Marital Deductions

The unlimited marital deduction is a provision in the United States Federal Estate and Gift Tax Law that allows an individual to transfer an unrestricted amount of assets to his or her spouse at any time, including at the death of the transferor, free from tax. The unlimited marital deduction is considered an estate preservation tool because assets can be distributed to surviving spouses without incurring estate or gift tax liabilities.

The unlimited marital deduction is an estate tax provision that went into effect in 1982. The provision eliminated both the federal estate and gift tax on transfers of property between spouses, in effect, treating them as one economic unit. The deduction was adopted by Congress to redress the problem of estates being pushed into higher tax brackets by inflation. Because the estate tax, like the income tax, is progressive, estates that grow with inflation are hit with higher tax rates.

With the unlimited marital deduction, the amount of property that can be transferred between spouses is unlimited, meaning that a spouse can transfer all of his or her property to the other spouse, during lifetime or at death, without incurring any federal estate or gift tax liabilities on this first transfer. The transfer is made possible through an unlimited deduction from estate and gift tax that postpones the transfers taxes on the property inherited from each other until the second spouse’s death. In other words, the unlimited marital deduction allows married couples to delay the payment of estate taxes upon the death of the first spouse because after the surviving spouse dies, all assets in the estate over the applicable exclusion amount will be included in the survivor’s taxable estate.
Any asset that is transferred to a surviving spouse can be included in the spouse's taxable estate unless it is spent or gifted during the surviving spouse's lifetime. Alternatively, if the surviving spouse remarries, the unlimited marital deduction may allow the assets to pass to the new spouse without the application of estate and/or gift taxes. In some situations, less taxes will be paid by using other estate planning methods such as using exemptions or trusts.
The unlimited marital deduction applies only to surviving spouses that are United States citizens. A Qualified Domestic Trust (or QDOT) may be obtained to provide unlimited marital deductions for non-qualified spouses. A bequest through a QDOT defers estate tax until principal is distributed by the trustee, a U.S. citizen, or corporation who also withholds the estate tax. Income on principal distributed to the surviving spouse is taxed as individual income. After the surviving spouse becomes a U.S. citizen, principal remaining in a QDOT may then be distributed without further tax.
This information is not intended to be tax or legal advice, and it may not be relied 
on for the purpose of avoiding any federal tax penalties. You are encouraged to seek 
tax or legal advice from an independent professional advisor.

Marital Deductions

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This information is not intended to be tax or legal advice, and it may not be relied 
on for the purpose of avoiding any federal tax penalties. You are encouraged to seek 
tax or legal advice from an independent professional advisor.
  • It can pay to tie the knot—at least according to the Internal Revenue Service. The IRS offers an unlimited marital deduction that allows married couples to make unlimited interspousal transfers of property without incurring a tax, either during their lifetimes or after their deaths. The deduction applies to both estate taxes and gift taxes.

    All U.S. residents can take this deduction for property transferred to a spouse who is also a U.S. citizen, but the rules change for non-citizen spouses.

    Some Other Rules 

    The unlimited marital deduction is only available until the second spouse dies. If they do not spend or deplete it during their lifetime, the value of the estate may be subject to estate taxes as they pass the property on to their own heirs. If they give the money or property to anyone other than a spouse, they may incur a gift tax.

    A surviving spouse can share the unlimited marital deduction with their new spouse, however, if they remarry. They could inherit from the first spouse and gift or leave the property to the second spouse without taxation, but it would be taxed if it were left it to other beneficiaries such as children.

    As of 2018, the estate and gift tax combined exemption was $5.6 million. Property passed over this amount to most individuals or entities other than a spouse is subject to either an estate or gift tax. The IRS additionally overs a $15,000 annual gift tax exclusion. The surviving spouse can give away this much per person per year during their lifetime without incurring a gift tax, regardless of the marital deduction.

    The Unlimited Marital Deduction and Living Trusts

    All this can require some intricate estate planning because certain living trusts can dodge the usual rules.

    If a decedent leaves property for the benefit of their surviving non-citizen spouse in a properly drafted “Qualified Domestic Trust, the “QDOT” will qualify for the deduction.

    Property passing into other types of trusts created by one spouse for the benefit of the other also qualifies for the unlimited marital deduction. These include a marital deduction trust or a qualified terminable interest property trust, sometimes called a QTIP trust. This is the “A” Trust in an AB trust plan. Inter vivos qualified terminable interest property trusts, sometimes called inter vivos QTIP trusts, also qualify. These are created for the benefit of a spouse during the trustmaker’s lifetime—the spouse who creates the trust.

    Estate Taxes at the State Level

    States that collect an estate tax of their own also allow for unlimited marital deductions. In states that allow for a state-only QTIP election through the use of an ABC Trust plan, the “A” trust and the “C” trust are QTIP trusts that qualify for the state unlimited marital deduction.