The Unlimited Marital Deduction and Your Taxes

How the Unlimited Marital Deduction Can Benefit Your Estate

Married couple
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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. 

Citizenship Counts, Too 

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. 

The deduction is not allowed if the spouse of the person making the gift is not a U.S. citizen, but the gifting spouse can give her up to $148,000 as of 2016 without incurring gift tax consequences. This amount is indexed for inflation, so it will go up periodically to keep pace with the economy. 

Some Other Rules 

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

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

As of 2016, the estate and gift tax combined exemption was $5.45 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 $14,000 annual gift tax exclusion. The surviving spouse can give away this much per person per year during her 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 his 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.

NOTE: State and federal laws change frequently and the above information may not reflect the most recent changes. Please consult with an attorney for the most up-to-date advice if you're considering making a large transfer, particularly to a non-citizen spouse. The information contained in this article is not legal or tax advice and it is not a substitute for legal or tax advice.