The marital deduction is a tax exemption that applies to one spouse after the other spouse dies. Also known as the estate tax marital deduction or the unlimited marital deduction, the marital deduction is an invaluable tool for planning the estate of one or both spouses.
The marital deduction arose from a provision in the U.S. Federal Estate and Gift Tax Law in 1982 which classifies the members of a marriage as one unit for economic or taxation reasons. This carve out for married couples led to the marital deduction.
This estate planning tool allows for the deceased spouse to leave as much of their estate to their spouse as they would like. Those assets are totalled up and then subtracted from the gross estate value. This means that not only are the assets being given away untaxed, but this donation to their spouse can also reduce the overall value of the remaining estate to under the state or federal estate tax deduction amount.
While its most common implementation is in a will, the marital deduction can actually occur at any time as long as the couple is married. This means that the marital deduction can also be used to skirt gift tax if one spouse gives assets to the other.
The marital deduction is an invaluable tool for providing for a spouse or maintaining a couple’s assets free from taxation. However, this method was originally intended to merely be a tactic to delay taxation of these assets.
Once both spouses pass, the issue of taxation once again arises, this time with regard to the beneficiaries inheriting the estate. Even though there is no unlimited deduction for beneficiaries, the marital deduction can also be used to help beneficiaries by creating a marital deduction trust.
A marital deduction trust is a financial tool which allows spouses to transfer certain assets between them free of taxation. In simple terms, the marital deduction trust is formed when the marital deduction is invoked and the other spouse is given the trust to use and or oversee.
One form a marital deduction trust can take is the form of a life estate. A life estate is a property, usually real estate, that an individual designates for their own use during their lifetime, but is co-owned by another individual who the property will fall to after their death. When used as a marital deduction trusts, it may be paired with general power of appointment, which gives the spouse the freedom to give the property away as they see fit. The marital deduction trust could also take the form of a Qualified Terminable Interest Property trust which has many similarities to a life estate without the option of general power of appointment.
The intended effect of a marital deduction trust is to shield both spouses’ assets from taxation after their deaths. The intended process is that once the first spouse passes away, their assets pass into the marital deduction trust. Since these assets are passed to their spouse, they are free from any taxation attempts.
Next, when the surviving spouse also passes away, the assets in the trust are not counted in the spouse’s assets and therefore are not included in their estate, cutting down on the gross estate value that would have been taxable while still reaping the benefits of the assets in the trust and passing them on to the intended beneficiaries.
The marital deduction and marital deduction trust are powerful estate planning tools. In order for you to fully utilize these tools, you will need the help of an experienced trusts & estates attorney.
An experienced trusts & estates attorney can review your current estate plan, or help you draft a last will and testament and create irrevocable trusts that get your beneficiaries the largest portion of your assets possible while losing as little as possible to taxation and fees.