Estate planning as an individual is complicated enough, but planning for it in a marriage can create greater difficulties. Working as a unified partnership for your joint estate’s future means that you both will have priorities you want to bring into the plan. Some concerns you both might have include costly estate taxes and providing for the other after one passes. If so, the estate tax marital deduction might be worth investigating. Here is some basic information you’ll need before considering whether the marital deduction could fit into your estate plan.
Consider working with a financial advisor who can guide you in creating an estate plan that meets the needs of both you and your spouse.
What Is the Estate Tax Marital Deduction?
The estate tax marital deduction, otherwise called the unlimited marital deduction or more simply the marital deduction, is a valuable estate planning device for certain married couples. It allows one marriage partner to transfer an unlimited amount of assets to his or her spouse without incurring a tax. The marital deduction is determinable from the overall gross estate. The total value of the assets passed on to the spouse is subtracted from that amount, giving us the marital deduction. This interspousal transfer can occur during the couple’s lifetime or after one spouse’s death, according to a will.
The marital deduction applies to both estate and gift taxes as well. You can find the provision under Section 2056 of the Internal Revenue Code as the marital deduction rule.
Who Qualifies for the Estate Tax Marital Deduction?
The marital deduction applies regardless of how the property or assets are passed on to the other spouse. This can include beneficiary designation, intestacy or any other method. However, there are other requirements that determine if the marital deduction applies.
Foremost is that the involved individuals are married. After that, you need a surviving spouse. Said spouse must inherit the property. This property must come from the decedent’s, or transferor’s, gross estate, and it has to be transferred directly. It cannot be a terminable interest.
An example of a terminable interest would be if the transferor left the assets to his or her surviving spouse but with a lifetime limit. That would turn the property into a life estate, which the beneficiary cannot leave to anyone after their own passing. However, an exception to the outright transfer is qualified terminable interest property (QTIP). A QTIP is an irrevocable trust that allows the grantor to provide for the spouse but still ensure that the assets pass on to certain beneficiaries following the surviving spouse’s death.
Keep in mind: spouses who aren’t U.S. citizens don’t qualify for the marital deduction. You can obtain a qualified domestic trust (QDOT) instead, which applies the marital deduction to assets placed in the trust. A non-citizen spouse can then access this.
How Does the Estate Tax Marital Deduction Work?
We’ve established that a marital deduction applies to assets subtracted from the transferor’s gross estate. The surviving spouse then inherits this property without paying an estate tax on it. The deduction also applies if the decedent gifts the property. The gift can be given outright, like the transfer, or placed into a trust. If it’s put into a trust, the surviving spouse must have access to income throughout their life and have power of appointment over the assets. A QTIP would allow you to navigate around the latter.
It’s essential to know that the marital deduction only defers the estate and gift taxes. So, while you do not have to pay them after the first spouse’s death or transfer, the taxes will apply when the surviving spouse passes. The tax burden depends on the estate’s size at the time of this death.
Estate Tax Marital Deduction: Key Considerations
While the marital deduction might work perfectly for certain estates, it may need support to be the right choice for yours. Or, the marital deduction might not work for you at all. Regardless of whether you need to bolster your choice or find other ways to minimize your estate plan’s costs, you should take advantage of other exemption and deduction options.
For 2022 returns, estates that exceed $12.06 million for individuals and $24.12 million for married couples are subject to estate tax. In 2023 those limits rise to $12.92 million and $25.84 million, respectively. So, if your estate does not surpass that threshold, you will not face a federal estate tax when your spouse passes. However, if you intend to use the marital deduction, your partner’s lifetime exemption is lost. That is because it cannot be transferred to the surviving spouse. This can create a problem for larger estates since the surviving spouse only has her or his own exemption value to protect the combined assets.
So, if the lifetime exemption isn’t helpful, you can pursue the credit shelter of an A/B Trust. The credit shelter can eliminate the lifetime estate tax exemption concern, since the total amount of assets left to the surviving spouse under the marital deduction will decrease. It’s best to speak to a financial professional before you pursue trusts in your estate plan, though.
While trusts can allow for flexibility, you may still be concerned about the beneficiary status. If you want to ensure your children or other individuals are the eventual beneficiaries of your estate, you can opt for a QTIP, as discussed earlier.
The estate tax marital deduction is a useful device for many married couples. However, if it’s not the right fit or used incorrectly, it can end up costing the estate more in the long run. If you and your partner are considering a marital deduction, it’s best that you speak with an estate attorney beforehand. They can break down the process and help you both decide if it’s the right choice for you. Most of all, they can guide you to an estate plan that protects you both and your assets, regardless of what the future may bring.
Estate Planning Tips
- Consider working with a financial advisor to make sure your investments and assets are getting the least confiscatory tax treatment. Finding a financial advisor doesn’t have to be hard. SmartAsset’s matching tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Estate planning comes with a maze of challenges. Unfortunately, getting lost or making a mistake is often costly. If you want to avoid that, check out our guide to the five estate planning mistakes you can’t afford to make.
- While the trusts mentioned here might not work for you, others could be a perfect fit. If you’re interested, read our report on how other trusts function.
- Income in America is taxed by the federal government, most state governments and many local governments. The federal income tax system is progressive, so the rate of taxation increases as income increases. A federal income tax calculator can give you a quick read on what you owe Uncle Sam.
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