A trust for your spouse, if you’re married, can provide reliable financial support if he or she survives you. With a trust, professional investment management is built right in, an important consideration if the beneficiary lacks investment expertise. Generally speaking, there are four approaches to be considered.
  • Traditional Marital Trust. To qualify for the federal estate tax marital deduction, a trust must pay all of its income to the surviving spouse at least annually. With the traditional marital deduction trust, the spouse also has the power to alter the ultimate disposition of trust assets, typically through specific instructions provided in his or her will.
  • Qualified Terminable Interest Property Trust (QTIP trust). However, the spousal power to direct the trust assets isn’t mandatory for the marital deduction. For example, in a second marriage situation, a QTIP trust might pay its income to the surviving spouse for life and its principal to children from the first marriage at the spouse’s death.
  • Qualified Domestic Trust (QDOT). When the surviving spouse is not a U.S. citizen, this special form of trust must be used to secure the marital deduction. A QDOT pays all its income to the surviving spouse and may be subject to U.S. transfer taxes before the death of the surviving spouse in certain circumstances.
  • Bypass Trust. Married couples can secure greater tax freedom with trust planning. This may be accomplished with a two-trust plan, combining a marital deduction trust with a trust that will avoid taxes in the surviving spouse’s estate. The spouse may receive all the income from the bypass trust without estate tax risk.

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