The marital deduction provides that transfers, both during life and at death, from one spouse to another are free from estate and gift tax liability. The deduction amount is unlimited. In order to benefit from this unlimited marital deduction, several qualifying factors must exist.
First, the property must actually pass to a spouse. It cannot be to a widow’s estate or unmarried person. It is also not available for gifts or bequests made to spouses who are not citizens of the United States unless the transfers are made through a qualified domestic trust.
The property left must be an absolute transfer with no strings attached to qualify. This means that terminal interest transfers, such as life estates or property that reverts back to the children, does not invoke the marital deduction. There are 5 exceptions to this terminal interest rule:
1. Property subject to a Qualified Terminable Interest Property Trust (QTIP);
2. General Power of Appointment (the right to determine the ultimate disposition of the property);
3. Survivorship condition (property may be conditioned upon the surviving spouse’s survival for a period of time, not to exceed 6 months);
4. Right to Payment (surviving spouse must have the right to pay life insurance, endowment or annuity proceeds coupled with the power of appointment), and
5. Income Interest (survivor has an income interest where he or she is the only non-charitable beneficiary).
These exceptions allow for the property transfer to count towards the marital deduction if certain conditions are met. The property remaining will also be taxable in the surviving spouse’s estate.
A QTIP is a special form of life estate interest given to a surviving spouse that qualifies for the marital deduction. The first spouse to die, the creator of the QTIP, controls the disposition of the remainder interest after the surviving spouse’s death. This is often used in second marriages when someone wants to ensure that the children of the first marriage ultimately receive the property while still providing for the second spouse during his or her lifetime.
The marital deduction defers the estate tax until the surviving spouse’s death so the current value as well as potential future value of the estate of both spouses should be considered in the planning process. Maximizing the federal estate tax exemption is also a consideration for high-net-worth couples. The goal may be to balance the expected values with adjustments for life expectancy, earning power and possible future inheritances.
Keeping the terms flexible so that additional planning can be done after the first spouse’s death can also be key to maximum benefits of the marital deduction. To do this, it may be beneficial to provide in a will or trust language allowing a surviving spouse to refuse or accept any part of the marital bequest.
For more information on how the marital deduction impacts an estate plan and to ensure that you check off all the requirements to qualify, contact the experienced estate planning attorneys at Stouffer Legal to learn about more options. You can schedule an appointment by calling us at (443) 470-3599 or emailing us at office@stoufferlegal.com.
