicaid long term care benefits. Medicaid has strict asset guidelines. However, Medicaid has a rule that if assets are passed to a spouse in a Supplemental Needs Trust through a deceased spouse’s will, the assets are automatically protected for Medicaid purposes. By creating a Marital Trust within a will and by including a provision that the trust can change to a Supplemental Needs Trust if the surviving spouse requires Medicaid, the assets in the trust become protected for Medicaid purposes.

Q-Tip Trusts for a Spouse and Alternative Beneficiaries

A Marital Trust can also be drafted as a Q-Tip Trust, allowing more control over assets passing to the surviving spouse, while still using unlimited marital deduction. When distributing assets outright, the deceased spouse loses the ability to control the remainder beneficiaries. Instead, the assets will pass according to the surviving spouse’s own estate planning documents. A Q-Tip Trust can be extremely beneficial for those who want to ensure their spouse is financially cared for, while also providing for alternative beneficiaries after the surviving spouse’s death. This is often the case for those who have children from prior relationships. By creating a Q-Tip Trust, the surviving spouse is entitled to all income, but not necessarily to principal in the trust. An independent Trustee can be appointed to manage the trust assets and the remaining trust property passes to the deceased spouse’s beneficiaries on the survivor’s death.

Experienced Estate Planning for Married Couples

It is important to review your will, assets and personal circumstances with an Estate Planning and Elder Law attorney to help determine the purpose of the Martial Trust within your will, and to discuss any additional estate planning tools that might further meet your goals.