Intentionally Defective Marital Deduction Trust

Is an Intentionally Defective Marital Deduction Trust right for you?

An intentionally defective marital deduction trust creates an irrevocable trust for all of the decedent’s assets. It solves issues of “control” and “taxable gains”. It is “intentionally” designed to be included in the survivors taxable estate. This gives the entire estate a step-up in basis (no capital gains) at the second death. It has a “disclaimer” option to fund an “exemption trust” if needed (for example, if you hit the lottery or see a significant increase in assets).

Benefits of an Intentionally Defective Marital Deduction Trust

Some things you never know when planning an estate are when you and your spouse will die, what laws may change after your estate plan is created, or how your circumstances or the size of your estate might change before or after your or your spouses death. You also don’t know, if your spouse survives you, whether your spouse will later decides to change beneficiaries, get remarried, or make other changes to assets left to him or her. An Intentionally Defective Marital Deduction Trust can be a good tool for planning your estate in anticipation of changes in the size of your estate, worries about control of assets, and/or concerns regarding changes in estate tax laws.

Creditor Protection and Medicaid Planning

By creating an irrevocable trust, the intentionally defective marital deduction trust can be useful for establishing creditor protection and/or Medicaid planning after the first death. Any assets placed into the irrevocable trust can be protected from creditors of the surviving spouse and from being included in assets to determine Medicaid for the surviving spouse. It can also protect assets from a divorce if the survivor remarries.

Protect From Changes in Beneficiaries

Sometimes a spouse may be worried that at his or her death, the surviving spouse could change the deceased spouse intended beneficiaries of his or her estate. An intentionally defective marital deduction trust protects the deceased spouse’s beneficiaries, by not permitting the surviving spouse or others to change the beneficiaries. If desired, it can still permits for the use of a limited power of attorney for flexibility for the survivor to change the beneficiary provisions.

Tax Savings with a Step Up in Basis

It provides for a step-up in basis on the assets in the irrevocable trust at the survivor’s death.

Administration of an Intentionally Defective Marital Deduction Trust

An Intentionally Defective Marital Deduction Trust does require the creation of an irrevocable trust. The formation of the irrevocable trust does not occur until the death of the first spouse. Administrative requirements for an irrevocable trust can include getting an EIN for the irrevocable trust and filing the annual taxes for the trust. The creation of the irrevocable trust is what provides the creditor protection and medicaid planning for the surviving spouse, and the protection from changes in beneficiaries for the beneficiaries of the trust.