A marital trust is a type of irrevocable trust that is set up for the benefit of a spouse during his or her lifetime.
In some marital trusts, this also covers the children (minor or adult) of the surviving spouse. It protects that spouse’s assets from future creditors while still allowing him or her to live off of all of the trust assets tax-free.
This means that the trust allows for financial stability during a divorce or death without having to make unnecessary sacrifices, including selling off assets when marital problems arise.
Furthermore, marital trusts allow for the marital property to be separate instead of commingled.
This is especially useful when one spouse has a significantly higher income than the other, as the property will be deposited into this person’s name.
When that happens, the marital property becomes community property which means it can go into divorce proceedings should the marriage end. This prevents an unfair result from occurring.
How Does a Marital Trust Work?
A marital trust is created during the marriage by filing a marital trust agreement, which can state how property should be transferred to the trust. It also states if it should take place upon death or divorce.
Additionally, you can choose any individual under the age of 18 as a beneficiary that is protected from creditors should this person file for bankruptcy.
This trust is typically used for assets that bring large income tax liabilities.
Therefore, marital trusts are beneficial if you have more than $5 million of assets to protect or want to provide for your spouse’s future financial needs without having too many legal limitations on how it is spent.
Why Do You Need to Have a Marital Trust?
There are several reasons why you should consider marital trusts for protecting your assets.
First, it allows the marital property to be kept separate instead of allowing them to become commingled during divorce proceedings. Simply put, the marital property becomes community property when needed.
You can also avoid additional costs associated with dividing assets in a divorce. These costs are an added expense that you could have easily avoided by setting up a marital trust in the first place.
Marital trusts can also protect children by offering them support while they are still minors or young adults until they reach the age of majority.
When you have debt, you need the marital trust so that marital property is protected from creditors during divorce proceedings. This ensures your financial security no matter what happens in your marriage.
Most importantly, it provides peace of mind for both spouses; they allow each spouse to know that their assets are protected without having to sacrifice anything.
Keep in mind that marital trust is irrevocable and does not need to be changed if marital problems arise.
Who Can Create a Marital Trust?
Anyone who is getting married and wants to protect marital property can create marital trust. It is best for people who are entering into transactions with property, such as buying a home together or purchasing other assets.
It can also be created after your marriage if you have already purchased property, but it may cost more money to set up this trust.
How to Set Up a Marital Trust?
Setting up a marital trust is fairly simple, but it can be time-consuming if you do not use an estate planning attorney.
First, you can set one up with a marital trust agreement. You need to make sure you have a marital property that can be put into this trust or you will not be able to establish one.
Then, decide how and when the marital property will be distributed. It is important to consider all possibilities before creating this document.
All of the assets should be listed in the marital trust agreement, and they will then be transferred into the marital trust for protection during divorce or death.
You can then transfer all marital property into the trust without having to worry about it going back to your spouse in case of a marital split.
It is very important that you should make sure you understand the marital trust agreement completely before signing it as well as take time to discuss any concerns with your spouse before moving forward.
After drafting the marital trust agreement, it needs to be notarized and then filed with the appropriate court system. After this, you will need to update all marital property records that are registered in your State.
The Pros of Having a Marital Trust
One of the biggest benefits of marital trusts is that it helps to protect marital property from taxes and costs associated with divorce.
The trust also ensures that your assets remain separated throughout the marriage, while still receiving a guideline for how they will be distributed should a marital split occur.
In addition, it can provide support for minor children or young adults until they reach the age of majority.
Finally, marital trusts protect marital property during bankruptcy proceedings since the trusts are not affected by the Bankruptcy Reform Act.
The Cons of Having a Marital Trust
One of the biggest disadvantages is that marital trust agreements can be expensive to draft and costly when filing for court approval; this can make the agreement inaccessible to lower-income couples who cannot afford this cost.
In addition, the trusts can cause marital problems; if your spouse becomes upset with you over the marital trust agreement, it could lead to problems and subsequently divorce or marital split.
Another difficulty is that the trust must be set up before any property is bought during the marriage because you cannot add marital property after it has been created.
Finally, marital trusts are not set up for couples who don’t own any marital property or if they do not want to separate marital assets during divorce or death.
Marital trusts can be a great benefit to couples who want to protect property from taxes and costly divorce proceedings, but it is important that both partners understand the marital trust agreement completely before signing.
It is also vital that you discuss any concerns about the trust with your spouse because if one person feels the marital trust is unfair or does not make sense, it can lead to problems.
Disclaimer: The above references an opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.