Marital Trusts or A Trusts

March 21, 2022

John Brennan talks with John Maher about marital trusts. He explains how they're created and briefly looks at the tax benefits of these sub-trusts.

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Podcast Transcription:

Transcription Disclosure: Below is a transcript of the conversation between John Maher and John T. Brennan. Please note, this is an unedited "word for word" rendition of the actual conversation and is not intended to be grammatically correct.

John Maher: Hi, I'm John Maher. I'm here today with John Brennan, Senior Vice President of Trust and Financial Services at Cape Ann Savings Bank in Gloucester, Massachusetts. Today, our topic is martial trust or "A" trusts. Welcome John.

John Brennan: Hi John.

What Is a Marital Trust?

John Maher: So John, what is a marital trust?

John Brennan: Okay, so a marital trust isn't necessarily distinct as a type of trust. You wouldn't say, "oh, I'm creating a marital trust." A marital trust comes about as a sub-trust of a trust and a marital trust is a term for when a trust creates a sub-trust that uses the marital deduction. The marital deduction is the ability of a spouse to pass assets to their spouse at death, free of all taxes. So a marital trust is the trust that… when we spoke on one of the earlier podcasts, I talked about a husband and wife and they own $2 million. To pass property, the husband or wife creates a trust so that the trust owns the assets and it uses their ability to pass property estate tax-free at death. When that person, that individual creates that first trust, which we're going to talk about in a second, credit shelter trust, the marital trust takes the overflow, so that's what you call the marital trust.

How Do You Create a Marital Trust?

John Maher: All right. So tell me about how you create a marital trust then.

John Brennan: Well, the marital trust gets created by the equation. What you are going to do... the trust terms are going to dictate, typically in Massachusetts, say a million dollars, which gets sheltered by the trust. And then the marital trust creates the overflow. That marital trust then directs income and assets to the surviving spouse, meaning they typically will get the income from that trust and might probably have rights to the principal of that trust under certain circumstances.

Pros and Cons of Creating a Marital Trust

John Maher: What are the pros and cons of creating a marital trust?

John Brennan: Well, I wouldn't think of it in terms of the pros and cons of a marital trust. If you have a marital trust, it's doing good work for you on the tax side. This type of trust, you can think of as a utilitarian tool. If you need a monkey wrench to tighten the lug nut, you know you're not going to say "what's the pro and the con of the monkey wrench?" You know what it's for. Same thing with a marital trust, it's here for a certain purpose. So when you need a marital trust, just like you need a monkey wrench, you need it because you need it.

Who Uses a Marital Trust?

John Maher: So tell me a little bit more about that and who a marital trust is used for?

John Brennan: Trusts have a lot of obscure terms and maybe sometimes convoluted ideas around them. But a marital trust is relatively simple. A marital trust is for married couples. And the reason why, is as I said earlier, married couples have the ability to pass property back and forth without any tax penalty.

Under tax law, they are an exception because you do not have the ability to give anyone your money, just because you want to. You can only do that with your spouse. So a marital trust is what it sounds like, because it's going from one marital partner to the other.

Why Do You Need a Marital Trust?

John Maher: And so just explain that a little bit more. Why is a trust needed in that case. You know... if a husband and a wife can just pass money back and forth to each other, without it being taxed. What's the purpose of the trust in that case?

John Brennan: Okay. So there's a couple answers. Here's another case where trusts are doing more than one thing at the same time. So the first spouse passes away, they create, and we're going to talk about this... a credit shelter trust... in the amount of the taxes they can defer.

The tax implications of the marital trust are that the first spouse to die passes everything remaining, except what went into their credit shelter trust. They pass everything that remains to their spouse. That means there is no estate tax due. That marital trust then goes on to benefit their surviving spouse.

The first spouse does not pay any taxes on it. That is the decedent spouse. But then when the second spouse passes away, that marital trust is included in the second spouse's estate. If you're fortunate and if things work out well… we're talking about people passing away, but if things work out, you could drain that trust. You could potentially spend down that trust, reducing your overall estate taxes when the second spouse passes. But as you can tell, I often have to draw pictures when I describe this stuff, because it can be kind of convoluted.

The Purpose of Marital Trusts

John Maher: So could you just sort of summarize your thoughts on marital trust and what they're for?

John Brennan: Well, marital trusts are a utilitarian tool and they are great for married couples and that ability to pass money tax free. Which exists in life, exists in the estate planning world as well.

John Maher: And what are some tips for using marital trust?

John Brennan: Well, the tip is use one, because if you have a taxable estate, namely in Massachusetts, if your net worth is over $1 million for a married couple, you have a taxable situation at death and you can circumvent that tax with good estate planning. So it really makes sense to have an estate plan, which incorporates your ability to create a credit shelter and the marital trust.

Contact Cape Ann Savings to Talk About Marital Trusts Today

John Maher: All right. Well, that's really great information, John. Thanks again for speaking with me.

John Brennan: Sure thing John.

John Maher: And for more information, you can contact Cape Ann Savings Trust and Financial Services at 978-283-7079, or visit the website at capeannsavings.bank.

Investments purchased through the Cape Ann Savings Trust and Financial Services Department are not FDIC insured, not FDIC guaranteed, not bank guaranteed, and may lose principal value.