A Marital Trust doubles the amount that you can pass free of estate taxes, while providing for your spouse after your death.
When a Massachusetts resident dies, they must pay a Massachusetts Estate Tax if the value of their taxable estate (essentially all assets) is over $1 million. If the value is over $11 million (subject to periodic adjustment), then they must also pay a Federal Estate Tax.
This raises an interesting scenario with married couples. Because each spouse is an individual, each spouse can pass $1 million free of estate taxes. The $1 million threshold is called the unified credit. However, spouses typically wish to leave all of their property to their survivor, which results in the combined value of the couple’s assets flowing through the surviving spouse’s taxable estate. This essentially wastes the first-to-die’s unified credit, and can result in much higher estate tax liability.
A Marital Trust is typically part of your Revocable Trust. It is a trust for your spouse, that allows them to benefit from the assets of your estate, while still utilizing your own unified credit. When done optimally, it increases the amount that a couple can pass tax free from $1 million to $2 million.
There are several ways of structuring the Marital Trusts. You could divide your taxable estate between your marital trust and another trust for your children (this is called an A-B Trust). You could place everything in the Marital Trust and allow your spouse to disclaim an appropriate amount to utilize your unified credit through a disclaimer trust. Or you could place certain restrictions on the Marital Trust, which would allow it to use your own unified credit. Your Executor could then make a QTIP Election in order to claim a Marital Deduction to the extent that the Marital Trust exceeds your own unified credit.
This type of estate tax planning requires careful preparation by an experienced estate planning attorney, but the savings can be dramatic. It’s better to keep your life’s savings in your family than to send it to the taxing authorities.