How a Family Trust and Marital Trust Work with a Living Trust in Illinois

 Posted on March 27, 2025 in Strategy and Asset Protection

A living trust (also called a "revocable living trust" or "declaration of trust") is a foundational estate planning document that enables people to manage their assets in the event of an incapacity or death. Simply put, a living trust efficiently distributes assets and avoids probate.

Illinois has its own estate tax, and the federal estate tax exemption is $13.99 million. An exemption is a specific amount of money or value that is excluded from taxation. In the context of estate taxes, an estate tax exemption allows a certain portion of an individual’s estate to pass tax-free before any tax on the estate applies. Call our Illinois estate planning attorney for more information about estate planning and how a living trust could help you.

How Do Marital Trusts Work? 

A marital trust (otherwise known as a "credit shelter trust" or "A/B" trust) is a sub trust that gets credited upon the death of a grantor (or person creating a trust). The purpose of a marital trust is to hold assets that qualify for the unlimited marital deduction under federal and Illinois estate tax laws.

There are two major types of marital trusts: Qualified Terminable Interest Property Trusts ("QTIP Trusts"), which allow the first spouse to control the principal of the marital trust until after the first spouse dies. The second type of trust is called a general power of appointment trust. The surviving spouse generally has unfettered access to the principal in this case. Generally, a blended family will use a QTIP Trust.

U.S. citizens who are married do not pay estate tax upon the first spouse to die. Rather, the marital deduction allows the surviving spouse to inherit an unlimited amount of money without applying an estate tax. Therefore, assets transferred to the marital trust occur after the first spouse dies.

Assets in the marital trust are not subject to estate tax until the surviving spouse dies. Upon the spouse’s death, remaining assets are subject to estate tax unless further planning is done. Typically, the surviving spouse is the sole beneficiary of the marital trust and has access to all of the income from marital trust.

How Do Family Trusts Work? 

A family trust is used to hold assets up to the applicable state or federal exclusion amount after the first spouse’s death. For example, the Illinois estate tax exemption is $4 million and the federal estate tax exemption in 2025 is $13.99 million. Thus, a pecuniary formula sets forth a strategy to place the maximum amount of the exemption that the first spouse owed at their death in the family trust. If, for example, the first spouse had $1 million in their name at death, then the family trust will be funded with $1 million.

The goal with family trusts is tax planning to eliminate or minimize estate taxes. One of the goals of estate tax planning is to equalize the spouse’s estates in Illinois, because if a couple has a net worth of $5 million (in Illinois) and the first spouse dies with $500,000 in their name, the deceased spouse may only apply $500,000 in Illinois estate tax exemption into the family trust. At the federal government level, a concept called "portability" allows the surviving spouse to utilize the unused estate tax exemption of the first spouse. However, portability does not exist in Illinois.

Marital Trusts and Family Trusts Work Together

The goal of marital trusts and family trusts is to use the Illinois estate tax exemption (and the federal estate tax exemption) to avoid or minimize inheritance tax. An estate tax is essentially a tax on inheritance such as real estate, life insurance proceeds, cash, investments, and retirement accounts, among many other asset types. For both federal and state taxes, a common estate planning strategy involves using a formula to allocate assets to a family trust based on the lowest available estate tax exemption. This strategy ensures that the estate tax burden is lessened.

Call an Aurora, IL Estate Tax Planning Lawyer 

By structuring a living trust to include both marital trust and family trust, a married couple in Illinois can take advantage of the marital deduction and available estate tax minimization strategies. The goal is for the surviving spouse to spend the assets allocated to the marital trust first, since those funds will be subject to an Illinois estate tax upon their death. In contrast, the funds in the family trust have already been taxed and characterized in a manner to avoid estate taxation.

An experienced Oswego, Illinois estate planning attorney can guide you and your family on wills and trusts, whether simple or complicated situations arise. Call Gateville Law Firm at 630-780-1034 for a free consultation.