July 2015

Marital Trust Design

When it comes to providing for your spouse after your death, your goals may include:

  • giving your spouse the financial benefits associated with some or all of your assets; and
  • specifying, at least in general terms, how these assets should be used for your spouse and where the remaining assets should pass after your spouse's death.

Trustee. The Trustee is in charge of the Marital Trust's assets. The Trustee decides how the assets will be invested and disbursed and is also responsible for legal requirements like income tax reporting. In some cases, it may be appropriate for the surviving spouse to serve as trustee of his or her own trust. In other cases, an independent trustee will be a better choice. Independent trustees include banks and trust companies, as well as family members, friends and trusted advisors.

Funding. What assets will form trust fund? The rules governing the Marital Trust will be established when you sign your estate plan. However, the trust often receives assets only after your death. You will need to decide what portion of your assets should flow to the Marital Trust. This may be expressed as a formula or in some other fashion. Taxes will play a role in determining the amount, but there are many non-tax factors to consider as well, not the least of which is how much your spouse will need to support his or her lifestyle.

Distribution Standards. How will the Trustee know how much to distribute to your spouse? Again, you'll need to create the rules when you establish your estate plan. Many of these trusts leave a great deal of discretion to the Trustee so that they can adapt to the circumstances. However, it is possible to provide that a set portion of the trust fund (e.g., 4% each year) will be distributed to the spouse.

Tax Deduction. By leaving money directly to your spouse, you can qualify for an estate tax deduction, which means that no estate taxes will be due, even on a large estate, until the second death. It's possible to gain this same advantage where the spouse's share is left in trust. Qualifying the trust for the deduction does require some rules to be followed and in some cases it is not advantageous to qualify for the deduction. This may be true because the estate of the first spouse to die is not sufficiently large to "soak up" all of the assets that can pass even without a deduction. In that case, it could be a mistake to take a deduction that will lead to the assets drawing a tax later (in the surviving spouse's estate) when they would not have drawn a tax in the decedent's estate even without a deduction.

Qualify for Elective Share. Absent a Premarital Agreement, North Carolinians are required to leave a certain portion of their property to their surviving spouse. Can you satisfy this requirement by leaving the property to the surviving spouse in a Marital Trust even though there are "strings attached?" Yes, you can if the trust is drafted in a manner to satisfy a couple of extra requirements that are intended to help assure that the surviving spouse actually receives financial benefits from the trust.

Remainder Beneficiaries. After the surviving spouse's death, the trust's assets will pass to others as specified by the decedent. The remainder beneficiaries may receive their shares in a further trust, governed by its own rules, or outright and free of trust.

Powers of Appointment. While the decedent specifies who will receive the trust assets from the Marital Trust after the surviving spouse's death, in some cases the decedent will leave the surviving spouse some ability to change the beneficiaries, or the size of the share they will receive. The decedent may believe that the surviving spouse will be in a position to benefit from knowledge after the decedent's death in fixing the final amount of the beneficiaries' shares.