The marital trust is generally funded with assets that exceed the amount transferable to a Credit Shelter Trust. The marital trust is generally not taxed in the donor’s estate because it qualifies for the marital deduction, if all conditions are met. However, it is subject to estate taxes at the death of the surviving spouse. The surviving spouse must receive all income for life and must have a general power of appointment (ability to direct principal for one’s own benefit or for the benefit of another).
In many ways, establishing a marital trust for the surviving spouse is similar to leaving the assets outright. However, with a power of appointment, the surviving spouse has the ability to use the assets of this trust for any purpose and can deplete this trust if he or she chooses. There are no guarantees that there will be any assets for the remaining beneficiaries at the surviving spouse’s death. Also, the surviving spouse has complete control and can distribute assets to different beneficiaries.
There are several benefits to establishing a marital trust. A trust will provide professional management of the assets for the surviving spouse. The trustee can take care of the investment decisions and simply send the income distributions to the spouse.
As with most trusts, this trust can be established as a revocable living trust during the lifetime of the donor or as a testamentary trust at the death of the donor through the final will. If the trust is established during the lifetime of the donor, the assets in the trust will not be subject to the delays and expenses of the probate process.
Regardless of how the trust was originally established, assets within a trust will not be subject to the probate process at the death of the surviving spouse. As such, probate expenses will be reduced and privacy will be preserved at the second death.
If the estate is very large, the surviving spouse may already have sufficient assets to provide for a comfortable lifestyle and may already have a substantial estate tax bill due at his or her death. In lieu of the marital trust, a more tax-effective strategy might be to leave assets to the children either directly or in trust with distributions scheduled at specific ages.