What Are Marital Trusts? Types and Tax Rules

A marital trust is a legal arrangement within an estate plan that holds assets for a surviving spouse. Established through a will or revocable living trust, it becomes active upon the death of the first spouse. The person creating the trust, the grantor, directs assets into it to provide financial support for their spouse. The grantor also determines who will inherit the remaining assets after the surviving spouse passes away, which is useful for preserving assets for other beneficiaries, such as children from a previous marriage.

Types of Marital Trusts

Several types of marital trusts exist, offering different levels of control. The Qualified Terminable Interest Property (QTIP) trust provides the surviving spouse with all income generated by the trust’s assets for their lifetime. The grantor retains control by designating in the trust document who will receive the principal assets upon the surviving spouse’s death.

This structure is useful in blended family situations, as it allows a grantor to provide for their current spouse while ensuring assets ultimately pass to their own children. The surviving spouse cannot change these remainder beneficiaries.

The General Power of Appointment (GPA) trust gives the surviving spouse much greater control. In addition to receiving the trust’s income, the spouse holds a “general power of appointment” over the principal. This power allows the surviving spouse to direct who will inherit the trust assets, including their own estate, creditors, or any other person they choose.

An estate trust handles income differently. The trustee has the discretion to either distribute income to the surviving spouse or accumulate it within the trust. Upon the surviving spouse’s death, the principal and any accumulated income are paid to the surviving spouse’s estate and distributed according to their will.

Key Roles and Asset Management

The trustee is the legal administrator of the trust and can be an individual or a financial institution. They have a fiduciary duty to manage assets prudently according to the grantor’s terms. This includes making investment decisions and distributing income and principal as required. The grantor also names a successor trustee to serve if the initial trustee cannot.

The surviving spouse is the primary beneficiary, and their rights are defined in the trust document. They are entitled to receive all income from the trust’s assets, with payments made at least annually. The trust may also permit the trustee to distribute principal to the surviving spouse for specific needs.

These principal distributions are often governed by a standard known as HEMS, which stands for Health, Education, Maintenance, and Support. This provides a guideline for the trustee when deciding whether to use the principal for the spouse’s benefit. The grantor can make these terms more or less restrictive to tailor the spouse’s access to the assets.

Remainder beneficiaries are the individuals or entities designated to receive the trust assets after the surviving spouse dies. Their rights are contingent and do not take effect until the surviving spouse passes away. The trustee’s primary obligation is to the surviving spouse, and the trust must be managed to prioritize their needs.

Tax Treatment and Reporting

Upon the death of the first spouse, assets can be transferred to the marital trust without immediate federal estate tax. This is possible through the unlimited marital deduction, a provision in U.S. tax law allowing tax-free asset transfers to a surviving spouse. To qualify, the trust must meet requirements, such as ensuring the surviving spouse is the sole beneficiary during their lifetime.

During the surviving spouse’s life, the trust must manage its income tax obligations. As a separate legal entity, the trust files an annual Form 1041 with the IRS to report all income and deductions. Because all income is required to be distributed, it is “passed through” to the surviving spouse, who receives a Schedule K-1 detailing this income. The spouse reports this on their personal Form 1040 and pays the associated tax.

The final taxable event occurs when the surviving spouse dies. The fair market value of the remaining trust assets is included in the surviving spouse’s gross estate for federal estate tax purposes. The executor of the spouse’s estate files Form 706, combining the trust assets with the spouse’s other assets to determine if estate tax is due.

Whether tax is owed depends on if the estate’s total value exceeds the federal estate tax exemption for the year of death. For 2025, the exemption is $13.99 million per individual. This high exemption is scheduled to expire at the end of 2025, and in 2026 is set to revert to an inflation-adjusted amount of approximately $6 million to $7 million.

Establishing a Marital Trust

Establishing a marital trust requires the grantor to make several foundational decisions. These choices will dictate the trust’s function and are used by an estate planning attorney to draft the legal documents. The primary decisions include:

• Selecting the type of marital trust (e.g., QTIP, GPA, or estate) that aligns with the grantor’s goals.
• Choosing a capable trustee and at least one successor trustee.
• Identifying the remainder beneficiaries who will inherit the assets.
• Defining the standards for any principal distributions to the surviving spouse, such as using the HEMS standard.

The grantor must also gather the full legal names and contact information for all involved parties, including the spouse, trustees, and beneficiaries. An attorney will then use this information and the grantor’s decisions to draft the trust provisions into a will or revocable living trust.

The QTIP Election Process

The tax benefits of a QTIP trust require a formal election by the executor of the deceased spouse’s estate. This step is necessary to qualify the trust for the unlimited marital deduction and defer estate tax. The election is made after the first spouse dies and assets are designated for the trust.

The election is made on the deceased spouse’s federal estate tax return, Form 706. The executor must list the property being transferred to the QTIP trust on Schedule M of the return. This action signifies that the trust meets all legal requirements for QTIP treatment.

Once the Form 706 is filed, the election is irrevocable. A proper election ensures the trust’s assets are deducted from the first spouse’s estate, deferring potential estate tax until the surviving spouse’s death.