Marital agreements – premarital, postmarital, and marital separation agreements – generally provide for the rights of a surviving spouse and, in many cases, for the rights of a surviving former spouse. Parties negotiating such an agreement may find it useful to incorporate provisions for a trust to hold assets for the benefit of a surviving spouse or former spouse. Parties in a blended family may want to balance the economic needs of a spouse, whether the marriage ends at death or dissolution, with the wish to pass wealth to their children. A wealthy party may want to ensure that property he/she inherited from parents or grandparents stays in his/her bloodline and may not want it to end up in the hands of a surviving spouse’s new spouse or other family members. Sometimes a key concern is to protect a party’s exclusive rights to a family vacation home that has been shared by his/her extended family for several generations. For many couples, one or more trusts will be the most appropriate means to achieve these goals.
It is generally appropriate for a marital agreement to give parties the option to create a trust but not to mandate a trust. A wealthy party may therefore elect to leave some or all assets outright to a surviving spouse or may do the estate planning required to implement a contract term permitting him/her to leave assets in trust. A party who has the right to create a trust will need to take the steps necessary to do so. A trust can create tax savings, protect the assets from the elective share claim of a spouse’s subsequent spouse, and preserve the decedent’s right to control the ultimate disposition of his or her assets. Parties may wish to consider one or more of the following:
Irrevocable Life Insurance Trust (ILIT). If properly drafted and administered, an ILIT removes the death benefit under a life insurance policy from both spouses’ estates for federal and state estate tax purposes, is not subject to the claims of creditors, and provides a reliable source of income for the survivor. A party may create a trust and then the trustee acquires the life insurance policy. Parties negotiating for such a term in a marital agreement will need to determine whether the party to be insured can get a policy at a cost that is acceptable, whether to get term insurance (and the duration of the required term) or another type, such as whole life. They will need to agree on the amount of the required death benefit. The person who is to benefit from the ILIT may want to negotiate for the right to be sole trustee or a co-trustee. The marital agreement should specify the beneficiary’s rights to income and whether he/she will be able to receive distributions of principal. The person entitled to be beneficiary will want the right to verify the status of the policy.
Qualified Terminable Interest Property (QTIP) Trust. A QTIP trust can serve the objectives of both parties. It allows a wealthy spouse to do some estate tax planning using the unlimited marital deduction, control the management of assets and their ultimate disposition, and protect the assets from the claims of creditors as well as an elective share claim of a subsequent spouse of the beneficiary. At the same time, it provides for the lifetime economic needs of the surviving spouse. The agreement should specify the obligation to conform to federal and state tax law requirements, specifically:
• The surviving spouse must be entitled to all the income from the trust;
• The income must be payable at least annually;
• The surviving spouse must have the right to require that trust assets be made income-producing;
• No one other than the spouse can have an interest in the trust property during the surviving spouse’s life.
The settlor of the trust can reserve the right to select the trustee. Counsel for the weaker party may wish to negotiate for a requirement that the trustee be an independent person, and not a member of the wealthy party’s family, or a financial institution, or both, or that the spouse be a co-trustee. It will often not be in the survivor’s interest for the trustee to be an adult stepchild. The agreement can give the spouse certain rights, such as the right to request the trustee to make distributions of principal for his or her health, education, maintenance, and support. It could restrict his/her right to invade principal if he or she remarries. It can also require the trustee to consider other resources available to the beneficiary before invading principal.
Qualified Domestic Trust (QDOT), a trust for a non-citizen spouse. Federal estate tax laws do not permit the estate of a decedent to utilize the unlimited marital deduction for a bequest to a surviving spouse who is not a U.S. citizen unless the property is placed in a QDOT. Therefore, when the spouse for whom a wealthy party agrees to make provisions at death is not a U.S. citizen, a QDOT may be the appropriate option to receive property the parties intend to meet the needs of the widow or widower.
In the absence of a contract, a surviving spouse has certain default rights to a share of the assets of a decedent, and to receive these assets outright and not in trust. Therefore, parties who wish to be able to utilize a trust to provide for a surviving spouse must negotiate for the right to do so in the marital agreement.
