A common part of crafting a good estate plan is establishing a trust (or trusts). A trust can help reduce your estate tax liability and keep your assets where they belong: with your family and beneficiaries.

There are many different kinds of trusts that serve many different purposes, and they can sometimes get complicated. However, the simplest, most common types of trusts fall under the umbrella of spousal trusts. These ensure your spouse (and maybe your children and grandchildren) is financially prepared after you are gone.

Here is a basic summary of four common spousal trusts:

1. A Trust (Marital Trust)

A marital trust is a specific type of trust established for the benefit of a surviving spouse. It is a trust that takes advantage of the unlimited marital deduction in order to avoid estate taxes at the time of the first spouse’s death in the event that the first spouse’s individual estate is more than the individual exemption amount.

Here’s how it works: At the time of death, trust-owned assets are transferred to a trust for the benefit of the surviving spouse, essentially allowing estate taxes to be delayed until the second spouse’s death. The surviving spouse must be the only beneficiary of the trust during his/her lifetime, however, at the time of the second spouse’s death, the trust can pass to any other named beneficiaries like children, grandchildren, etc.

Additionally, an A Trust can give the surviving spouse broad access to the funds in the trust during the survivor’s lifetime, even allowing the spouse to withdraw everything in the trust. Finally, A Trusts are irrevocable trusts, which means they cannot be changed or altered after the trust has been established.

2. Qualified Terminable Interest Property (QTIP) Trust

Most A Trusts are actually also QTIP Trusts. However, for it to be a QTIP Trust, only the surviving spouse can be the beneficiary of the trust during his or her lifetime, and the trust is required to pay all income generated by the trust (e.g. dividends and interest) to the surviving spouse at least annually. This is what keeps trust-owned assets in the surviving spouse’s estate, even if he/she can’t dictate where trust assets will go at death.

What is the difference between a marital trust and a QTIP trust?

QTIP Trusts function almost the same as Marital Trusts. They’re both irrevocable trusts that can only name the surviving spouse as beneficiary during that spouse’s lifetime. However, the major distinction between the two is that with a QTIP Trust, the grantor of the trust maintains control of it, even after death. This means that you’re giving your spouse all the income from the trust but can limit their right to the principal, meaning you can place restrictions on what the funds are used for and even how much can be taken out.

3. Bypass Trust (B Trust)

B Trusts (also called family trusts or credit shelter trusts) work a little differently but are often used in concert with A Trusts–meaning oftentimes, when a spouse sets up an A Trust, they also set up a B Trust. B Trusts are once again created upon the death of the first spouse, but they’re capped at whatever the current estate tax exemption allows. This means they can greatly reduce your estate tax liability, or, if the entirety of the estate is less than the combined exemptions of both spouses, then a B Trust can help avoid estate taxes altogether.

What is the difference between a QTIP trust and a Bypass trust?

B Trusts also do three things differently than A Trusts and QTIP Trusts: They keep the trust-owned assets out of the surviving spouse’s estate, trust-generated income does not need to be paid out, and anybody can be a beneficiary of trust assets during the lifetime of the surviving spouse. In fact, there’s no requirement that the surviving spouse has to receive anything. In order to keep the assets out of the survivor’s estate, the surviving spouse cannot have complete control over the assets. If the spouse is the trustee, there has to be limitations for access to trust principal to an “ascertainable standard” (usually health, education, maintenance and support). These trusts are also irrevocable, so once they’re established, they’re set in stone.

What is the difference between a marital trust and a Bypass trust?

With a marital trust, the surviving spouse generally is able to access the income, as well as the principal balance. However, the principal in a bypass trust can be used for expenses of the surviving spouse, such as health and support, but is not generally accessible to the surviving spouse. Instead, those assets will not be included in the surviving spouse’s estate for federal estate tax purposes at his or her death and are passed to the contingent beneficiaries of the bypass trust free of federal estate tax.

4. Spousal Lifetime Access Trust (SLAT)

A SLAT is an irrevocable trust set up by one spouse for the other during their lifetime; the donor spouse does not need to pass away for this trust to be created, which is a stark difference between SLATs and the other trusts mentioned above. While the donor spouse makes an irrevocable gift to the trust and gives up any right to the funds, the beneficiary spouse, and potentially other beneficiaries such as children and grandchildren, are provided access to the gifted funds right away.

Basically, you put money into a separate account that only your spouse (and maybe your kids and grandkids) can access. Because the terms of a SLAT are so flexible, the money in the account can be used for a wide variety of purposes.

Other Trusts Used in Estate Planning

As previously mentioned, there are myriad types of trusts that serve many purposes. What kind of trust(s) you want to add to your estate plan (or even whether or not you want to add one) is entirely up to you and your legacy goals.

Speaking with a financial advisor or estate planning attorney can help you crystallize your goals and ensure the best plan for you is in place. Reach out today to find out if a spousal trust is right for you.

Spousal Trust FAQs

What is the disadvantage of a QTIP trust?

One disadvantage of a Qualified Terminable Interest Property (QTIP) trust is that the surviving spouse typically has limited control over the trust assets. While they are entitled to receive income from the trust, the original grantor determines who ultimately inherits the remaining assets, which the surviving spouse cannot change.

What are the disadvantages of a spousal lifetime access trust?

One of the main drawbacks of a SLAT is that it is irrevocable, meaning the grantor cannot easily change or undo it once established. Access to the assets also depends on the beneficiary spouse. If the spouses divorce or the beneficiary spouse dies, the grantor may lose indirect access to the trust’s assets.

Who pays taxes on a SLAT trust?

In many cases, the grantor pays income taxes on a SLAT because it is often structured as a grantor trust. This allows the trust assets to grow without being reduced by taxes inside the trust, which can further reduce the taxable estate over time. However, tax treatment depends on how the trust is structured.

What are the best assets to put into a spousal lifetime access trust?

Assets that are expected to appreciate in value are often good candidates for a SLAT. These may include investment portfolios, business interests, or real estate. By placing appreciating assets into the trust, future growth occurs outside the grantor’s taxable estate.

What is the difference between a marital trust and a family trust?

A marital trust is designed primarily to provide financial support to a surviving spouse while allowing assets to pass to heirs later. A family trust, on the other hand, may benefit multiple family members and can be structured to distribute assets across generations. Both are used in estate planning but serve different goals.

What happens to a marital trust when the surviving spouse dies?

When the surviving spouse dies, the assets in a marital trust typically pass to the final beneficiaries, often children or other heirs named in the trust. Because marital trusts generally qualify for the marital deduction, estate taxes are often deferred until the death of the surviving spouse.

Editor’s Note: This article was originally published on 7/29/2020.

This information is not intended to provide individualized tax or legal advice. Discuss your specific situation with a qualified tax or legal professional.

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