Transferring assets between spouses at the time of one spouse’s death should be a simple matter. Unfortunately, potential estate tax implications, creditor claims and probate proceedings can make the process extremely complex and costly. That’s why affluent married couples and blended families should strongly consider spousal trusts.
Structured Wealth Transfer
In spousal trust arrangements, one spouse transfers assets into a trust for the benefit of the other spouse during their lifetime. This provides a structured framework for seamless asset transfer, tax optimization and protection against potential creditor challenges. Spousal trusts can also enable controlled inheritance distribution and address various estate planning complexities. Because spousal trusts come in multiple forms, couples can choose the type best suited to their unique situation and goals. Here are four of the most popular types.
Also known as A trusts, marital trusts use the unlimited marital deduction to defer estate taxes until the surviving spouse’s passing. The trust structure safeguards assets from creditors, legal claims and potential new marriages, ensuring that they remain within the intended family lineage. One of the characteristic features of marital trusts is that they enable the spouse who creates the trust to stipulate how assets will be distributed after the surviving spouse’s death.
Marital trusts are used to provide an ongoing income stream—from interest, dividends or rental income generated by the assets held within the trust—to the surviving spouse. Thus, the trust can be used to provide a surviving spouse with financial security while preserving the trust principal for the eventual beneficiaries and carefully controlling how distributions are made.
With qualified terminable interest property trusts, also known as QTIP trusts, the surviving spouse is the sole beneficiary throughout their lifetime. Like marital trusts, QTIPs provide income to the surviving spouse: They must pay all dividends and interest to the beneficiary once per year at minimum. However, the surviving spouse’s access to the trust’s principal, and what they can use it for, may be restricted.
Bypass trusts (so called because they bypass the taxable estate of the first spouse to die) are often set up alongside marital trusts. Assets placed in these trusts are capped according to what’s permitted under the estate tax exemption, currently at $12.92 million per individual.1 With so-called B trusts, trust-generated income is not required to be distributed. What’s more, additional beneficiaries of the trust assets are permitted during the lifetime of the surviving spouse. With bypass trusts, principal may be used for specific surviving spouse expenses such as health, education and support.
Spousal Lifetime Access Trusts
Spousal lifetime access trusts, or SLATs, are unique in that the donor does not need to die for this trust to be created and the beneficiary spouse and any other beneficiaries receive immediate access to the trust assets. The beneficiary spouse may receive distributions from the SLAT, yet the trust assets are technically excluded from their estate and not subject to estate tax upon their death.
Ensuring a surviving spouse’s financial security, managing estate tax implications, planning for blended families and preserving wealth for future generations are excellent reasons to consider spousal trusts. Don’t hesitate to speak with your wealth advisor if you’d like to learn more.
1 “Estate Tax”
This article is provided for informational and educational purposes only and is meant to be general in nature. It does not represent a complete analysis of the trusts mentioned, and it should not be construed as an individualized recommendation or personalized advice. The use of trusts involves complex laws, tax rules, and regulations, and they may not be appropriate for your specific circumstances. Interested parties are strongly encouraged to seek advice from qualified tax, legal, and financial professionals before making any planning or financial-related decisions. The information has been obtained from sources believed to be reliable, but we do not warrant the accuracy or completeness of the information provided. Investments inside of a trust are subject to risk and the potential to lose principal.
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