Who Pays Inheritance Tax on Marital Trust Assets?
Marital trusts can do many good things, but they can't affect inheritance tax. Inheritance tax is only found in six states, but it kicks in whether you pass property through a will or through a trust. On the upside, there's a good chance nobody will have to pay tax, depending who inherits and which state you live in.
Marital trusts such as an AB Trust or a QTIP trust let your spouse inherit your assets without owning them. Instead of him taking ownership at your death, they pass to an irrevocable trust. During life, he has access to the assets and any income they produce; when he dies, your other beneficiaries inherit. Among the benefits this brings, it guarantees that if your spouse remarries, he can't leave your property to his new spouse and neglect your kids.
Six states -- Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania -- impose inheritance tax as of 2013. If your beneficiaries live in one of those states, they pay. If they don't live there but you do, they pay. If you pass on property you own there, that part of their inheritance may be taxable. The executor for your estate files one inheritance tax return for all of your heirs, taking the tax bill out of their shares of the estate.
If your assets fall under one of the six states' jurisdictions, a lot depends on the family relationships of the people you leave your assets to. Your spouse never pays inheritance tax, no matter how much you leave her. In some states your children are also exempt, and in others they pay a minimal amount. More distant relatives pay more, and unrelated friends pay most. Putting property into a trust doesn't change who owes the tax or how much they have to pay.
As of 2013, you can leave up to $5.25 million to your beneficiaries without paying estate tax. No matter how big your estate is, your spouse pays no estate tax on inheriting it. It's possible, though, that inheriting your assets could bulk up his assets to the point he'll leave a taxable estate behind. Here's a tax a marital trust can block: because your spouse never owns the assets, they won't become part of his estate. That may help keep his assets down to a nontaxable level, leaving more for your beneficiaries.
A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.