A marital trust is a financial tool that lets you transfer your assets to your spouse after you die. A family trust is a broader term to describe a trust you can manage during your lifetime, making sure your assets get distributed to your family. In estate planning, you have several financial tools you could use to protect your assets and pass them along to your loved ones. But which one is best? So many options.
While you have options, we’d suggest looking into two common types of trusts; the marital trust and the family trust. They both serve similar purposes, but they have distinctions as well. In this article, we’ll explain everything you need to know about the differences between marital trusts and family trusts, their definitions, benefits, and potential drawbacks. We’ll also show you what it means for your beneficiaries, their tax implications, control, and access. Once you better understand these two trusts, you can make informed decisions about your estate planning strategies.
Defining Trusts: An Overview
We’re going to get into the intricacies of marital trusts and family trusts in a minute, but let’s first make sure you have a foundational understanding of trusts as a whole. Generally, a trust is a legal arrangement where someone you choose (the trustee) holds and manages assets on behalf of those who receive the payouts from the trust (the beneficiaries). And you, the grantor, set the trust up to protect your assets safely and securely. You also have a trust agreement that makes sure that your trust’s assets are fairly managed and properly distributed, even after your death.
What is a Trust?
A trust is essentially a legal vehicle for your assets. Using the trust, you can transfer ownership of your assets just as you would want. Trusts can be established during the grantor's lifetime, referred to as a living trust, or set up through a person's will, also known as a testamentary trust. You’ll soon discover that trusts have a variety of advantages, like avoiding probate, minimizing estate taxes, giving long-term care to your beneficiaries, and maintaining privacy.
Importance of Trusts in Estate Planning
Trusts serve a lot of purposes, but one of the most common options is for estate planning. You want to make sure your assets are firefly distributed after you die, so it’s important to have a method to do this – the trust. The reason we like to use a trust is that they eliminate costs and protect your assets until it’s time for distribution. When you create a marital or family trust, you outline your wishes exactly as you desire, and you lay out the terms of how your assets are protected and distributed.
And if life gets complicated for you at times, trusts work well to meet your specific needs and circumstances. For example, you could create a special needs trust to provide for the long-term care for a disabled beneficiary. This type of trust makes sure that the beneficiary's eligibility for government benefits remains unaffected while they still get all the additional support from the trust.
In addition, marital trusts and family trusts can also be used to protect assets from creditors. When you place assets in an irrevocable trust, you shield them from potential lawsuits, bankruptcy, or other financial challenges you might face. So, if you work in a high-risk profession, or you have a lot of potential for legal liabilities, this might be your best option to protect what matters to you.
And if you’re the charitable type, trusts can serve you well for this purpose. When you create a family trust or marital trust, you can state your desire to have part of your estate donated to support causes and organizations close to your heart. With the right trust, you can leave a lasting legacy and make a positive impact on your community well after you pass away.
As you can see, trusts offer a wide range of benefits for your estate planning. Whether it is protecting assets, providing for loved ones, or leaving a charitable legacy, marital and family trusts can give you the peace of mind that your wishes will be listened to and your assets will be managed effectively.
Exploring Marital Trusts
Ok, now let’s get into the specific trusts so you know which option will serve you best. Marital trusts, also known as QTIP (Qualified Terminable Interest Property) trusts, are most often used in estate planning to give your surviving spouse your assets while saving them from costly tax bills. These trusts allow you, the grantor, to leave your assets to your spouse, safely making sure that they’re well cared for when you’re gone.
The Basics of Marital Trusts
The key distinction to remember is this: marital trusts are made for the benefit of your surviving spouse. They also come into effect after you die. Upon the grantor's death, the assets are transferred into the trust, and your spouse has the right to use the trust property. Why would you do this? Commonly, the trust provides a source of income to the spouse, very common in situations where the grantor has the high-paying wage of the family. But it should be noted that the surviving spouse doesn’t get complete control over the trust. You set the terms of the trust agreement. These terms will dictate how your assets will be distributed after the grantor's death.
So, what are your goals? How do you want to care for your spouse when you’re gone? These are the questions to consider when laying out these terms for your marital trust. Some marital trusts could offer benefits for your spouse's lifetime. Or maybe you just want to have a specific time limit or conditions for distribution. The real benefit is the flexibility of marital trusts, all to meet your needs and desires.
Benefits of Marital Trusts
Beyond looking after your spouse, marital trusts have several advantages for estate planning. As we already know, these trusts provide financial security for the surviving spouse. That might mean a source of income for a time or the entirety of your assets safely transferred to them. You might find this to be a good choice if your spouse doesn’t have a lot of financial knowledge, or the management of your assets would be a burden on them.
On top of this, when you transfer your assets to a marital trust (as opposed to simply leaving it in your will), you can maximize any estate tax exemptions and minimize potential estate taxes. Basically, it’s less money for the government and more money distributed to your spouse. This can even become generational wealth for future generations or charities.
Potential Drawbacks of Marital Trusts
And yes, there are two sides to every coin. We’re painting a rosy picture here of marital trusts, but there are potential drawbacks to consider. For one, you might balk at the idea that there is a lack of control for the surviving spouse over the trust assets. If you so choose, your trust agreement might only give your spouse limited decision-making power or restricted access to the principal. If this doesn’t make sense in your situation, think carefully before creating this type of trust.
Also, you should know that assets held in a marital trust may be subject to estate taxes upon the death of the surviving spouse. So, if you’re planning on having the assets last longer than just your spouse’s lifetime, it might be a factor to consider. If you’re at all concerned about any of these implications, you should speak with a qualified estate planning attorney or financial advisor to make sure your trust structure meets all your needs.
Unpacking Family Trusts
Ok, now let’s cover the more general financial tool known as the family trust. Family trusts, also known as revocable living trusts or inter vivos trusts, are widespread estate planning tools with multiple purposes. These trusts provide a different kind of flexibility over your assets. You can designate beneficiaries, minimize probate, and maintain privacy all while safeguarding the precious assets in your estate.
Understanding Family Trusts
Unlike a marital trust which comes into effect after you die, a family trust is created during your lifetime. And because it’s operational while you’re alive, you can also modify the terms of your trust agreement. When you transfer your assets into the trust, you can serve as both the grantor and trustee. In this way, you keep control over the trust assets, but they’re no longer attached to your name. You will assign the beneficiaries who will receive the assets upon your death or incapacitation.
When establishing a family trust, you need to stay vigilant about updating your terms, because situations change. People change. Your assets change. And when you create it, the way you transfer assets into the trust's name needs to be in the right way to meet all your legal requirements too. Remember that your assets could include altering the ownership of various properties, renaming financial accounts, and re-titling assets. Is this daunting? Maybe at first. But it’s a crucial step to keep the trust operational and effective.
Advantages of Family Trusts
Just like many other trusts, family trusts give several advantages for estate planning. First off, you get seamless asset transfers during your lifetime. You’ll also create a clear plan for how your assets will be managed and distributed. In this way, you avoid any hurtful family disputes. And when you assign the beneficiaries within the trust, you can rest assured that your assets are securely distributed just as you would want, even if you are no longer around to make the decision.
Another significant advantage of family trusts is how they can bypass the probate process. Probation can become a very hurtful, costly process after the death of a loved one. Would you want your family members to go through something like that on top of dealing with your passing? Not to mention the steep costs of going through probate, eating away at your assets. But if you use a family trust, you can save their loved ones from heartache. Your trust provides an efficient transfer of assets and reduces their financial burden.
Lastly, family trusts offer unique privacy terms that you can’t find in other estate planning tools. For example, you might have a will in place. That’s a matter of public record, meaning all your assets and beneficiaries are exposed to the public. But by using a family trust, you maintain privacy and shield all your private details from the prying eyes of creditors, debtors, and anyone who doesn’t need to know.
Possible Limitations of Family Trusts
And now it’s time for us to do our due diligence and give you the downsides to know. Family trusts offer many benefits, but you’ve also got to be aware that you might not find it to be a one-stop-shop for your asset protection plan. One possible downside is the administrative burden of managing the trust during your lifetime. This includes funding the trust, keeping up to date with asset management records, and constantly updating the trust document to reflect any changes. This responsibility can be time-consuming, especially if your assets require a lot of work to upkeep.
You might also need to know that family trusts don’t offer the same level of asset protection as other types of trusts. While family trusts offer a degree of control and flexibility, it’s not the best shield from creditors or lawsuits. If that’s a concern for you, you might want to speak with a financial advisor to discuss other alternatives or trusts to get stronger safeguards against potential financial threats.
Key Differences Between Marital and Family Trusts
While both marital trusts and family trusts serve important purposes for estate planning, they have some distinctions. If we lay these out side by side, you’ll get a better picture of what’s going to make the most sense for your situation.
Beneficiaries: Marital Trust vs Family Trust
Here, the big difference is in the designated beneficiaries. Marital trusts work for the financial well-being of a spouse. On the other hand, family trusts have a broader range of beneficiaries. This includes children, grandchildren, or other family members. It may even include charities as well. Obviously, you should consider who will receive the assets after you die to determine which trust makes the most sense.
Tax Implications: Marital Trust vs Family Trust
Tax implications are very different between marital trusts and family trusts. Marital trusts give estate tax savings by using the applicable exemption amount. Basically, this just means that assets placed in a marital trust are excluded from the taxable estate. This will significantly reduce the tax burden on your surviving spouse. Comparatively, family trusts don’t have the same kind of tax savings. But you do get the option to avoid the probate process.
Control and Access: Marital Trust vs Family Trust
And lastly, let’s talk about control. The level of control varies greatly between marital trusts and family trusts. In marital trusts, your spouse doesn’t have much control over the trust assets. Because everything is clearly laid out in the trust agreement, they can’t make changes after you pass away. All asset decisions have been made for them, not by them. You might want this peace of mind, knowing that your spouse will be taken care of financially. Family trusts, on the other hand, have much more flexibility and control. And it’s a control that you still have during your lifetime. In a family trust, you continue to provide specific instructions for the distribution of assets. You might want this family trust option if you want certain assets to be used for specific purposes, like education or healthcare.
Deciding On the Family Trust or Marital Trust
As you can see, these two trusts give you multiple options and apply in different situations.
If you’re still trying to figure it all out, you should speak with a qualified estate planning attorney or financial advisor to see what makes the most financial sense for you. In fact, that’s good advice even if you’re not confused. A qualified advisor can point out how marital trusts and family trusts offer you unique benefits. Plus, they’ll help you make informed decisions to protect and manage your assets.
Remember, estate planning is a complex process. You want to get it right. That means setting it up with the help of professionals who specialize in this area. Because if you take the time to do it right, you’ll get all the benefits you want for your assets and your loved ones.
And that’s what matters most – your loved ones. Your assets should be protected. They should be safe. And they should serve the ones you love the most, even after you’re gone. Use the family trust or marital trust to meet all your goals and protect what matters to you.
