Marital Trusts: Pros and Cons

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”

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Special Estate Planning Considerations for a Blended Family

Blended families create special estate planning issues.
It is important to address the special estate planning issues involved in a blended family situation.

There are a number of special estate planning considerations that affect those in a blended family. Remarriages are on the rise. According to the article “Estate planning documents for second marriages” from the Cleveland Jewish News, half of previously married seniors have married again.  And the issues are compounded if each spouse has one or more children from a previoius marriage.

We’ve all heard the horror stories of what happens when there is inadequate or no estate planning done to address these issues. Take, for example, a couple each of whom had children at the time of their marriage. Twenty years after the marriage, the husband dies. He had wanted to provide for his second wife, so his will stated that all his assets went to his wife. He may have assumed that anything left would go back to his children after her death, but nothing was put in place to make that happen.

What actually occurred was that his wife lived a long time after he passed, and she simply combined their assets. When she died, her will left all of the assets to her children, and her husband’s children received nothing. The husband’s children didn’t believe that he meant to do that, but because of the lack of planning, that’s exactly what happened.

What were the alternatives? He could have set up a marital trust to hold the assets for his second wife on his death, but upon the wife’s passing, would have gone back to his children. He could have named his wife as trustee to control the trust assets, or, if he wanted extra insurance that the assets remaining at his wife’s death would pass to his children, he could name an independent person or a trust company as trustee to oversee the trust.

Another horror story involves the couple in a second marriage who do not have wills or any other estate plan. Absent a will stating otherwise, Texas law provides that, if the surviving spouse is not the parent of all of the deceased spouse’s children,  a deceased spouse’s share of community property goes to the deceased spouse’s children. As a result, many surviving spouses are shocked go find out that they own their home and other property acquired during the marriage with their step children.

Anyone involved in a second marriage, especially if they have children from a previous marriage, needs to review their estate planning to make sure that their wishes will be carried out and not left to chance or the dictates of Texas law. Not only should they review their wills, but also insurance policies and retirement accounts to make sure that their beneficiary designations say what they want. For more information on what to consider if you are in a blended family situation see https://galligan-law.com/life-stages/blended-families/

There’s no “set it and forget” plan for estate documents, so before you walk down the aisle a second time, or shortly after you do so, speak with an estate planning attorney to clarify your goals and put them into the appropriate estate planning documents.

Reference: Cleveland Jewish News (May 7, 2019) “Estate planning documents for second marriages”

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