How Can Children Access Funds in a Marital Trust?
With portability now a crucial tool in the estate planners' arsenal, a great many have turned away from a traditional approach to estate planning, in which the estate is divided between a marital and bypass trust. If the entire unused estate tax credit will continue to be available at the death of the surviving spouse, there is less need to use the bypass trust at all, because everything can go to the surviving spouse via a marital trust.
Unfortunately, other questions arise, such as, what if the children need to use funds that are tied up in the trust while the surviving spouse is still alive? If all available assets are part of the marital trust, would the children have access to the funds they need?
Well. according to the law, “any disposition of all or part of a qualifying income interest for life in any property (in a marital trust) shall be treated as a transfer of that means, if assets from a marital trust are distributed directly to the children, the transfer tax on the entire principal and income of the trust is accelerated. So that would seem to be a problem, unless the amount needed by the children is relatively small. In those cases, a simple 5 or 5 power, which allows the surviving spouse to distribute the greater of 5% or $5,000 of the marital trust to himself or herself, could be used, although any gift made under that power would incur a gift tax. However, such a use would not accelerate the tax on the entire principal and income of the marital trust.
On the other hand, if the 5 or 5 power is insufficient, there may be other things that can be done. For example, a commutation of the surviving spouse’s life estate and the children’s remainder interest would trigger an acceleration, but the gift tax would only be for the remainder interest since full and adequate consideration is paid for the income interest. Also, if a spouse who purchases the remainder interest of a marital trust is deemed to have made a gift of the remainder interest but not a gift of the income interest.
In other words, there's no way to avoid this issue entirely, but there are ways to mitigate the tax consequences in a situation where children need some of the marital assets. This is a conversation anyone should have with their estate planner at some point in the process. Ask your planner if the traditional bypass and marital trust route is best for you, or whether you should direct all assets into a single marital trust. You should always talk about what might happen if the children should need access to some of the marital funds, and the tax consequences if they do.
