Are There Different Types Of Marital Trusts In Florida?
Marital trusts in Florida are generally subjective to the creativity of the drafting attorney and the client establishing the trust. The two most common marital trusts are QTIP trusts, which are qualified terminable interests trusts, and general discretionary trusts for the surviving spouse. In the QTIP trust, the surviving spouse is generally just going to live on the income derived from the assets but cannot take a principal distribution for any reason. General discretionary trusts can be used for the surviving spouse’s needs as they come along in their lifetime. The general idea with marital trusts is that we are setting aside a sum of money in a marital trust as opposed to a family or bypass or credit shelter trust, where there are fewer restrictions. A credit shelter trust is a pool of money to be used as a last resort, to meet the needs of the surviving spouse.
How Do Bypass Trusts Work?
A bypass trust works alongside a marital trust and usually consists of money set aside to utilize only in the case of an emergency. The primary focus of meeting the surviving spouse’s needs should be the marital trust with the bypass trust merely being a standby in the case of an emergency. At the time of death of the first spouse, there needs to be a decision made on what gets funded in the marital trust and what gets funded in the bypass trust. Under federal estate tax law, the money inside the bypass trust or the credit shelter trust would normally preserve the estate tax exemption that each spouse is entitled to, upon their death, to protect their estate and reduce the impact of estate taxes on their estate. The bypass trust serves that function as well. Upon death, it is determined what is going to go into the bypass trust and what is going to go into the marital trust. The bypass trust would typically address rights to income during the life of the surviving spouse because the income tax rate for a trust is going to be much higher than the income tax rate for the individual. It is, therefore, generally recommended for the bypass trust to distribute income from the trust assets at least annually. Then, upon death of the surviving spouse, the bypass trust and the marital trust are terminated or distributed to the remainder beneficiaries.
What Is The Difference Between A Marital Trust And A Family Trust?
Generally speaking, a marital trust is a specific allocation to the surviving spouse without too many strings attached. The family trust is more intended for the living children of the spouse who died first. Usually, the family trust is the money used as a last resort. The surviving spouse will have more rights and ability to withdraw principal as it relates to the marital trust. The last difference would be that the family trust is usually set up to preserve the exemption of estate taxes for the first spouse who passes away, so that the family can utilize the exemptions of both spouses rather than just the surviving spouse’s. The surviving spouse would just get their one exemption. The family trust, finally, is used as the legal tax shelter to preserve the estate tax exemption upon death of the surviving spouse.
Are AB Trusts Obsolete?
In the early 2010s, there was a change in the Tax Code that made it so that AB trust planning or bypass trust planning was no longer essential to preserving the estate tax exemption of both spouses. Under that law change, the surviving spouse is able to make an election to also receive, in addition to his or her own exemption, the exemption of their surviving spouse. The result was that these marital, family, or AB trusts were no longer necessary for the purposes of tax planning. It was the intention to not complicate the estate tax planning when both spouses are alive. Instead, if the planning was left imperfect, it allowed the surviving spouse to make up for poor planning by the election of the surviving spouse upon death of the first spouse.
The AB trusts are not totally obsolete because this law did not merely address the estate tax exemption. Where the AB trust and the marital or bypass trust come into play is to avoid the accidental disinheritance of your blood children in favor of your surviving spouse, who is not the parent of your blood children. In that case, AB trusts should be considered when a married couple is performing their estate planning.
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