What Is a Non-Marital Trust and How Does It Work?
Learn how a non-marital trust functions within an estate plan to shelter assets from estate tax and ensure they are managed for specific beneficiaries.
A non-marital trust is an irrevocable estate planning tool for married couples, meaning its terms cannot be easily changed once funded. Also known as a bypass or credit shelter trust, it is designed to hold a portion of a couple’s assets after one spouse passes away. The trust is funded after the first spouse’s death, and its assets are legally separate from the surviving spouse’s personal property.
Core Purpose of a Non-Marital Trust
The primary function of a non-marital trust is to minimize a couple’s combined estate tax liability. This is achieved by utilizing the deceased spouse’s available federal estate tax exemption, which is the amount of assets an individual can transfer without incurring estate tax. For 2025, the federal estate tax exemption is $13.99 million per individual, but this amount is scheduled to be significantly reduced at the beginning of 2026 unless Congress passes new legislation. When the first spouse dies, assets up to the value of their remaining exemption are transferred into the non-marital trust.
Because the surviving spouse does not legally own these assets, the contents of the trust bypass their taxable estate. When the surviving spouse later passes away, the trust’s assets, including any appreciation in value, are not included in their estate. This strategy allows a couple to use both of their individual estate tax exemptions, protecting more wealth for their heirs.
The non-marital trust is also effective for state-level estate tax planning. Many states impose their own estate tax, often with exemption amounts that are much lower than the federal threshold. Unlike the federal system, most state estate tax exemptions are not “portable,” meaning a surviving spouse cannot use any of their deceased spouse’s unused state exemption.
By funding a non-marital trust with an amount up to the state exemption limit, a couple can ensure the first spouse’s state exemption is fully utilized. This prevents the assets from being added to the surviving spouse’s estate, where they could be subject to state estate tax upon the second death.
Key Roles and Asset Management
The operation of a non-marital trust involves three roles: the Grantor, the Trustee, and the Beneficiaries. The Grantor is the deceased spouse whose assets fund the trust. The Trustee is the person or institution responsible for managing the trust’s assets according to the trust document. The Trustee has a fiduciary duty to act in the best interests of the beneficiaries.
Beneficiaries are divided into two categories. The lifetime beneficiary is the surviving spouse, who is entitled to receive benefits from the trust during their lifetime. The remainder beneficiaries are those who will receive the trust’s remaining assets after the surviving spouse’s death, often the couple’s children or other designated heirs.
Distributions to the surviving spouse are governed by a standard known as HEMS, for Health, Education, Maintenance, and Support. This standard allows the trustee to make payments for the spouse’s medical needs, education, and to maintain their standard of living. HEMS provides flexibility while setting limits that prevent the trust assets from being considered part of the spouse’s estate for tax purposes.
The executor of the deceased spouse’s estate is responsible for identifying and retitling assets—such as bank accounts, investments, or real estate—into the name of the non-marital trust. The specific assets chosen to fund the trust are often determined by a formula outlined in the estate planning documents to precisely capture the available exemption amount.
Tax Treatment of Trust Assets
A non-marital trust is a separate taxable entity and must obtain an Employer Identification Number (EIN) from the IRS. The trustee must file an annual income tax return for the trust using IRS Form 1041. This is required if the trust has any taxable income or gross income of $600 or more.
Income generated by trust assets, such as dividends or interest, is reported on Form 1041. If income is distributed to the surviving spouse, it is reported to them on a Schedule K-1, and the spouse pays the income tax. If income is kept within the trust, the trust pays the tax at its own, often higher, tax rates.
The most important tax outcome is that assets in the trust are excluded from the surviving spouse’s gross estate upon their death. This exclusion applies to the initial principal and any growth the assets experience over the survivor’s lifetime, sheltering the wealth for the remainder beneficiaries.
Understanding Portability as an Alternative
Portability offers an alternative to a non-marital trust for some families. This federal tax law allows a surviving spouse to use any of their deceased spouse’s unused federal estate tax exemption. This unused portion is known as the Deceased Spousal Unused Exclusion (DSUE) amount.
To use portability, the executor of the first spouse’s estate must file a federal estate tax return, Form 706, even if no tax is owed. This election adds the DSUE amount to the surviving spouse’s own exemption, increasing the total they can pass to heirs free of federal estate tax.
While portability can simplify estate administration, a non-marital trust remains a better tool in several scenarios. Portability does not apply to most state estate taxes, making a trust the primary method for shielding assets from state-level taxation.
A trust also provides asset protection from creditors and ensures assets are distributed to specific heirs, like children from a previous marriage. Additionally, portability does not apply to the Generation-Skipping Transfer (GST) tax exemption, so a trust is needed to preserve the first spouse’s GST exemption.