According to The Knot, there was an undeniable wedding boom last year. There were 2.6 million weddings, or 7,123 weddings per each day of the year. More than 60 percent of the population attended at least one wedding. These trends are expected to bleed well into 2023 and 2024.
While a record number of couples standing at the altar are saying “I do,” estate planning is likely one of the last things on their minds. However, it should be one of the first things on that honey-do list (after the buzz of the wedding and honeymoon begin to wear off, of course.) Estate Plans are the key way to making sure you can leave your asset to your spouse without a hitch, in case anything were to happen. Today we’ll explore the differences between a Marital Trust vs. Bypass Trust, which are two viable estate planning options for married couples.
Is a Bypass Trust the Same as a Marital Trust?
Bypass Trusts and Marital Trusts work a little differently but work in tandem together. The two Trusts combined are known as an AB Trust and are a popular estate planning vehicle used by married couples to shield assets from estate taxes that could otherwise result when one of them passes away.
When one of the spouses passes away, the couple’s estate is split up into two separate Trusts:
The Marital Trust, or A Trust
The Bypass/Family Trust, or B Trust
The Marital Trust (A Trust) is established with the purpose of supporting the surviving spouse. It avoids estate taxes when the first spouse passes away because it can take advantage of the unlimited marital deduction, which allows the unlimited transfer of assets to a spouse without taxation. In order for the Marital Trust to be valid, the surviving spouse must be the sole beneficiary of the Marital Trust during their lifetime. When they pass away, however, they are free to bequeath the Trust to anyone of their choosing, such as their children or grandchildren. The surviving spouse has full access to the Trust funds and can even withdraw everything if they so wish.
When the A Trust is set up, the B Trust (Bypass or Family Trust) is also typically created. When the first spouse passes away, they can make it such that assets are passed to beneficiaries other than the spouse, such as their children, without incurring estate taxes. They pass the maximum amount of assets possible allowed by estate tax exemption. The remainder of the estate is transferred into the A Trust (where the beneficiary is the spouse who has the unlimited marital deduction discussed above.) While the surviving spouse can benefit from the Trust during their lifetime, such as receive income, they do not own the Trust. They can set themselves up as the Trustee but must follow the terms of the Trust.
What is the Difference Between a Marital Trust and a Bypass Trust?
When it comes to a Marital Trust and a Bypass Trust, the whole is greater than the sum of its parts. While they are indeed two different types of Trusts, they work in concert together to create a single estate planning and tax strategy.
Together, the Marital Trust and Bypass Trust make up the AB Trust. They are used by married couples whose assets exceed the federal and/or state threshold for estate taxes. By splitting up assets into two separate Trusts when one of the spouses passes away, the surviving spouse and children can still receive support from the estate without incurring estate taxes.
The first Trust (the A Trust) is the Marital Trust that is created solely for the benefit of the surviving spouse. They own the assets and can do what they please with them, such as withdraw them from the Trust, sell them, or gift them. They can choose to bequeath the assets to their children when they pass away.
The second Trust (the B Trust) is funded with the maximum amount of assets allowed by the estate tax exemption. This Trust can help support both the surviving spouse and children, but the surviving spouse does not own these Trust assets. While they can manage the assets and oversee the Trust (in the role of Trustee), they must strictly comply with the terms set forth by the Trust. The assets are not a part of the surviving spouse’s estate and are instead bequeathed to the first spouse’s contingent beneficiaries (typically the children.)
Which Type of Trust is Right For You?
Before you begin worrying too much about whether a Marital Trust vs. Bypass Trust is right for you, know that the 2023 estate tax exemption is nearly $13 million or $26 million for individuals and married couples, respectively. In other words, leveraging the AB Trust is usually a consideration for married couples with a high net worth who come even close to the estate tax exemption. If you fall into this category, then us, this special type of Trust is certainly worth your consideration.
For most married couples, however, an AB Trust may not be necessary. Instead, you may consider other beneficial types of Trusts, such as a Joint Revocable Trust. Be sure to check out our guide that introduces many different types of Trusts to choose from.
Once you have an idea of what you’d like for your Estate Plan to look like, you might find yourself wondering where to begin. Don’t worry! Trust & Will has solved this problem for you. With our Trust-based Estate Plan, we take the pain and confusion out of estate planning so that you can prioritize the protection of your assets and have that peace of mind we’re all looking for.
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