Bottom Line. A marital trust can be a powerful estate planning tool for those looking to provide for a surviving spouse while maximizing tax advantages. By utilizing a marital trust, couples can ensure that their assets are passed on in a tax-efficient manner and that their family's financial future is protected.
One of the biggest mistakes parents make when setting up a trust fund is choosing the wrong trustee to oversee and manage the trust. This crucial decision can open the door to potential theft, mismanagement of assets, and family conflict that derails your child's financial future.
One disadvantage of a SLAT is that if the non-donor spouse dies before the donor, the donor spouse loses indirect access to trust assets.
Once the surviving spouse dies, the marital trust then passes onto other beneficiaries. The terms of the trust will then dictate how the beneficiaries will receive the income or principal from the trust.
The assets transferred into the marital trust are not subject to estate tax—they are tax free because they qualify for the unlimited marital deduction. Estate taxes are deferred until the surviving spouse dies.
This type of trust not only provides a financial resource for your spouse, but it also assures that your assets are ultimately distributed according to your wishes, and that your heirs do not incur any more estate taxes than are necessary.
With a trust, there is no automatic judicial review. While this speeds up the process for beneficiaries, it also increases the risk of mismanagement. Trustees may not always act in the best interests of beneficiaries, and without court oversight, beneficiaries must take legal action if they suspect wrongdoing.
Separate Trusts Pros: Can be a wise option for couples who own separate property, either from previous marriages or relationships, or even from a family inheritance. They also might be beneficial if you have a prenuptial agreement that already dictates property and earnings should be separate from one another.
In addition, because SLATs are typically structured as so-called “grantor trusts” for income tax purposes, the gifting spouse remains personally responsible for paying all income taxes attributable to the trust assets, allowing the SLAT to grow income tax-free.
Trusts offer amazing benefits, but they also come with potential downsides like loss of control, limited access to assets, costs, and recordkeeping difficulties.
There are a variety of assets that you cannot or should not place in a living trust. These include: Retirement accounts. Accounts such as a 401(k), IRA, 403(b) and certain qualified annuities should not be transferred into your living trust.
There is no minimum
You can create a trust with any amount of assets, as long as they have some value and can be transferred to the trust. However, just because you can doesn't necessarily mean you should. Trusts can be complicated.
Simple Living Trusts for Married Couples
Simple living trusts are often considered the easiest kinds of trusts to set up and keep. In a simple living trust, a couple can share the control and benefits of the trust while they are living. Once one spouse dies, the other spouse will have total control over the trust.
The setup of any marital trust involves at least three parties: a guarantor who establishes it, a trustee who manages it, and a beneficiary who receives the assets when the guarantor passes away.
Trust assets are more likely to be deemed separate assets and not subject to division in the event of divorce if the trust is funded by someone other than the beneficiary via gift or bequest or is in a jurisdiction that permits self-settled trusts, is irrevocable, and has a trustee with discretion over distributions.
Q: Do trusts have a requirement to file federal income tax returns? A: Trusts must file a Form 1041, U.S. Income Tax Return for Estates and Trusts, for each taxable year where the trust has $600 in income or the trust has a non-resident alien as a beneficiary.
Separate trusts may be a good option for couples who own separate property that they brought into the marriage, either from inheritances or previous marriages, but they can be more expensive and more complicated to administer. Joint trusts, on the other hand, allow for more flexibility.
In this instance, the spouse can change a trust after death, but only the survivor's trust, not the bypass trust. However, certain states have laws — such as California's Uniform Trust Decanting Act — that provide the spouse an avenue for altering the bypass trust.
Parents and other family members who want to pass on assets during their lifetimes may be tempted to gift the assets. Although setting up an irrevocable trust lacks the simplicity of giving a gift, it may be a better way to preserve assets for the future.
There are also some potential drawbacks to setting up a trust in California that you should be aware of. These include: When you set up a trust, you will have to pay the cost of preparation, which can be higher than the cost of preparing a will. Also, a trust doesn't provide special asset or estate tax protection.
Your Assets Might Not Be Protected: Another crucial point to note is that not all trusts offer protection from creditors. For instance, in revocable trusts, the assets are not protected from creditors as the grantor retains control of the assets. Potential Tax Burdens: Finally, trusts can carry potential tax burdens.
Potential Drawbacks of a SLAT
Since you cannot be a trustee, you won't have any say in whether and when distributions will be made to the beneficiaries. Many couples who consider SLAT planning ultimately decide they are not comfortable losing this much control over their assets.
To qualify as a spousal trust, the beneficiary spouse must be entitled to receive all of the income earned in the trust during their lifetime. This means that your spouse must have a legal right to enforce payment of the income and no one can withhold it from them.
What are the cons of a Marital Trust? The Marital Trust has a tax ID and must file a separate tax return.