At OC Wills & Trust Attorneys, we help estate planners create all types of trusts, including marital trusts. This type of trust provides significant benefits for you and your family; however, trusts are complex entities involving tax rules and asset management considerations.
When you meet with us, you will work directly with a knowledgeable trust attorney who will walk you through the process. Contact our office today to arrange a consultation. Our estate planning firm serves clients in Irvine, Huntington Beach, and Orange County.
What Is a California Marital Trust?
A marital or “bypass” trust is an irrevocable trust that allows you to transfer assets to a surviving spouse tax-free. It also protects the surviving spouse’s estate from tax consequences before the remaining assets pass on to their children. Terms of a marital trust include:
- Grantor – The person who establishes the trust.
- Beneficiary – The primary beneficiary is the surviving spouse who receives trust income upon the grantor’s death. The surviving spouse must be the sole beneficiary entitled to receive trust assets during their lifetime.
- Trustee – The person (or organization) appointed to manage the trust assets and transfer property to the beneficiary (a marital trust must have at least one named trustee to be valid).
- Principal – The assets initially placed in the trust, including investments that generate income during the beneficiary’s lifetime.
How Does a Marital Trust Work?
The trust agreement specifies all the assets and property held in the trust, such as:
- Stocks
- Bonds
- Mutual funds
- Cash
- Real property
Upon the grantor’s death, trust assets pass to the surviving spouse and are not subject to federal estate taxes. Because of the martial deduction rule under the Internal Revenue Code, neither spouse owes estate taxes on the transfer.
The surviving spouse can receive income from the trust. Also, the trustee may have the right to transfer some of the principal or initial investment to the surviving spouse under certain circumstances, such as a medical emergency.
The grantor can also give the surviving spouse “general power of appointment,” allowing them to instruct the trustee to transfer trust assets up to a predetermined amount. Finally, the remaining trust assets pass on to the couple’s children or other beneficiaries when the surviving spouse dies.
What Are the Benefits of a Marital Trust?
A marital trust provides a family with significant tax benefits. Although the remaining trust assets are subject to estate taxes when the surviving spouse dies, the couple can take advantage of the federal estate and gift tax exemption – the amount you can leave to heirs before estate taxes kick in.
In 2022, the exemption is $12.06 million for an individual. But the portability rules of current tax law allow a couple to combine their exemptions, which means they can protect up to $24.12 million from federal estate taxes.
Suppose the grantor transfers $10 million to the surviving spouse through a marital trust, and that spouse transfers $15 million total to the couple’s children upon their death. No estate taxes are due because it does not breach the couple’s combined exemption of $24.12 million. Without the marital trust, the surviving spouse’s remaining estate would owe estate taxes on the amount that exceeded the individual exemption of $12.06 million.
Notably, the federal estate and gift tax exemption amounts will expire at the end of 2025 unless Congress acts to make those amounts permanent, and tax laws are always subject to change. So it is essential to work with an experienced trust attorney when establishing and managing a marital trust.
Marital Trust Example
A Qualified Terminable Interest Property (QTIP) trust is one type of marital trust – well-suited for couples who have children from prior marriages. While the surviving spouse is still the initial beneficiary, a QTIP does the following:
- Allows the grantor to designate specific beneficiaries such as children from another marriage, grandchildren, or anyone else
- Allows the surviving spouse to decide what portion of the deceased’s estate should be held in the trust to maximize tax savings
The surviving spouse must receive any income produced by the trust at least annually and also has the right to use the real estate property. Upon their death, the trust assets go to the final beneficiaries named in the trust. Estate taxes are due on all the surviving spouse’s assets that exceed the individual exemption amount, including those held in the QTIP trust.
Contact Our Experienced Orange County Marital Trust Attorney
Marital trusts can help couples with substantial estates minimize estate tax and preserve their wealth for their children and other beneficiaries. But you need an experienced trust attorney to help you navigate the complex tax laws. Contact our office today so we can start working on your marital trust.
