The Marital Trust-Family Trust Estate Plan      Estate planning for a married couple includes using two basic Federal estate tax "shelters".  The first such "shelter" is the unlimited marital deduction.  The unlimited marital deduction means that a U.S. citizen spouse may leave to his or her U.S. citizen spouse any amount of assets without having to pay any estate taxes.  However, the unlimited marital deduction may not be the best estate planning technique because assets that escape estate taxes on the death of the first spouse are likely to be heavily taxed on the death of the surviving spouse.  Therefore, the marital deduction only defers estate taxes until the death of the surviving spouse, it does not eliminate estate taxes. The second estate tax "shelter" is this:  Every U.S. citizen can (in 2002) leave up to $1,000,000 to any other U.S. citizen or entity without incurring any Federal estate tax. This is what we call the "coupon" amount.  This "coupon" amount will increase to $1,500,000 in 2004; $2,000,000 in 2006; and $3,500,000 in 2009.  In 2010, the Federal estate tax is repealed, and in 2011 the Federal estate tax is brought back with a "coupon" amount of $1,000,000.  With a married couple, each spouse has his or her "coupon" amount, for a combined "coupon" amount (in 2002) of $2,000,000.  The Marital Trust-Family Trust Estate Plan allows a married couple to take advantage of both "shelters", making sure that there are no Federal estate taxes on the death of the first spouse, as well as making sure that there are little or no Federal estate taxes on the death of the surviving spouse. This is how the Marital Trust-Family Trust Estate Plan will typically work (click here to see a Diagram of the Marital Trust-Family Trust Estate Plan):   Both spouse's Wills or Revocable Living Trusts will provide that the first deceased spouse's estate is divided into 2 parts:  The Marital Trust and the Family Trust.  The first spouse's "coupon" amount is allocated to the Family Trust.  Remember, that in 2002 the "coupon" amount is $1,000,000.  This means that the Family Trust may be funded with as much as $1,000,000.  The Family Trust can provide the surviving spouse with as much income and principal as needed for the surviving spouse's health, education, and maintenance.  This means that the Family Trust may provide as much as necessary to the surviving spouse to keep him or her in his or her accustomed standard of living.  The Family Trust may also designate the children and grandchildren as the beneficiaries of the Family Trust while the surviving spouse is still alive. Because the assets in the Family Trust are equal to the first spouse's "coupon" amount, there will be no Federal estate taxes to pay at the first spouse's death on the assets in the Family Trust.  The Family Trust is designed so that it is not included (and therefore not taxed) in the estate of the surviving spouse.  Furthermore, the appreciation on the assets in the Family Trust also escape Federal estate taxes on the death of the surviving spouse. Assets which are valued (at the time of the first spouse's death) over the first spouse's available "coupon" amount are allocated to a Marital Trust.  The Marital Trust is not subject to Federal estate taxes because of the unlimited marital deduction.  However, the Marital Trust will be included in the surviving spouse's estate.  However, because the surviving spouse has his or her own available "coupon" amount, there may be no Federal estate taxes due at the death of the surviving spouse. The Marital Trust may provide that all assets are distributed outright to the surviving spouse, or that all of the assets are held in trust for the surviving spouse's benefit. If the assets are held in the Marital Trust for the surviving spouse's benefit, then the Marital Trust must provide that all of the net income from the Marital Trust is distributed to the surviving spouse. Although the Marital Trust must distribute all of the net income to the surviving spouse, it can provide the surviving spouse with as much of the principal as needed for the surviving spouse's health, education, and maintenance.  This means that like the Family Trust, the Marital Trust may provide as much as necessary to the surviving spouse to keep him or her in his or her accustomed standard of living.  However, the surviving spouse should make sure that the Marital Trust pays all of the expenses, rather than the Family Trust.  The reason for this is simple:  The Family Trust will not be subject to further estate taxes, but the Marital Trust will be included in the estate of the surviving spouse.  Therefore, if more the surviving spouse can reduce the Marital Trust, the less will be included in his or her estate. One of the benefits of this type of Marital Trust is that the first spouse can specify the beneficiaries of the Marital Trust at the death of the surviving spouse.  For example, the Marital Trust is perfect for situations where there are children from a prior marriage, or where there is a need to protect the assets from the surviving step-parent spouse.       Call us at 800-501-3220 or Email Us to learn more about how you can prepare a proper estate plan using the Marital Trust-Family Trust Estate Plan.         Return to the list of Estate Planning topics. Printer Friendly Version