Estate Planning | X. The Unlimited Marital Deduction

The Marital Deduction Defined

The Single Economic Unit

Under current law, an individual is permitted to leave an unlimited amount of property to his spouse at his death without incurring any estate tax. The theory behind the unlimited marital deduction is that a married couple should be treated as a single economic unit for estate tax purposes.

Benefits of the Unlimited Marital Deduction
1. Defers estate taxes until the death of the surviving spouse.
2. May fund the applicable estate tax credit of the surviving spouse.
3. Ensures the surviving spouse has sufficient assets to support his lifestyle

Advantages of the Unlimited Marital Deduction

The marital deduction defers the payment of estate tax until the death of the surviving spouse. In some high-net worth planning situations, it may make sense to incur estate tax at the first death to increase the total tax savings for the family.

A second advantage of the unlimited marital deduction is an opportunity to fund the applicable estate or gift tax credit of the surviving spouse.

The use of the marital deduction to transfer assets to the surviving spouse helps ensure that the surviving spouse will have sufficient assets to maintain his lifestyle after the death of the first spouse.

Requirements of the Unlimited Marital Deduction

In order to claim a marital deduction, the person who died must have been married as the date of his death and the surviving spouse must receive the property through the estate.

Limitations of the Unlimited Marital Deduction

  • Property passing to the spouse must qualify for the marital deduction
  • Only the net value of qualifying property that is left to a surviving spouse can be included as the marital deduction.

The marital deduction does not avoid estate taxes; it postpones them.

Qualification for the Marital Deduction

For a transfer to qualify for the estate tax marital deduction, the property interest must meet three requirements:

  • The property must be included in the decedent's gross estate
  • The property must be transferred to the surviving spouse
  • The interest must not be a terminable interest unless it meets one of the exceptions to the terminable interest rule.

A general principal of taxation is that an individual cannot deduct something that is not first brought into the tax base.

Property Transferred To A Surviving Spouse

Property must pass from the person who died to the surviving spouse and must be for the benefit of the surviving spouse. A guy can't leave his money to his children through a trust where the surviving spouse is the trustee and get the unlimited marital deduction. This would be bad estate planning if the goal was to use the deduction benefit.

The Terminable Interest Rule

The rule is based on the idea that a martial deduction should only be permitted when property passing from the decedent spouse to a surviving spouse will be included in the surviving spouse's gross estate.

The current (2011) unlimited marital deduction allows individuals to defer estate tax at the death of the first-to-die spouse but not avoid it entirely.

Terminable Interest Defined

A terminable interest is any interest in property passing from a decedent to his surviving spouse where the surviving spouse's interest in that property will terminate at some point in the future.

The Terminable Interest Rule and the Unlimited Marital Deduction

1. A terminable interest is transferred to a surviving spouse
2. Another interest in the same property passes from the decedent to someone other than the surviving spouse (a third party) for less than full and adequate consideration in money or money's worth
3. The third party may posses or use any part of the property after the interest of the surviving spouse terminates.

Exceptions to the Terminable Interest Rule

Survivorship Clause

General Power of Appointments (GPOA)

Qualified Terminable Interest Property (QTIP) Trust

Charitable Remainder Trust (CRT)

Outright Bequests To The Spouse

The simplest way to qualify the transfer of property for the unlimited marital deduction is to transfer property directly to the surviving spouse. Many individuals prefer this method, since the surviving spouse has complete control over the property during his lifetime.

Limiting A Direct Transfer

While an outright transfer to the surviving spouse is simple and provides the surviving spouse with complete control over the property, it may be more appropriate to limit the surviving spouse's control over the property through the use of a trust.

General Power of Appointment (GPOA) Trusts

A general power of appointment trust, also known as an "A Trust," creates a terminable interest for the surviving spouse that will nevertheless require the unconsumed assets to be included in the surviving spouse's gross estate.

Qualifying A GPOA Trust For The Marital Deduction

To qualify for the marital deduction, the trust must grant to the surviving spouse a power to appoint the trust property to himself, his estate, his creditors, or the creditors of his estate.

Estate Trusts
A general power of appointment trust that only grants the surviving spouse the power to appoint the property to his estate is referred to as an estate trust.

Qualified Terminable Interest Property (QTIP) Trusts

A QTIP Trust, also known as a "C Trust," allows a person who died to qualify a transfer for the marital deduction at his death yet still control the ultimate disposition of the property.

A QTIP Trust holds property for the benefit of a surviving spouse and makes income distributions to the surviving spouse at least annually.

Qualifying As A QTIP Trust

The QTIP Trust As A Lifetime Transfer Device

Estate Taxes


Planning For The Noncitzen Spouse

Qualified Domestic Trust

Alternatives to Qualification



Bypass Trust

A bypass trust, sometimes called a credit shelter trust or "B Trust," is used to ensure that an individual can make full use of his applicable estate tax credit amount.

The deceased spouse's unused exemption amount will be lost if the surviving spouse remarries, a bypass trust is created to receive property with a fair market value equal to the decedent's remaining applicable estate tax credit equivalency ($5,000,000 in 2011)

For the Benefit of the Surviving Spouse

Typically, a bypass trust gives the surviving spouse the right to receive the trust income. Bypass planning may be important for any client where the combined estates of the husbandf and wife exceed the applicable estate tax credit equivalency.

Common Trust Arrangements

A common testamentary trust arrangement includes the transfer of the remaining applicable estate tax credit equivalency to a bypass trust, also known as a B Trust, the transfer of a certain amount to a General Power of Appointment Trust, also known as an A Trust, and the transfer of the remaining balance to a QTIP Trust, known as a C Trust. The arrangement is often referred to as an ABC Trust

You would use the ABC Trust method in order to get the complete use of the applicable estate tax credit equivalency with the transfer to the B Trust. The decedent can provide the necessary funds for the surviving spouse through the ABC Trusts. The A Trust can provide for the income distributions along with the power to appoint the principal to herself.

While the B and C Trusts could give income distributions to the surviving spouse as well as the ability for the surviving spouse to receive principal distributions from the B & C Trusts for health, education, maintenance and support.


Disclaimers and Bypass Trusts

Irrevocable Life Insurance Trust (ILIT)

One of the most powerful is the use of an Irrevocable Life Insurance Trust (ILIT) to provide for the surviving spouse, prevent property from being included in the gross estate of either spouse, and protect assets from the claims of the beneficiaries' creditors

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