What is a Marital Trust?
Married people often provide for each other while they are both living. A marital trust is a legal arrangement through which a person or entity holds a spouse's assets and provides a way for him to give income and assets to his spouse when he dies. The surviving spouse is the beneficiary of this type of trust. Though such a trust can be set up to provide income and pay expenses after the death of a spouse, a marital trust can also provide for other parties, such as the deceased spouse’s, or grantor's, children.
The reasons a person may create a marital trust vary. For example, an individual may create one to provide income for his spouse after his death. Another person may create one to provide for his spouse and secure his assets for his children once both spouses have died. While a marital trust can give the surviving spouse income, it can be constructed to leave all the trust's assets to the grantor's children once both spouses are dead.
This type of trust can be useful for protecting assets in the event the surviving spouse remarries. In the absence of a marital trust, the new spouse could attempt to get money or assets from a surviving spouse’s inheritance if the couple divorces or the surviving spouse dies. A marital trust, however, can protect the grantor's assets from falling into the hands of another person simply because of remarriage.
Some people also find marital trusts helpful for planning the distribution and protection of assets in blended families, which are families involving stepchildren. For example, a trust grantor may wish to leave his assets to his biological or adopted children rather than his stepchildren. At the same time, he may not want to leave his spouse without income. In such a case, he may create a trust, which allows his assets to be used for the surviving spouse’s benefit as long as the surviving spouse is alive. He may arrange, however, for all of the assets held in the trust to go to his biological or adopted children once the surviving spouse dies.
There are some specific requirements for creating a marital trust. For instance, all of the income from the trust must go to the surviving spouse; the grantor cannot split the income among several people. Another requirement is for someone to pay taxes on the income from assets in the trust. While the grantor is alive, he is responsible for the taxes based on the laws in his country. After he dies, the surviving spouse is usually responsible for the income taxes.
Here is the scenario. The wife has a trust and names the husband as the trustee when she dies. It also says that when the husband dies, the two children are named co-successor trustees. The wills of both specify that the children split everything after the death of both the husband and wife.
The wife died 12 years ago, the husband just died. The children sell a vacation home that was in the wife's trust. Can the children claim a stepped up tax bases on the death of the husband for capital gains? My estate attorney is saying that the value of the property has to be based on the death of the wife because she was the grantor of the trust. My accountant says it's based on the death of the husband.
It only seems fair that it is based on the husband dying because the children did not get their inheritance until the husband died.
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