Marital Trust vs. Family Trust

When considering estate planning, knowing the differences between a marital trust and a family trust is important. A marital trust provides income and principal distributions while deferring estate taxes, while a family trust maximizes estate tax exemptions by distributing assets to children or other family members. Both types of trusts can be customized for specific financial goals, but you should make note of key differences.

If you want to create an estate plan, a financial advisor can help you manage and distribute your assets.

What Is a Marital Trust?

A marital trust, also known as an “A” trust, is a legal arrangement designed to provide financial security for a surviving spouse while also optimizing estate tax benefits. They're often established as part of an estate plan to ensure that the deceased's assets can use all tax exemptions available to the surviving spouse.

How Marital Trusts Work

When one spouse passes away, their assets are transferred into the trust. The surviving spouse receives income generated by these assets and may have access to the principal under certain conditions. More importantly, the assets in the marital trust are not subject to estate taxes upon the death of the first spouse, thanks to the unlimited estate tax marital deduction , but may be subject to estate taxes when the surviving spouse dies.

Why Marital Trusts Are Used

Marital trusts provide income for the surviving spouse, while minimizing estate taxes, and offer a structured way to manage and distribute assets. This can be particularly beneficial in complex family situations or when significant wealth is involved.

What Is a Family Trust?

A family trust, a.k.a. a bypass trust or "B" trust, is a legal arrangement designed to manage assets for family members. It is established by a grantor, who transfers their assets into the trust which is then managed by a trustee after the grantor dies. Beneficiaries get money from the trust as specified by the terms set by the grantor that the trustee is legally bound to follow.

How Family Trusts Work

Family trusts operate by transferring the ownership of assets from an individual to the trust itself. This transfer can reduce tax liabilities and ensure the grantor’s wishes are honored. The trustee, who can be a family member, friend, or professional, makes decisions about the investment portfolio , distributions and other financial matters. The terms of the trust dictate how and when beneficiaries receive their inheritance, which can be structured to provide for education, healthcare or other specific needs.

4 Key Differences Between Marital and Family Trusts

• Purpose and beneficiaries. A marital trust ensures that the surviving spouse has access to income and the principal from the trust during their lifetime. A family trust is intended to benefit the surviving spouse and other family members by preserving the estate’s assets for future generations.
• Tax implications. In a marital trust  the assets are not subject to estate taxes. A family trust does not qualify for the marital deduction but still uses some estate tax exemptions, thereby preserving more wealth.
• Control and flexibility. Marital trusts allow the surviving spouse to access the trust’s income and principal, often without restrictions. Family trusts typically have more restrictions to provide a balance between supporting the surviving spouse and protecting the inheritance.
• Asset distribution. In a marital trust the surviving spouse can use assets freely. In a family trust, the assets are divided between the surviving spouse and the children from the outset, which keeps the children’s inheritance out of the surviving spouse’s financial decisions.

Which Is Right for You?

Deciding which trust is right for you involves considering your financial goals, tax planning needs and family dynamics.

Choosing between a marital trust and a family trust depends on your estate planning goals. A marital trust allows for income and principal distributions to a surviving spouse and defers estate taxes until the spouse's death. This type of trust helps the surviving spouse get financial support while postponing tax liabilities.

A family trust, on the other hand, is designed to maximize estate tax exemptions by distributing assets to children or other family members upon the death of the first spouse. This trust helps protect assets from higher tax rates and could help pass more wealth to heirs.

Bottom Line

Marital trusts offer security and flexibility for a surviving spouse, while family trusts prioritize preserving wealth for future generations. Each type of trust has distinct benefits that cater to different needs, such as minimizing estate taxes or ensuring that assets are protected for heirs. Consulting an estate planning attorney can offer you personalized guidance to align your estate plan with your long-term objectives.

Tips for Estate Planning

• A financial advisor can help you create a plan to help manage your estate and distribute assets to beneficiaries. SmartAsset's free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you're ready to find an advisor who can help you achieve your financial goals, get started now .
• A living will is often overlooked in favor of a last will, but both are important and individual documents for you to consider. Here's why you could benefit from creating one .

Photo credit: ©iStock.com/FG Trade, ©iStock.com/simonkr, ©iStock.com/fizkes

The post Marital Trust vs. Family Trust appeared first on SmartReads by SmartAsset .