A marital trust holds assets for the surviving spouse’s benefit and qualifies for the unlimited marital deduction, which defers federal estate tax until that spouse dies. A family trust (also called a bypass or “B” trust) is funded with assets up to the deceased spouse’s federal estate tax exemption, so those assets pass to heirs free of estate tax at the second death. The core difference between a marital trust vs. a family trust is what happens at the second death: marital trust assets are taxed in the surviving spouse’s estate, and family trust assets are not. Couples with significant wealth often use both, splitting assets between them when the first spouse dies to use each spouse’s exemption.
What a Marital Trust Does
The marital trust exists to take advantage of one rule: a U.S. citizen spouse can inherit unlimited property from the other spouse without any federal estate tax. That rule, the marital deduction, comes from 26 U.S.C. § 2056 and lets the first estate deduct the full value of property passing to the surviving spouse.1Office of the Law Revision Counsel. 26 USC 2056 – Bequests, etc., to Surviving Spouse The deduction is a deferral, not a permanent break. The tax bill arrives when the surviving spouse dies and those assets are counted in the survivor’s taxable estate.
Most marital trusts are structured as Qualified Terminable Interest Property (QTIP) trusts. A QTIP lets the first spouse to die decide where the trust property goes after the surviving spouse also dies, which is especially useful in blended families. To qualify, the surviving spouse must receive all income from the trust at least annually, and no one can direct trust property to anyone other than the surviving spouse during that spouse’s lifetime.2Office of the Law Revision Counsel. 26 USC 2056 – Bequests, etc., to Surviving Spouse – Section: Qualified Terminable Interest Property
Because QTIP assets qualified for the marital deduction, Section 2044 requires them to be pulled back into the surviving spouse’s gross estate at the second death.3Office of the Law Revision Counsel. 26 USC 2044 – Certain Property for Which Marital Deduction Was Previously Allowed Any growth between the two deaths gets taxed too.
What a Family Trust Does
The family trust takes the opposite approach. Instead of deferring tax, it uses up the deceased spouse’s federal exemption at the first death. Every individual gets a unified credit under 26 U.S.C. § 2010 that shields a set amount from estate tax. For 2026, that amount is $15 million per person.4Internal Revenue Service. What’s New – Estate and Gift Tax By funding the family trust with assets up to that limit, the estate locks in the exemption. The unified credit covers the tax, so nothing is actually owed.
The real benefit shows up at the second death. Family trust assets are not owned by the surviving spouse, so they sit outside the survivor’s taxable estate entirely. Any appreciation during the surviving spouse’s remaining years stays outside too. When the surviving spouse dies, the family trust property passes to the children or other heirs without being taxed again.
The family trust is irrevocable once funded. The surviving spouse can benefit from it, but the assets belong to the trust, not to the spouse. That legal separation is what keeps the property out of the survivor’s estate.
The Key Differences at a Glance
The two trusts look similar in structure and often share a trustee, but they operate under different rules at nearly every point.
Estate Tax Treatment
Marital trust assets qualify for the marital deduction and are taxed at the second death. Family trust assets consume the exemption at the first death and are not taxed at the second.
Access for the Surviving Spouse
A QTIP marital trust must pay all net income to the surviving spouse at least annually. That is a federal requirement, not a drafting choice: without it, the trust loses QTIP status and the marital deduction disappears.5Office of the Law Revision Counsel. 26 USC 2056 – Bequests, etc., to Surviving Spouse – Section: Qualifying Income Interest for Life Principal distributions are optional and depend on the trust document.
The family trust operates under tighter rules. To keep assets out of the survivor’s taxable estate, principal distributions must be limited to what the tax code calls an ascertainable standard. Under 26 U.S.C. § 2041, a power limited to a beneficiary’s health, education, support, or maintenance is not treated as a general power of appointment.6Office of the Law Revision Counsel. 26 USC 2041 – Powers of Appointment Planners abbreviate this as HEMS. If the trust lets the spouse take principal for any reason, the IRS treats the spouse as having unrestricted control, which collapses the bypass and pulls the trust into the survivor’s estate.
Control Over Final Beneficiaries
Both trusts let the first spouse to die control who ultimately receives the property. The QTIP structure is the mechanism on the marital side. The family trust achieves the same result directly, because the surviving spouse never owns the assets.
Creditor Protection
The family trust also shields assets from the surviving spouse’s creditors and from claims arising later in that spouse’s life. The marital trust offers less protection because the surviving spouse’s mandatory income interest is reachable in many situations.
The Step-Up in Basis Tradeoff
This is where most of the real-world tension between the two trusts lives. When someone dies, their assets generally receive a new cost basis equal to fair market value at the date of death. That is the step-up under Section 1014.7Office of the Law Revision Counsel. 26 U.S. Code 1014 – Basis of Property Acquired From a Decedent Heirs who sell later owe capital gains tax only on appreciation after that date.
Marital trust assets get this step-up twice: once when the first spouse dies and again when the surviving spouse dies, because QTIP assets are included in the survivor’s estate under Section 2044.3Office of the Law Revision Counsel. 26 USC 2044 – Certain Property for Which Marital Deduction Was Previously Allowed Suppose the first spouse bought stock at $100,000, it was worth $500,000 at the first death, and it had grown to $900,000 by the second. The heirs’ basis is $900,000. They can sell immediately with zero capital gains.
Family trust assets get only one step-up, at the first death. Because the trust sits outside the survivor’s estate, there is no second adjustment. Using the same numbers, the heirs’ basis stays at $500,000. Selling at $900,000 produces $400,000 in taxable capital gains. For assets expected to appreciate significantly, the family trust’s estate tax savings can be partially offset by larger capital gains bills later. The planning move is to steer rapidly appreciating assets into the family trust, where the estate tax benefit is largest, and keep assets the heirs are likely to sell soon in the marital trust for the double step-up.
When You Need Both and When Portability Is Enough
Since 2011, surviving spouses have had a simpler option for preserving the deceased spouse’s unused exemption: portability. Under 26 U.S.C. § 2010(c)(4), the surviving spouse can add the deceased spouse’s unused exclusion amount (DSUE) to their own.8Office of the Law Revision Counsel. 26 USC 2010 – Unified Credit Against Estate Tax In theory, a couple could skip the family trust and rely on portability to shelter up to $30 million combined in 2026.
Portability requires action. The executor must file Form 706 and specifically elect portability, even if the estate owes no tax. The standard deadline is nine months after death, with an automatic six-month extension. For estates below the filing threshold, Revenue Procedure 2022-32 allows a late election up to five years after death.9Internal Revenue Service. Frequently Asked Questions on Estate Taxes Miss that window and the unused exemption is gone.
Portability has real limits that a bypass trust does not. The DSUE amount is fixed at the deceased spouse’s death and never adjusts for inflation. Growth on the assets stays inside the surviving spouse’s estate and is taxed at the second death. Portability does nothing for state estate taxes and provides no asset protection from the surviving spouse’s creditors. For couples whose combined wealth substantially exceeds the exemption, the family trust remains the stronger tool. For those closer to or below the exemption, portability is simpler and preserves the double step-up.
The Rule for Non-Citizen Spouses
The unlimited marital deduction does not apply when the surviving spouse is not a U.S. citizen. Section 2056(d) disallows it outright.10Office of the Law Revision Counsel. 26 USC 2056 – Bequests, etc., to Surviving Spouse – Section: Disallowance of Marital Deduction Where Surviving Spouse Not United States Citizen The workaround is a Qualified Domestic Trust, or QDOT. Under Section 2056A, the marital deduction is restored if the assets pass into a trust with at least one U.S. trustee, a trustee power to withhold estate tax on any principal distribution, and an irrevocable QDOT election made on the deceased spouse’s Form 706.11Office of the Law Revision Counsel. 26 USC 2056A – Qualified Domestic Trust The QDOT collects estate tax on a rolling basis: each principal distribution to the non-citizen spouse triggers tax, and whatever remains is taxed when that spouse dies. Income distributions are not subject to the additional tax.
The 2026 Exemption and What It Means for Existing Plans
Many estate plans drafted between 2018 and 2025 assumed the exemption would drop roughly in half in 2026 when the Tax Cuts and Jobs Act’s temporary increase expired. That sunset did not happen. The One, Big, Beautiful Bill Act, signed into law on July 4, 2025, set the basic exclusion amount at $15 million per person for 2026, with inflation adjustments in future years.4Internal Revenue Service. What’s New – Estate and Gift Tax
For a married couple, up to $30 million can now pass free of federal estate tax. At that level, relatively few estates face exposure. The family trust still serves purposes beyond tax savings: it protects assets from the surviving spouse’s creditors, shields growth from future law changes, and ensures that the first spouse’s intended beneficiaries receive the property no matter what happens in the surviving spouse’s life. For couples whose estates sit well below $30 million, the cost and complexity of maintaining two trusts may not be worth the tax benefit alone, and portability offers a simpler path. For those at or above the threshold, the split-trust structure remains the most reliable way to keep both exemptions working.
Any plan built around the assumption that the exemption would drop to roughly $7 million in 2026 should be reviewed. Formula clauses tied to “the maximum exemption amount” will now funnel $15 million into the family trust rather than $7 million, which can leave the surviving spouse with far less liquid wealth than intended.8Office of the Law Revision Counsel. 26 USC 2010 – Unified Credit Against Estate Tax Documents drafted with the sunset in mind need updating.