Marital Deduction Trusts

A marital deduction trust is a type of trust that married couples can use to delay paying federal estate taxes while controlling what happens to trust property.

The trust works by taking advantage of the unlimited marital deduction, holding the deceased spouse’s property, describing how a surviving spouse can use trust property, and determining what should happen to the property after the surviving spouse dies.

What Is the Unlimited Marital Deduction?

A primary goal of a marital deduction trust is to take advantage of the unlimited "marital deduction." (See Internal Revenue Code Section 2056). This tax perk allows married couples to pass any amount of property to the surviving spouse without gift or estate taxes.

What assets qualify for the marital deduction? Any assets that pass directly from one spouse to the other and any property that passes from the deceased spouse into a marital deduction trust. (See below.)

But why delay estate taxes? For spouses with very large estates, not paying estate taxes at the death of the first spouse benefits the couple by keeping more of the deceased spouse's property available for use by the surviving spouse.

However, the marital deduction isn't a free pass on estate taxes. The federal government will assess estate taxes on what remains of that property as part of the surviving spouse's estate when the surviving spouse dies. But for the family as a whole, it can delay when those taxes must be paid, and in situations where much of the trust property is depleted during the surviving spouse's life, delaying those taxes can reduce or even eliminate the tax liability.

However, before we go any further, let's take a moment to acknowledge that very, very few families in the United States need to worry about owing estate taxes. Federal estate taxes apply only to those estates worth more than $15 million for deaths in 2026. This exemption amount is adjusted for inflation each year. And if you're married, “portability”—the ability for a surviving spouse to carry over the unused portion of the exemption—doubles that amount to $30 million. So, if you don’t have millions of dollars, you don’t need to worry about avoiding the federal estate tax. In that case, the primary reason to make a marital deduction trust might not be the tax savings but rather the flexibility or control you can infuse into the trust itself.

Why Use a Trust?

Married couples get the marital deduction for any property that they leave to their spouses. So why use a trust to pass property to the surviving spouse? Why not just pass it to the surviving spouse directly?

Transferring property through a trust provides benefits that aren't available under direct transfers. Trusts can:

• Keep property out of probate.
• Provide a plan for incapacity.
• Name a third-party trustee to manage the property.
• Protect the property from creditors.
• Establish management for trust property.
• Describe how the beneficiary can use trust property.
• Name the final beneficiaries to receive trust property after the surviving spouse's death.

Enter "marital deduction trusts," which qualify to get the unlimited marital deduction—just as if the property were transferred directly to the surviving spouse, with the added benefits of a trust.

What Are Marital Deduction Trusts?

A marital deduction trust is a trust that 1) a married person sets up for the benefit of their spouse and 2) qualifies for the unlimited marital deduction. What the spouse can do with the property in the trust depends on the trust's terms, but as a requirement for the marital deduction, the surviving spouse must receive any income produced by the trust.

Property transferred into the trust is treated as if it were a direct transfer to the surviving spouse—so no tax on trust property will be due when the first spouse dies. So spouses who make marital trusts benefit from using a trust, plus the benefit of delayed estate taxes.

The trust must name a trustee (who will manage the trust), describe how trust property can be used, and name final beneficiaries. The trustee can be the surviving spouse, a third-party fiduciary, or both as co-trustees. This decision will likely depend on how much control the trust-making spouse wants the surviving spouse to have, as well as the practical ability of the surviving spouse to manage the trust.

How Marital Deduction Trusts Work

Here is a broad overview of the lifecycle of a marital deduction trust.

• Spouse creates a trust document. While both spouses are alive, one spouse creates a trust document that lays out the terms of a marital deduction trust that benefits the second spouse. While the trust-making spouse is still alive, that spouse can modify or revoke the trust. The trust-making spouse can fund the trust during their life or have it funded at their death. Attorneys draft marital deduction trusts for couples, and the trusts are usually just one piece of a larger estate plan. Each spouse can make a marital deduction trust for the benefit of the other, but only one of those trusts will end up providing for the surviving spouse (the trust of the first spouse to die).
• First spouse dies. When the first spouse dies, all or a portion of that spouse's assets go into the marital deduction trust. That property qualifies for the unlimited marital deduction, even though it didn't go directly to the surviving spouse. No estate tax is due.
• Surviving spouse benefits from the trust. For the rest of the surviving spouse's life, the surviving spouse can use trust property according to the terms of the trust. Often this means that the surviving spouse can spend the trust income or assets on basic needs (sometimes described as "health, education, maintenance, and support") and can continue to live in the couple's home. Because the goal of the trust is to benefit the surviving spouse with trust income, it's the trustee's job to make sure that the trust is producing income—and the surviving spouse usually has the power to enforce this requirement. Depending on how the couple drafted the trust, the trust may be able to protect trust assets from the creditors of the surviving spouse, the final beneficiaries, or the deceased spouse's estate.
• Surviving spouse dies. When the surviving spouse dies, the trustee (or successor trustee) distributes trust property according to the terms of the trust. The value of the surviving spouse's estate will include trust property. If the estate is large enough (more than $30 million using both spouses' exemptions), the surviving spouse's estate will owe federal estate tax.

Types of Marital Deduction Trusts

During the surviving spouse's life, the terms of the trust determine many aspects of how the trust works. For example, the terms of the trust determine who the trustee is, how the surviving spouse benefits from the trust, how much control the surviving spouse has over the trust principal, and who gets what's left of the trust property after the surviving spouse dies. These terms can vary widely, depending on the goals of the trust-making spouse.

Some marital deduction trusts give the surviving spouse broad use of trust assets and the ability to name beneficiaries for trust property. Other marital deduction trusts are more restrictive—they give the surviving spouse limited access to the trust principal and no power to change the final beneficiaries.

General Power of Appointment

To give the surviving spouse broad use of trust property and the ability to determine the trust's final beneficiaries, the trust-making spouse can give the surviving spouse a "general power of appointment over the trust." This gives the surviving spouse the power to direct the trustee (sometimes themselves) to make certain distributions of the trust principal. The power could be unlimited, or the trust could limit the power to a specific dollar amount or a certain percentage of the whole. Remember that the surviving spouse must receive all of the income from the trust—so this power is about using the trust principal.

In this type of trust, the surviving spouse usually has the power to determine the final beneficiaries of the trust. The trust may name final beneficiaries, but the surviving spouse can modify them. For example, suppose a trust names the couple's two children as final beneficiaries, but during the surviving spouse's life, one child makes millions of dollars in a tech investment. In that case, the surviving spouse can change the terms of the trust to make the non-rich child the trust's sole beneficiary.

QTIP (Qualified Terminable Interest Property) Trust

In contrast to a general power of appointment, a QTIP trust restricts the surviving spouse's power to name final beneficiaries. The job of a QTIP trust is to give the surviving spouse access to trust property during life and to give the first-to-die spouse complete control over where trust property goes when the surviving spouse dies. For this reason, married couples with children from prior marriages often use QTIPs so that the surviving spouse can use trust property (like the couple's home), and the children get the property when the surviving spouse dies.

In a QTIP, the terms of the trust determine the surviving spouse's access to the trust principal. Terms can vary widely, depending on whether the trust aims to protect the trust principal for the final beneficiaries. If the first-to-die spouse wants all or nearly all of the trust property to end up with the final beneficiaries, then the trust may give the surviving spouse only minimal access to the trust principal. For example, the surviving spouse may be able to use the principal only for "health, education, maintenance, and support." On the other hand, if the first-to-die spouse doesn't care how much of the trust property remains for the final beneficiaries, then the trust may give the surviving spouse broad access to the trust principal. As you might guess, this type of trust can create tension between the surviving spouse and the final beneficiaries, and attorneys should draft QTIPs with potential conflict in mind.

In a QTIP, like all marital deduction trusts: 1) No matter how much access to the principal the trust gives to the surviving spouse, the surviving spouse must have access to all of the trust's income, paid at least annually. 2) When the surviving spouse dies, the federal government will assess estate tax on the surviving spouse's estate. 3) The estate's value will include the value of any remaining trust property.

Estate Trusts

A third type of marital deduction trust is an "estate trust." An estate trust is different because it benefits the surviving spouse's estate, rather than the surviving spouse as a person during life. It doesn't require regular payouts of trust income to the surviving spouse. Instead, trust income and principal are included in the surviving spouse's estate when the surviving spouse dies.

With an estate trust, the surviving spouse can determine the final beneficiaries of trust property through their own estate planning device, like a will or trust.

Another unique feature of an estate trust is that the beneficiary (the surviving spouse) doesn't have the power to force the trustee to make the trust property produce income. During the surviving spouse's life, it's okay for trust property to have no income, or it could have income but not pay it out to the spouse. So if the surviving spouse doesn't need trust income, this kind of trust can be useful for holding non-income-producing property (such as real estate) or property that requires reinvestment of income (such as a business).

Important Related Issues

This article looks at marital deduction trusts in the light of federal law—with particular consideration to the federal estate tax laws and the federal unlimited marital deduction. However, state laws also play an important role in estate planning with marital trusts. State laws affect how couples own property, state estate taxes, income taxes, creditor protection, probate, and many other essential aspects of estate planning. For this reason, when you're considering a marital deduction trust, get help from an attorney familiar with your state's estate planning and tax laws.

Also, this discussion of marital deduction trusts applies to married couples who are US citizens. If one spouse isn't a US citizen, the unlimited marital deduction doesn't apply. But estate planning for non-citizen spouses can help those couples. Get advice from an attorney familiar with this area of the law.

Marital Deduction Trusts Are Not Bypass Trusts

There are many, many types of trusts that couples can use for estate planning, and it can be confusing to figure out which does what.

One common confusion is between marital deduction and "bypass"* trusts. These are two broad categories of trusts that have distinct goals and processes. Here are some key differences.

To add to the confusion, these two types of trusts can be used together in one couple's estate plan. For example, a couple can create an "AB" trust which divides into an "A" trust (marital deduction trust) and a "B" trust (a bypass trust) when the first spouse dies. Good legal and tax advice is essential when considering this type of trust.

* Bypass trusts are also known as "credit shelter" trusts and as the "B" in "AB" trusts.

How to Create a Marital Deduction Trust

Marital deduction trusts must be precise, reflect the spouses' goals, and comply with complex federal and state laws. See an experienced lawyer to get a well-drafted trust that meets the needs of your family's circumstances.

Questions for Your Attorney

• Should I try to avoid estate taxes?
• Should I try to avoid probate?
• How will my trust reflect our goals?
• Can I make a trust that will help my spouse and still leave something for my children?
• How can I reduce conflict between my spouse and my children?