What Is a Family Trust and a Marital Trust?

By Jennifer Kiesewetter, J.D.

What Is a Family Trust and a Marital Trust?

By Jennifer Kiesewetter, J.D.

Estate planners use trusts to minimize estate taxes, avoid probate court, reduce court fees, and allow funds to pass more quickly to beneficiaries. Generally, a trust allows a third-party to hold onto assets on behalf of a beneficiary through a fiduciary agreement. Many types of trusts exist and vary by purpose and how the trust's creator intends for its funds to be used.

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Family and marital trusts are two types of trusts that allow married couples to provide for the care of the surviving spouse and children while preserving the federal estate tax exemption and providing protection from creditors and claims from future spouses. These trusts are often called AB trusts—the marital trust is the "A" trust and the family trust is the "B" trust.

Federal Estate Tax Exemption

The federal estate tax exemption is an amount that's subtracted from an estate's gross value before calculating estate taxes on the remaining amount. The tax exemption amount is adjusted each year for inflation. For example, for 2018, the tax exemption amount is $10 million per person and the 2018 adjusted amount is $11.18 million per person.

Before 2011, the exemption amount applied to each spouse individually. But, beginning in 2011, the tax exemption amount was made portable between married couples, meaning the exemption or any unused amount of the exemption can be transferred from the deceased spouse to the surviving spouse. If you choose to make this election, you must do so on a federal estate tax return.

How a Marital Trust Works

If a married couple chooses to create martial trust, or A trust, they must include the appropriate marital trust language in their will or revocable living trust. The couple divides their assets evenly in their names or the name of the revocable living trust. Do not leave the marital assets in joint accounts, as these assets pass outside the trust.

If one spouse dies in 2018, the first $11.18 million would be funded into the family trust, or the B trust. If the deceased spouse's assets exceed $11.18 million, the excess assets fund the marital trust. Any assets above the exemption are not subject to estate taxes until after the surviving spouse passes away.

When the surviving spouse passes away, the surviving spouse still has his or her estate tax exemption. The second exemption is then applied to the assets in the marital trust. If any assets exceed the exemption, those assets are taxed as part of the second spouse's estate. Any assets remaining after the tax bill is paid pass to the beneficiaries of the marital trust. The beneficiaries of the marital trust may be the same or different than those of the family trust.

How a Family Trust Works

Because the assets in the family trust are up to the estate tax exemption of the first spouse, the assets pass to the final beneficiaries free of estate taxes. Depending upon how long the second spouse lives, the assets in the family trust could grow to a significant balance with earnings over time.

Estate planning is complex. To ensure you're correctly using exemptions and credits, protecting your spouse, and protecting your children or other family members, you may want to hire an online service provider or attorney. Consulting a legal service provider or estate planning attorney helps save you time and gives you peace of mind in knowing you're protecting your loved ones in life and death.

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