How Marital Trusts Work

Most marriage-oriented trusts postpone payment of estate taxes until both spouses in a marriage have died. A marital deduction trust allows you to put property in trust with your spouse as the beneficiary.

Upon your death, your spouse has the right to use the property in the trust. No matter how valuable the property in the trust is even if it exceeds that year’s federal estate tax exemption amount, your spouse won’t owe any federal estate taxes.

When your spouse dies, any leftover amount transfers to the beneficiaries that your spouse determined.

If you die first but want to determine who receives the trust property after your spouse dies, consider instead using a Qualified Terminable Interest Property trust, commonly known by its acronym as the QTIP trust. A QTIP trust operates much the same as a marital deduction trust, with one important exception: You, not your spouse, specify who receives the remaining property in the trust after your spouse dies.

Such a trust would be appropriate if you and your spouse were both on your second marriages and you each have children from a first marriage. You and your spouse’s first-marriage children (to put it delicately) don’t quite see eye to eye.

Regardless of your cool relationship with your spouse’s children, you and your spouse have a happy marriage, and you want to provide for your spouse if you die first. And, because you both are fairly well off financially, a marriage-oriented trust makes sense to delay estate tax impacts.

A QTIP trust enables you to designate what happens to leftovers. After all, this estate is yours, and for all intents and purposes you are just “loaning” it to your second spouse for the duration of his or her life if you die first. Afterwards, you want the leftovers to go to your children, or your favorite charity.

Married couples can also shelter property from estate taxes by using a bypass trust, which in effect bypasses the surviving spouse. Suppose that you die before your spouse does but instead of either a QTIP trust or marital deduction trust, you’ve set up a bypass trust.

Instead of the property being held in trust for your spouse (as in a QTIP or marital deduction trust), the property in a bypass trust “bypasses” your spouse (thus the reason for the often-used term) to someone else, such as your child, for whom the property is held in trust.

However, unlike the relatively simple process of giving property to your child as a gift or leaving your child property in your will, your spouse can still benefit from the property under a bypass trust. Although the property is held in trust for the ultimate benefit of your child, your spouse (while living) can have the benefit of the trust assets.

Because your spouse never takes possession of the property in a bypass trust, he or she never is considered to be the property owner and therefore never has to include the property in his or her estate — and possibly be subject to estate taxes on the property.

An incredible number of rules apply to bypass trusts and, specifically, the estate tax consequences. The IRS has all kinds of restrictions. To determine the exact amounts you want to use to fund a bypass trust, consider the exemption amounts, your estate’s value, the value of your spouse’s estate, and other factors.

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Source:http://www.dummies.com/how-to/content/how-marital-trusts-work.html