Marital Deduction Trusts

Marital deduction trusts used to be a very popular estate planning tool for married couples whose gross estate would potentially be subject to federal estate tax. Such trusts allowed married persons to effectively double the federal estate tax exclusion. Being subject to federal estate tax was much more likely prior to 2001, when the federal estate tax exemption amount was below $1 million. Therefore, at that time, a marital deduction trust made sense for many married couples.

However, with the enactment of the American Taxpayer Relief Act of 2012, the federal estate tax exemption amount has gone up to over $5 million during the past few years. And, now, the Tax Cuts and Jobs Act passed in 2017 has more than doubled that amount to $11.4 million in 2019. Due to these dramatically increased exclusion amounts and new “portability” options, which allows a surviving spouse to claim the unused portion of a deceased spouse’s exclusion amount, marital deduction trusts may no longer be necessary for most married couples.

In fact, having a marital deduction trust still in place could leave the surviving spouse with nothing, which would not be what the married couple intended. Many marital deduction trusts require that upon the death of the first spouse, a “credit shelter trust” is funded first, up to the maximum federal estate tax exclusion amount. Then, the remainder is passed to the surviving spouse. With the current maximum federal estate tax exclusion amount being $11.4 million, most surviving spouses would be essentially disinherited.

Married couples with existing marital deduction trust should review their trust with an estate planning attorney and either modify their funding requirements or consider replacing their marital deduction trust with a joint trust.