Estate planners commonly create family and marital trusts to minimize estate taxes for their clients. In some cases, it’s necessary to create both types of trusts contemporaneously in order to effectively minimize the estate tax. However, achieving this result requires careful preparation of the trust documents to insure that they include unambiguous language that adheres to the federal estate tax laws.
Estate Tax Fundamentals
Marital and family trusts are estate planning tools that take advantage of the marital deduction and unified credit. The marital deduction reduces your “taxable estate” -- which is the final estate value subject to the estate tax -- by the value of all assets you transfer to your spouse at death. The unified credit, on the other hand, is an additional exemption that further reduces the value of your estate (beyond the marital deduction) for tax purposes. All taxpayers are eligible to utilize a unified credit, but since the amount can change each tax year, your available credit amount will depend on the year of your death.
The underlying purpose of a marital trust is to provide assurance that the estate will take full advantage of the marital deduction by making the surviving spouse the sole beneficiary. Since the marital deduction is only available for assets you leave to a surviving spouse, naming your spouse as the sole beneficiary eliminates the possibility of other family members receiving the assets and losing the marital deduction on your estate tax return. Moreover, you can draft the marital trust document to prevent your spouse from disposing of trust assets during their lifetime. If you do, however, you must provide your spouse with a general power of appointment in the trust document. A general power of appointment allows the surviving spouse to name the beneficiaries of the marital trust assets that remain at her death. This is vital since the IRS will not allow for the marital deduction on the first spouse’s estate return unless the surviving spouse receives either full ownership of the assets or a general power of appointment over them.
Using Family Trusts
Creating a family trust, which is simply a trust in which all beneficiaries are your family members, isn’t essential unless you choose to allocate a portion of your estate to other family members such as your children. By creating a family trust, instead of transferring 100 percent of your estate to your surviving spouse, you can rest assured that in the event your spouse remarries after your death or becomes estranged from your children, they will receive the trust assets.
Overall Tax Implications
The benefits of combining a marital and family trust is that the assets you transfer to the marital trust are entirely exempt from the estate tax because of the marital deduction. This allows you to reserve the unified credit for the remaining estate assets you transfer to the family trust. As a result, your estate only pays tax on the value of assets you transfer to the family trust, less the applicable unified credit amount for the year of your death.
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