Trusts for married couples: everything you should consider

Making sure you are setting up the right financial plan for your spouse, family, and legacy is one of the primary concerns in end-of-life planning. Having covered all the different types of trusts in a separate piece, we’d like to cover which trust arrangement works best for married couples.

There are countless types of trusts which married couples may create, but the first thing you should consider before exploring all of these types is whether or not you would like to create a joint trust with your spouse. 

Joint trusts

A joint trust is a single trust document that can cover both spouses’ assets and offers provisions for what happens upon the death of each. It is ideal for couples who live in a community property state, have the same beneficiaries and trustees in mind, and have the same distribution goals. This type of trust is also a good option for a married couple with a simple estate. 

Joint trusts are a popular option for married couples because they’re less expensive to set up and are compatible with the notion that the marital estate is a single unit. Joint trusts exempt couples from going through the often-painful process of splitting shared assets into separate parts to be held in separate trusts. 

There are some drawbacks to joint trusts, though. One of them is that a joint trust might not offer protection from creditors or judgments against each spouse. In other words, one person’s debt could affect the other’s assets as well. Another disadvantage includes the lack of flexibility after the death of one spouse. Once the first spouse dies, the trust assets are disbursed according to that spouse’s designations. The remaining spouse will undoubtedly face difficulty in trying to amend or revoke assets in their own trust. 

So the alternative to a joint trust - an individual or separate trust - may be a great option for those who find those drawbacks highly unappealing. An individual trust is especially well suited for cases of second marriages, or for cases when either or both spouses have significant individual estates prior to the marriage. Furthermore, individual trusts still offer the option for each spouse to name the other as a co-trustee. This means that both spouses will be able to control all assets even though they may be funded into separate trusts. 

Marital trust - the “A” trust

If you have a basic idea of whether or not you would like to create a joint trust, you should now take a look at some common types of trusts that you may use to benefit your spouse and family. The first is the marital trust, also known as the “A” trust. This is a type of irrevocable trust that can be established by one spouse for the benefit of the other. It allows for the tax-free transfer of assets to a surviving spouse through the “marital deduction rule” (Section 2056 of the Internal Revenue Code). 

This trust is especially useful for cases in which one spouse’s individual estate is more than the individual exemption amount. If a marital trust is used in this case, assets are transferred to the trust upon the death of the spouse, allowing estate taxes to be delayed until the surviving spouse’s death. The surviving spouse has access to all the assets and funds in the trust and has the ability to determine who will be the beneficiary of the trust upon his or her death. 

QTIP trust

A QTIP trust, which stands for “qualified terminable interest property,” is a type of marital (or A) trust. However, it differs slightly from a marital trust in that the assets are not fully controlled by your spouse: only you hold the ability to determine who will inherit the trust after the death of you and your spouse. QTIP Trusts are often used by those who have offspring from different marriages. When you set up a QTIP Trust, you name a trustee and two types of beneficiaries. One is a lifetime beneficiary, which is your spouse, and the other is a final beneficiary. This final beneficiary is the one who receives the assets in the trust after the death of the lifetime beneficiary, your spouse. Final beneficiaries could be your children from another marriage, grandchildren, or anyone else. Since the trust is irrevocable, the lifetime beneficiary (your spouse) is unable to change the terms of the trust or who will be the final beneficiary. Your spouse is also unable to sell the assets in the trust because they are not the owners.

Credit shelter trust - “B” trust

A credit shelter trust, also known as a bypass trust or “B” trust, is an irrevocable trust which is used by couples to reduce taxes when passing assets on to their heirs. This trust is created upon the death of the first spouse, but the total funds or asset value which flow into the trust is capped at whatever the current estate tax exemption allows. The beneficiary of this trust is not the surviving spouse. The property “bypasses” the surviving spouse and keeps the assets out of their estate—hence the name “bypass.”

As a result, the surviving spouse cannot have complete control over the assets. Their access to the trust is limited: they can only use funds in the trust to pay for things such as medical or educational expenses.

This trust is often used together with marital trusts (A trusts); the combination of these two trusts is known as the A-B joint trust. This trust is usually created so that some assets can flow directly into the surviving spouse’s estate, while some assets are left to the heirs of the couple without taxes. 

QDOT Trust

A QDOT trust, an abbreviation for “Qualified Domestic Trust,” is a type of trust which helps non-citizen spouses take advantage of the marital deduction on estate tax normally offered to other married couples. It is the best way to preserve marital assets for surviving spouses who have not gained U.S citizenship: the surviving spouse pays no taxes on the assets in the trust with no limit.

However, this trust has its own limitations; upon the death of the non-citizen spouse, an estate tax will be imposed on the trust and any surviving beneficiaries will see a significant reduction of the value of the trust.

Each type of trust has its own set of benefits and drawbacks. Choosing the right trust can be hard at times, but remember that you have the option to consult our concierge service if you have any questions or require additional assistance. Peacefully’s concierge service can help with referrals to trusted professionals, offering case-specific advice, recommendations, and coordination for you. For more about our concierge service or to schedule a free consultation, click here.

— Lucy Jung