Marital Trust Options
The first choice is to determine what type of Marital Trust should be used. The primary choices are the following:
- Federal Marital only. For states that have no separate estate tax and only the Federal estate tax will be applicable, this is generally the preferred choice. The trust language is less complicated and easier to administer.
- Marital Trust I and II. This option will allow the trust to be sub-divided into two separate shares. This formula is for those states which have a separate state estate tax. The sub-shares will automatically (by formula) equal the minimum amounts necessary to maximize the Federal and state marital deductions saving the executor the need to calculate the best amount of the state and/or Federal Q-Tip election. Marital Trust I will typically be funded with the amount needed to eliminate both the Federal and state estate tax, while Marital Trust II will be funded with the amount needed to eliminate either the Federal or state estate tax. This could result because the optimum amount of the Federal marital deduction available could be everything in excess of $5 million (adjusted for inflation to $5,600,000 for 2018) whereas the optimum state marital deduction in a state such as Massachusetts could be everything in excess of $1 million. All of Marital Trust I will be part of the surviving spouse's estate for purposes of both the Federal and state estate tax at his or her subsequent death, but Marital Trust II will escape taxation by one or the other jurisdictions at such time.
Once the choice of the type of trust is made, a number of additional options can then be selected, including the following:
Power to Distribute Principal
To qualify for the estate tax marital deduction, the trust must require (among other things) that all the current income be distributed to the surviving spouse. For those clients who would like to provide for distributions in excess of the income, i.e., to distribute some of the principal as well. While many possible expressions of intent are available, the "standard" choices Lawyers Service Center documents typically have include either a "liberal" standard (the Trustee is directed to be "very liberal in exercising its discretion" to expended principal) or a "conservative" standard (where the Trustee is directed to be "conservative in exercising its discretion"). In both cases, the Trustee's discretion is absolute and the Trustee is not required to justify its decision to anyone.
Power of Withdrawal
As noted above, one of the requirement to qualify for the estate tax marital deduction is that, at a minimum, all the income must be distributed to the surviving spouse. For those couples who want to provide even more control to the surviving spouse, an absolute power to withdraw the Marital Share can also be included. Including such a power is tantamount to making an outright distribution to the surviving spouse. If a QTIP Only trust described above is selected, including such a power of withdrawal may cause the surviving spouse's estate to include more assets than might otherwise be the case. For example, for a decedent with a $6,000,000 estate, the "optimum" Federal marital deduction would be $400,000, yet to eliminate the Massachusetts estate tax, the marital deduction would need to be $5,000,000. Giving the surviving spouse the power to withdraw the entire Marital Share will effectively cause an "extra" $4,600,000 to be taxable in the survivor's Federal estate someday. If such a power of withdrawal is to be given, it is preferable to use the Marital Trust I and II approach and limit the power of withdrawal to Marital Trust I only.
5x5 Powers
Powers can be included to allow the spouse the right each year to withdraw from the Marital Share an amount equal to five percent of the market value of the Marital Share, or $5,000, whichever amount is greater. This kind of power enables the surviving spouse to be assured of a maximum access to the principal (within precise tax limitations) without having to rely on the trustee.
For trusts with Marital Trust I and Marital Trust II shares, it is possible to give a 5x5 power over one share, but not the other.
Powers of Appointment
Another option to build in flexibility and/or give the surviving spouse greater control over the ultimate disposition of the trust assets is to include a special or limited power of appointment. The "typical" limitation on this power is to either limit the power only to the Grantor's descendants, to the Grantor's descendants and their spouses, or to anyone. The choice of which group the power should apply to depends upon the amount of flexibility the Grantor is willing to give. Many clients will limit the power to descendants only to make sure that the surviving spouse does not end up exercising the power in favor of a new spouse. For many couples in a second marriage with children from prior marriages, the choice is often not to include any such powers.
As with the 5x5 powers, for those trusts using the Marital Trust I and II options, different powers can be given over each Marital Trust share.
Return to Trust Options page.