A marital trust lets a married couple provide for the surviving spouse, keep control of where the property goes after both spouses have died, and defer estate tax until the second death. New York’s own estate tax, with its “cliff,” makes the drafting less forgiving than in most states. We design marital trusts for New York couples and administer them after the first spouse dies.
What a Marital Trust Is
A marital trust is an irrevocable trust that comes into being at the first spouse’s death and holds assets for the surviving spouse. The survivor ordinarily receives all of the income for life and may receive principal in the circumstances the trust describes. When the survivor dies, whatever remains passes to the beneficiaries the first spouse named, usually children or grandchildren.
The structure does several things at once. Federal and New York estate tax on the trust property is deferred until the second death. The property is shielded from the surviving spouse’s creditors and from a later spouse. The first spouse, not the survivor, decides who takes the remainder, which matters most in blended families. A trustee manages the assets, and because the trust passes outside probate the arrangement stays private rather than becoming a Surrogate’s Court record.
Types of Marital Trusts Used in New York
Which form is right depends on the family, the assets and the tax goal.
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QTIP trust (qualified terminable interest property)
The QTIP trust is the marital trust used most often in New York. It qualifies for the unlimited marital deduction while letting the grantor decide who ultimately takes the property. The surviving spouse must receive all of the income at least annually but cannot redirect the remainder. That combination suits second marriages, where the grantor wants to provide for the current spouse and still be certain that children of the first marriage inherit what is left.
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General power of appointment trust
This version gives the surviving spouse a general power of appointment, so the survivor can direct where the property goes at his or her death. It offers the survivor the most flexibility and the grantor the least control over the ultimate beneficiaries.
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Estate trust
An estate trust accumulates income during the survivor’s lifetime and pays the principal and accumulated income to the survivor’s estate at death. It is uncommon but fits some specific situations.
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Credit shelter trust paired with a marital trust
Many New York plans combine a credit shelter trust (also called a bypass or family trust) with a marital trust. The credit shelter trust absorbs the deceased spouse’s available exemption; the marital trust holds the balance, which qualifies for the marital deduction. Together they use both spouses’ exemptions.
The New York Estate Tax Cliff
New York imposes its own estate tax on top of the federal one, and in recent years the New York basic exclusion amount has been well below the federal exemption. The state also has a cliff: if a taxable estate exceeds 105% of the basic exclusion amount, the whole estate becomes subject to New York estate tax, not merely the part above the exclusion.
The cliff creates both risk and opportunity for New York residents. A properly drafted marital trust, often combined with disclaimer planning or a Santa Clara-style formula clause, can steer an estate around the cliff and keep wealth that would otherwise go to tax. Unlike the federal system, New York does not currently allow a surviving spouse to use the deceased spouse’s unused exclusion (portability), which is why credit shelter and marital trust planning matters more here than in states that follow the federal rule.
Who Should Consider One
Marital trusts are not only for the very wealthy. A couple should look at one when their combined assets approach or exceed the New York basic exclusion amount, or when either spouse has children from a prior relationship. The same is true when the couple owns real estate, a business or large retirement accounts; when they want to protect assets from creditors or a future spouse; or when they want a professional to manage money for the survivor. A marital trust is also useful when the eventual beneficiaries are minors, have special needs, or do not handle money well.
Funding the Trust
Signing the trust document is the first step, not the last. The trust does nothing until it is funded, and funding is where many plans fail. Real property in New York is retitled into the trust or the trust is named to receive it; beneficiary designations on life insurance and retirement accounts are updated; brokerage and bank accounts are transferred; and business interests, partnership shares or LLC membership interests are assigned. We work through each of these steps with the client so that the trust actually holds what it was meant to hold when the first spouse dies.
Choosing a Trustee
The choice of trustee is one of the most consequential decisions in the plan. Each common option carries a trade-off.
| Trustee | What it offers | What to watch |
|---|---|---|
| Surviving spouse as sole trustee | Maximum control for the survivor | Can create tax problems unless the trust is carefully structured |
| Co-trustees (spouse and an independent trustee) | Balances the survivor’s control with outside oversight | Two signatures needed; pick an independent trustee who will actually engage |
| Corporate trustee (New York bank or trust company) | Professional management and continuity | Fees; less personal knowledge of the family |
| Adult children | Family knowledge, low cost | Can create conflict in blended families |
Mistakes We See in Existing Marital Trusts
Most of the problems we are asked to fix were avoidable. The trust was never funded after it was signed. A formula clause written years ago no longer matches current exemption amounts. The QTIP election on the federal or New York estate tax return was made incorrectly or not at all. The trustee named was unsuitable, or no successor was provided. The New York cliff was ignored in the design. Beneficiary designations on retirement accounts and life insurance were never brought into line with the plan.
Because exemption amounts, family circumstances and asset values all change, a marital trust should be reviewed at least every three to five years and after any major life event.
How We Help
We begin with an analysis of the estate to determine whether a marital trust is the right tool at all. If it is, we draft the trust around the client’s assets, family and goals, coordinate with the client’s accountant, financial planner and insurance adviser, and see the funding through. After the first spouse dies we support the survivor and the trustee in administering the trust, handle modification or decanting when circumstances change, and appear in Surrogate’s Court when a dispute or an accounting requires it.
If you are creating a plan, revising an old one, or administering a marital trust after losing a spouse, call us at 212-233-1233 or write to [email protected].
