In estate planning for a married couple, it isn’t always as simple as “give it all to my spouse.”  Blended families, concerns about creditors and predators, new spouses and taxes are all reasons to make money available for your spouse when you are gone, but not simply leave it to them.  Clients often use marital trusts in these situations to protect the inheritance they leave to their spouse.  Forbes’ recent article, “Guide To Marital Trusts,” explains the pros and cons of using a marital trust.

As a quick explanation before the pros and cons, a marital trust leaves an inheritance in trust to the surviving spouse.  The trust pays all of the income it generates (e.g. dividends) and the principal it holds can be use for certain reasons.  When the surviving spouse dies, remaining property goes to whomever the first spouse named.  There are variations, but you can assume these trust terms for now.

The main benefits are the following:

1. Tax Planning.  Depending on the tax elections you make, the marital trust can be considered the same as leaving the inheritance to your spouse for estate and gift tax purposes.  This allows you to use the marital tax deduction and not have estate tax apply to that inheritance.  Separately, you can elect the opposite, which might be wiser in substantial estates as it keeps money out of the estate of the survivor.  Either way, the trust gives flexibility you don’t get from leaving the inheritance directly to spouse.
2. Provide for Spouse.  The marital trust distributes its income directly to the spouse.  Meaning, there is a stream of money that goes to the spouse to provide for their needs, and they may have the power to use more of the marital trust if they need it.
3. Remainder Beneficiary Planning.  When the surviving spouse dies, the remaining assets go to the beneficiaries set by the first spouse.  This is helpful in blended families when the first spouse wants the remaining assets to go to their children as opposed to surviving spouse’s family.  You can change this to provide options to the surviving spouse of who to leave it to, even if it is limited to a group of people.  Similarly, because the trust holds the property, it tends to stay there and provide financial security to the future beneficiaries.
4. Protect Assets from Creditors, Predators and Potential New Spouses.  Because the assets are held in trust with restrictions on it, there is an aspect of asset protection planning.  It is very difficult for creditors of the surviving spouse to get at the assets held by the trust, although the income might be in jeopardy.  Depending on who is in charge of the trust, it can also prevent a spouse who is suffering from cognitive decline misuse or waste the trust assets.  It can also prevent assets being paid to a new spouse because they are not the beneficiary.  Depending on how it is structured, you can also make it so that remarriage affects the distributions.

However, there are also downsides to using a marital trust. Those downsides include:

1. This is the number one reason people don’t use a marital trust.  It is an irrevocable trust, so once the first spouse dies, it is difficult to undo or change.  That is also a pro to the first spouse (if you want to make sure left over money goes to your kids, you can’t let the survivor change that), but can make things cumbersome.
2. Requires attention. To get the benefit of the marital trust, you need to make sure the assets are properly titled to the trust and that the income is distributed as appropriate.  Many financial institutions set up the accounts held by the marital trust to automatically distribute the income, so this is very doable, but does require more administration and attention.

I would add, as sort of a pro and a con, trusts for spouse can greatly assist with Medicaid planning for the surviving spouse if done as part of the first spouse’s will.  The marital trust can protect assets so that they are disregarded for Medicaid eligibility, although the income must be used.  If you want to build a trust for the surviving spouse for any of the above pros while incorporating Medicaid planning, there may different styles of trusts that can accomplish it better.

Reference: Forbes (June 30, 2022) “Guide To Marital Trusts”