Should I Disband My Deceased Husband’s Marital Trust?
I’m the beneficiary of a trust left by my husband. The investments in the trust include long- and short-term losses that could offset capital gains in other investments I hold in my name. Can I terminate the trust and transfer those losses to my personal account in order to offset those gains?
There are a few issues here:
First, given the increase in the federal estate tax thresholds in recent years, there’s probably not any reason to keep the trust for federal estate tax purposes (unless the combination of your own assets and your husband’s trust are likely to exceed $6 million, the federal estate tax threshold beginning in 2026).
Second, depending on the state in which you reside, your estate may be subject to a lower threshold for state estate taxes. That’s something you should check out before liquidating the trust.
Third, do you have the right to liquidate the trust? Typically marital trusts such as yours limit distributions to the so-called “ascertainable” standard for the surviving spouse’s “health, education, maintenance and support.” Making distributions for tax planning purposes or to eliminate the administrative burden of managing the trust does not satisfy this limitation. You will have to check the terms of the trust (though it’s unlikely that anyone will challenge a distribution since those who might are likely your children and grandchildren who would ultimately benefit from your savings in taxes).
Fourth, your situation is unusual in that you have losses in the trust. More surviving spouses are likely to have capital gains sitting in their marital trusts. Unlike investments in the surviving spouse’s own name, those in the trust will not benefit from a step-up in basis upon the death of the surviving spouse. This is a reason many surviving spouses for whom estate tax planning trusts (including marital, credit shelter and QTIP trusts) have, in effect, been superseded by the increase in the estate tax threshold may want to consider disbanding them. By moving the property into their name, or their revocable trust, it will be in their estate and receive a step-up upon their death.
As you can see, these are complicated issues. I’d recommend consulting with a tax professional before proceeding.