When one spouse dies, they can choose to pass their entire estate to their surviving spouse without the estate being taxed. The main law protecting the deceased spouse's estate from taxation, Section 2056 of the IRC (Internal Revenue Code), allows for a deduction to prevent the survivng spouse from paying taxes on it, but the deduction only covers part of the deceased spouse's estate. Other federal laws allow a couple to create a trust for marital deductions, or “marital deduction trust." This type of trust protects the estates of both spouses, instead of only the estate of the deceased spouse. Trusts for marital deductions allow a married couple to pass their entire estate to the surviving spouse upon death, without any of the property being taxed.
What Are the Requirements for Trusts for Marital Deductions?
There are many different requirements for a trust for marital deductions to be considered valid. While the specific details may vary by state, the surviving spouse generally must demonstrate that:
- They are the trust’s only beneficiary during their lifetime, meaning that the surviving spouse is the only person who can receive any property, assets, or funds from the trust while they live; AND
- They have been given the sole authority to distribute trust assets when they die; OR
- All the income generated by the trust must be passed to the survivor spouse annually during their lifetime, with instructions as to who will receive the trust assets if the surviving spouse dies. This is also known as a “qualified terminable interest property trust”, or QTIP trust. It is also the most common form of marital trust.
Also, as with most other types of trusts, marital deduction trusts will not be valid unless it:
- Names one or more persons who will be responsible (the “trustee”) for transferring the trust assets to the named beneficiary (the spouse)
- Specifies which assets or property will be held in the trust, whether it be money, real property, securities such as stocks or bonds, or the person’s entire estate
If a trust for marital deductions does not meet these requirements, the trust will likely be considered invalid, and the couple will not qualify for federal tax deductions on the transfer.
Can I Write My Own Trust Documents for Marital Deductions?
For many trust arrangements, the person creating the trust (the “settlor”) may wish to write the trust document by themselves. This might be practical if the person is dealing with a limited amount of assets or is looking for a straight-forward transfer of property.
However, trusts for marital deductions are usually highly complex, since they often deal with the transfer of an entire estate. Such a transfer will require a detailed analysis of all the property that a person owns, and, sometimes, all the property of their spouse as well. Also, marital deduction trusts must conform to many different federal tax laws and tax requirements.
For these reasons, it is highly recommended that a couple seeking to create a marital deductions trust consult with an estate planning lawyer for advice on how to proceed. As mentioned, failure to follow trust requirements can disqualify the spouses for the much-needed tax benefits.
Do I Need a Lawyer for Help with Trusts for Marital Deductions?
If you are considering creating a marital deductions trust, you might want to contact an estate lawyer for guidance before you start planning. Your attorney can be there to guide you through the drafting process, to make sure that you fully comply with federal and state tax requirements. In the event of a dispute over the trust funds, a lawyer can represent you in court to help you protect your interests.