Marital Trusts & Their Benefits

What Is A Marital Trust?

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.

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 included in the surviving spouse’s estate.

Exemptions From By-Pass Trusts And Estate Tax

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.

Qualification Of Medicaid And Supplemental Needs Trust

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 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.

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